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 October 2, 2004
-------------------------
[ ] 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
--------
LIZ CLAIBORNE, INC.
-------------------------------------------------
(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
-------------------------------------------------
(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 .
----- -----
Indicate by check whether the registrant is an accelerated filer (as
defined in Rule 12B-2 of the Exchange Act). Yes X No .
----- -----
The number of shares of Registrant's Common Stock, par value $1.00 per
share, outstanding at November 5, 2004 was 108,548,602.
2
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
October 2, 2004
PAGE
NUMBER
------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of October 2, 2004,
January 3, 2004 and October 4, 2003 .......................... 3
Condensed Consolidated Statements of Income for the Nine and Three
Month Periods Ended October 2, 2004 and October 4, 2003....... 4
Condensed Consolidated Statements of Cash Flows for the Nine Month
Periods Ended October 2, 2004 and October 4, 2003............. 5
Notes to Condensed Consolidated Financial Statements............... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................... 23
Item 3. Quantitative and Qualitative Disclosures About Market Risk......... 42
Item 4. Controls and Procedures............................................ 44
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.................................................. 45
Item 2. Unregistered Sales of Equity Securities and Use Of Proceeds ....... 45
Item 5. Other Information.................................................. 45
Item 6. Exhibits........................................................... 46
SIGNATURES .................................................................. 47
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)
October 2, January 3, October 4,
2004 2004 2003
------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents $ 85,600 $ 293,503 $ 81,505
Marketable securities 48,757 50,414 47,603
Accounts receivable - trade, net 684,030 390,802 596,121
Inventories, net 621,514 485,182 529,443
Deferred income taxes 49,395 45,756 44,171
Other current assets 111,431 82,744 72,658
------------ ------------ ------------
Total current assets 1,600,727 1,348,401 1,371,501
------------ ------------ ------------
Property and Equipment - Net 434,636 410,741 400,701
Goodwill - Net 762,873 596,436 492,062
Intangibles - Net 268,270 244,168 244,240
Other Assets 3,963 7,253 6,877
------------ ------------ ------------
Total Assets $ 3,070,469 $ 2,606,999 $ 2,515,381
============ ============ ============
Liabilities and Stockholders' Equity
Current Liabilities:
Short-term borrowings $ 28,785 $ 18,915 $ 18,313
Accounts payable 320,455 227,125 212,038
Accrued expenses 277,058 236,134 229,291
Income taxes payable 43,282 29,316 35,822
------------ ------------ ------------
Total current liabilities 669,580 511,490 495,464
------------ ------------- ------------
Long-Term Debt 567,478 440,303 434,238
Other Non-Current Liabilities 17,732 23,526 14,668
Deferred Income Taxes 57,859 43,861 46,618
Commitments and Contingencies
Minority Interest 12,411 9,848 9,168
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 164,770 124,823 108,994
Retained earnings 2,752,342 2,539,742 2,466,117
Unearned compensation expense (37,197) (21,593) (3,292)
Accumulated other comprehensive loss (35,556) (50,207) (35,763)
------------ ------------ ------------
3,020,796 2,769,202 2,712,493
Common stock in treasury, at cost, 68,183,250, 66,865,854
and 67,452,696 shares (1,275,387) (1,191,231) (1,197,268)
------------ ------------ ------------
Total stockholders' equity 1,745,409 1,577,971 1,515,225
------------ ------------ ------------
Total Liabilities and Stockholders' Equity $ 3,070,469 $ 2,606,999 $ 2,515,381
============ ============ ============
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
---------------------------------------------------------------
(39 weeks) (40 weeks) (13 Weeks) (13 Weeks)
October 2, October 4, October 2, October 4,
2004 2003 2004 2003
---------------------------------------------------------------
Net Sales $ 3,435,272 $ 3,209,208 $ 1,306,581 $ 1,174,192
Cost of goods sold 1,851,235 1,807,775 713,008 654,303
------------ ------------ ------------ ------------
Gross Profit 1,584,037 1,401,433 593,573 519,889
Selling, general & administrative expenses 1,203,868 1,052,517 413,570 356,803
Restructuring (gain) (105) -- (105) --
------------- ------------ ------------- ------------
Operating Income 380,274 348,916 180,108 163,086
Other expense - net (1,532) (2,360) (9) (1,804)
Interest expense - net (22,403) (22,689) (7,897) (7,866)
------------ ------------ ------------ ------------
Income Before Provision for Income Taxes 356,339 323,867 172,202 153,416
Provision for income taxes 125,431 117,240 60,614 55,537
------------ ------------ ------------ ------------
Net Income $ 230,908 $ 206,627 $ 111,588 $ 97,879
============ ============ ============ ============
Net Income per Weighted Average Share, Basic $2.13 $1.93 $1.04 $0.91
Net Income per Weighted Average Share, Diluted $2.10 $1.89 $1.03 $0.89
Weighted Average Shares, Basic 108,293 107,187 106,894 107,959
Weighted Average Shares, Diluted 109,986 109,275 108,496 110,325
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
--------------------------------
(39 weeks) (40 weeks)
October 2, October 4,
2004 2003
--------------------------------
Cash Flows from Operating Activities:
Net income $ 230,908 $ 206,627
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization 82,216 77,413
Non-cash deferred compensation 7,528 10,719
Other, net 16,635 16,492
Change in current assets and liabilities, exclusive of
acquisitions:
(Increase) in accounts receivable - trade (292,643) (212,085)
(Increase) in inventories (132,661) (56,110)
(Increase) in other current assets (27,118) (19,546)
Increase (decrease) in accounts payable 92,072 (23,777)
Increase (decrease) in accrued expenses 51,545 (5,095)
Increase in income taxes payable 13,595 9,581
------------ ------------
Net cash provided by operating activities 42,077 4,219
------------ ------------
Cash Flows from Investing Activities:
Purchases of investment instruments (78) (64)
Purchases of property and equipment (90,812) (72,506)
Payments for acquisitions (197,221) (101,138)
Payments for in-store merchandise shops (5,148) (5,390)
Other - net (841) 424
------------ ------------
Net cash used in investing activities (294,100) (178,674)
------------ ------------
Cash Flows from Financing Activities:
Short-term borrowings 9,399 (3,676)
Commercial paper - net 126,046 15,314
Proceeds from exercise of common stock options 42,942 39,100
Purchase of common stock (116,817) --
Dividends paid (18,308) (18,114)
------------ ------------
Net cash provided by financing activities 43,262 32,624
------------ ------------
Effect of Exchange Rate Changes on Cash 858 11,773
------------ ------------
Net Change in Cash and Cash Equivalents (207,903) (130,058)
Cash and Cash Equivalents at Beginning of Period 293,503 211,563
------------ ------------
Cash and Cash Equivalents at End of Period $ 85,600 $ 81,505
============ ============
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 ("S.E.C."). Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
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 2003 Annual Report on
Form 10-K. 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 January
3, 2004 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.
SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The Company is engaged primarily in the design and marketing of a broad range of
apparel, accessories and fragrances.
PRINCIPLES OF CONSOLIDATION
The condensed consolidated financial statements include the accounts of the
Company. All intercompany balances and transactions have been eliminated in
consolidation.
USE OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES
Use of Estimates
- ----------------
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 and
disclosure of contingent assets and liabilities at the date of the condensed
consolidated financial statements. These estimates and assumptions also affect
the reported amounts of revenues and expenses. Estimates by their nature are
based on judgments and available information. Therefore, actual results could
materially differ from those estimates under different assumptions and
conditions.
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, income taxes, accounts receivable - trade, net,
inventories, net, the valuation of goodwill and intangible assets with
indefinite lives, 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. Changes in such estimates, based on more accurate
future information, may affect amounts reported in future periods.
Revenue Recognition
- -------------------
Revenue within the Company's wholesale operations is recognized at the time
title passes and risk of loss is transferred to customers. Wholesale revenue is
recorded net of returns, discounts and allowances. Returns and allowances
require pre-approval from management. Discounts are based on trade terms.
Estimates for end-of-season allowances are based on historic trends, seasonal
results, an evaluation of current economic conditions and retailer performance.
The Company reviews and refines these estimates on a monthly basis based on
current
7
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
experience, trends and retailer performance. The Company's historical estimates
of these costs have not differed materially from actual results. Retail store
revenues are recognized net of estimated returns at the time of sale to
consumers. Licensing revenues are recorded based upon contractually guaranteed
minimum levels and adjusted as actual sales data is received from licensees.
Income Taxes
- ------------
Income taxes are accounted for under Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes." In accordance with SFAS No.
109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, as measured by enacted tax rates that are expected to be in effect in the
periods when the deferred tax assets and liabilities are expected to be settled
or realized. Significant judgment is required in determining the worldwide
provisions for income taxes. In the ordinary course of a global business, there
are many transactions for which the ultimate tax outcome is uncertain. It is the
Company's policy to establish provisions for taxes that may become payable in
future years as a result of an examination by tax authorities. The Company
establishes the provisions based upon management's assessment of exposure
associated with permanent tax differences, tax credits and interest expense
applied to temporary difference adjustments. The tax provisions are analyzed
periodically (at least annually) and adjustments are made as events occur that
warrant adjustments to those provisions.
Accounts Receivable - Trade, Net
- --------------------------------
In the normal course of business, the Company extends credit to customers that
satisfy pre-defined credit criteria. Accounts Receivable - Trade, Net, as shown
on the Condensed 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 an evaluation of historic and
anticipated trends, the financial condition of the Company's customers, 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 products
as well as allowable customer markdowns and operational charge backs, net of
expected 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 seasonal negotiations with the Company's customers as
well as historic deduction trends (net of expected recoveries) and the
evaluation of current market conditions. The Company's historical estimates of
these costs have not differed materially from actual results.
Inventories, Net
- ----------------
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 determined based on historical
sales trends for this category of inventory of the Company's 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.
Estimates may differ from actual results due to quantity, quality and mix of
products in inventory, consumer and retailer preferences and market conditions.
The Company's historical estimates of these costs and its provisions have not
differed materially from actual results.
Goodwill and Other Intangibles
- ------------------------------
SFAS No. 142, "Goodwill and Other Intangible Assets," requires that goodwill and
intangible assets with indefinite lives no longer be amortized, but rather be
tested at least annually for impairment. This pronouncement also requires that
intangible assets with finite lives be amortized over their respective 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."
A two-step impairment test is performed on goodwill. In the first step, the
Company compares the fair value of each reporting unit to its carrying value.
The Company's reporting units are consistent with the reportable segments
identified in Note 13 of Notes to Condensed Consolidated Financial Statements.
The Company determines the fair value of its reporting units using the market
approach as is typically used for companies providing products where the value
of such a company is more dependent on the ability to generate earnings than the
value of the assets used
8
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
in the production process. Under this approach the Company estimates the fair
value based on market multiples of revenues and earnings for comparable
companies. If the fair value of the reporting unit exceeds the carrying value of
the net assets assigned to that unit, goodwill is not impaired and the Company
is not required to perform further testing. If the carrying value of the net
assets assigned to the reporting unit exceeds the fair value of the reporting
unit, then the Company must perform the second step in order to determine the
implied fair value of the reporting unit's goodwill and compare it to the
carrying value of the reporting unit's goodwill. The activities in the second
step include valuing the tangible and intangible assets of the impaired
reporting unit, determining the fair value of the impaired reporting unit's
goodwill based upon the residual of the summed identified tangible and
intangible assets and the fair value of the enterprise as determined in the
first step, and determining the magnitude of the goodwill impairment based upon
a comparison of the fair value residual goodwill and the carrying value of
goodwill of the reporting unit. If the carrying value of the reporting unit's
goodwill exceeds the implied fair value, then the Company must record an
impairment loss equal to the difference.
SFAS No. 142 also requires that the fair value of the purchased intangible
assets, primarily trademarks and trade names, with indefinite lives be estimated
and compared to the carrying value. The Company estimates the fair value of
these intangible assets using independent third parties who apply the income
approach using the relief-from-royalty method, based on the assumption that, in
lieu of ownership, a firm would be willing to pay a royalty in order to exploit
the related benefits of these types of assets. This approach is dependent on a
number of factors including estimates of future growth and trends, estimated
royalty rates in the category of intellectual property, discounted rates and
other variables. The Company bases its fair value estimates on assumptions it
believes to be reasonable, but which are unpredictable and inherently uncertain.
Actual future results may differ from those estimates. The Company recognizes an
impairment loss when the estimated fair value of the intangible asset is less
than the carrying value.
Owned trademarks that have been determined to have indefinite lives are not
subject to amortization and are reviewed at least annually for potential value
impairment as mentioned above. Trademarks that are licensed by the Company from
third parties are amortized over the individual terms of the respective license
agreements, which range from 5 to 15 years. Intangible merchandising rights are
amortized over a period of four years. Customer relationships are amortized
assuming gradual attrition over time. Existing relationships are being amortized
over periods ranging from 9 to 12 years.
The recoverability of the carrying values of all long-lived assets with definite
lives is reevaluated when changes in circumstances indicate the assets' value
may be impaired. Impairment testing is based on a review of forecasted operating
cash flows and the profitability of the related business. For the nine months
ended October 2, 2004, there were no adjustments to the carrying values of any
long-lived assets resulting from these evaluations.
Accrued Expenses
- ----------------
Accrued expenses for employee insurance, workers' compensation, profit sharing,
contracted advertising, professional fees, and other outstanding Company
obligations are assessed based on claims experience and statistical trends, open
contractual obligations, and estimates based on projections and current
requirements. If these trends change significantly, then actual results would
likely be impacted.
Derivative Instruments
- ----------------------
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended and interpreted, requires that each derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability and 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
whether the derivative qualifies for hedge accounting treatment.
The Company uses foreign currency forward contracts and options for the specific
purpose of hedging the exposure to variability in forecasted cash flows
associated primarily with inventory purchases mainly with the Company's European
and Canadian entities and other specific activities and the swapping of floating
interest rate debt for fixed rate debt in connection with the synthetic lease as
well as the swapping of 175 million euro of fixed rate debt to floating rate
debt in connection with our 350 million Eurobonds. These instruments are
designated as cash flow and
9
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
fair value hedges and, in accordance with SFAS No. 133, to the extent the hedges
are highly effective, the 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
portions of the cash flow and fair value hedges, if any, are recognized in
current-period earnings. Amounts recorded in Accumulated Other Comprehensive
Income (Loss) are reflected in current-period earnings when the hedged
transaction affects earnings. If fluctuations in the relative value of the
currencies involved in the hedging activities were to move dramatically, such
movement could have a significant impact on the Company's results of operations.
Hedge accounting requires that, at the beginning of each hedge period, the
Company justify an expectation that the hedge will be highly effective. This
effectiveness assessment involves an estimation of the probability of the
occurrence of transactions for cash flow hedges. The use of different
assumptions and changing market conditions may impact the results of the
effectiveness assessment and ultimately the timing of when changes in derivative
fair values and underlying hedged items are recorded in earnings.
The Company hedges its net investment position in euro-functional subsidiaries
by borrowing directly in foreign currency and designating 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, 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 to hedge quarter-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 recognized in current period
earnings. No gains or losses were incurred during the quarter.
OTHER SIGNIFICANT ACCOUNTING POLICIES
Fair Value of Financial Instruments
- -----------------------------------
The fair value of cash and cash equivalents, receivables, short-term borrowings
and accounts payable approximates their carrying value due to their short-term
maturities. The fair value of the Eurobonds was 372.0 million euro as of October
2, 2004. Fair values for derivatives are either obtained from counter parties or
developed using third-party valuation service quotes or cash flow models.
Cash and Cash Equivalents
- -------------------------
All highly liquid investments with an original maturity of three months or less
at the date of purchase are classified as cash equivalents.
Marketable Securities
- ---------------------
Investments are stated at market. The estimated fair value of the marketable
securities is based on quoted prices in an active market. Gains and losses on
investment transactions are determined using the specific identification method
and are recognized in income based on settlement dates. Unrealized gains and
losses on securities held for sale are included in Accumulated Other
Comprehensive Income (Loss) until realized. Interest is recognized when earned.
All marketable securities are considered available-for-sale.
Property and Equipment
- ----------------------
Property and equipment is stated at cost less accumulated depreciation and
amortization. Buildings and building improvements are depreciated using the
straight-line method over their estimated useful lives of 20 to 39 years.
Machinery and equipment and furniture and fixtures are depreciated using the
straight-line method over their estimated useful lives of three to seven years.
Leasehold improvements are amortized over the shorter of the remaining lease
term or the estimated useful lives of the assets.
Foreign Currency Translation
- ----------------------------
Assets and liabilities of non-U.S. subsidiaries have been translated at
period-end exchange rates. Revenues and expenses have been translated at average
rates of exchange in effect during the period. Resulting translation adjustments
have been included in Accumulated Other Comprehensive Income (Loss). Gains and
losses on
10
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
translation of intercompany loans with foreign subsidiaries of a long-term
investment nature are also included in this component of stockholders' equity.
Cost of Goods Sold
- ------------------
Cost of goods sold includes the expenses incurred to acquire and produce
inventory for sale, including product costs, freight-in, import costs and
provisions for shrinkage.
Advertising, Promotion and Marketing
- ------------------------------------
All costs associated with advertising, promoting and marketing of Company
products are expensed during the periods when the activities take place. Costs
associated with cooperative advertising programs are expensed when the
advertising is run.
Shipping and Handling Costs
- ---------------------------
Shipping and handling costs are included as a component of Selling, general &
administrative expenses in the Condensed Consolidated Statements of Income.
Stock-Based Compensation
- ------------------------
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related Interpretations in accounting for its
stock-based compensation plans. Accordingly, as stock options are granted at
market price, no compensation cost has been recognized for its fixed stock
option grants. Compensation expense for restricted stock awards is measured at
fair value on the date of grant based on the number of shares granted and the
quoted market price of the Company's common stock. Such value is recognized as
expense over the vesting period of the award. To the extent restricted stock
awards are forfeited prior to vesting, the previously recognized expense is
reversed to stock-based compensation expense.
Had compensation costs for the Company's stock option grants been determined
based on the fair value at the grant dates for awards under these plans in
accordance with SFAS No. 123 "Accounting for Stock-Based Compensation," the
Company's net income and earnings per share would have been reduced to the pro
forma amounts as follows:
Nine Months Ended Three Months Ended
----------------------------------------------------------------
(39 weeks) (40 weeks) (13 Weeks) (13 Weeks)
October 2, October 4, October 2, October 4,
(In thousands except for per share data) 2004 2003 2004 2003
- ---------------------------------------- ----------------------------------------------------------------
Net income:
As reported $ 230,908 $ 206,627 $ 111,588 $ 97,879
Add: Stock-based employee compensation
expense included in reported net income,
net of tax 5,980 4,931 2,128 1,625
Less: Total stock-based employee
compensation expense determined under
fair value based method for all awards*,
net of tax (21,569) (18,860) (7,689) (6,627)
------------ ------------ ------------ ------------
Pro forma $ 215,319 $ 192,698 $ 106,027 $ 92,877
============ ============ ============ ============
Basic earnings per share:
As reported $2.13 $1.93 $1.04 $0.91
Pro forma $2.00 $1.81 $1.00 $0.87
Diluted earnings per share:
As reported $2.10 $1.89 $1.03 $0.89
Pro forma $1.97 $1.78 $0.99 $0.85
* "All awards" refers to awards granted, modified, or settled in fiscal periods
beginning after December 15, 1994 - that is, awards for which the fair value
was required to be measured under SFAS No. 123.
11
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For this purpose, the fair value of each option grant is estimated on the date
of grant using the Black-Scholes option-pricing model with the following
weighted average assumptions used for grants in 2004 and 2003, respectively:
dividend yield of 0.6% and 0.6%, expected volatility of 34% and 38%, risk free
interest rates of 3.1% and 3.1% and expected lives of five years.
Fiscal Year
- -----------
The Company's fiscal year ends on the Saturday closest to December 31. The 2004
fiscal year reflects a 52-week period resulting in a 39-week nine-month period,
as compared to the 2003 fiscal year, which reflected a 53-week period resulting
in a 40-week nine-month period.
Cash Dividend and Common Stock Repurchase
- -----------------------------------------
On October 5, 2004, 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 15, 2004 to stockholders of record at the close of business on
November 25, 2004. As of November 5, 2004, the Company has $101.5 million
remaining in buyback authorization under its share repurchase program.
Prior Years' Reclassification
- -----------------------------
Certain items previously reported in specific captions in the accompanying
financial statements and notes have been reclassified to conform to the current
year's classifications.
2. ACQUISITIONS
On December 1, 2003, the Company acquired 100 percent of the equity interest of
ENYCE HOLDING LLC ("ENYCE"), a privately held fashion apparel company, for a
purchase price at closing of approximately $121.9 million, including fees and
the retirement of debt at closing, and an additional $4.8 million for certain
post-closing adjustments. Based upon a preliminary independent third-party
valuation of the tangible and intangible assets acquired from ENYCE, $27.0
million of purchase price has been allocated to the value of trademarks and
trade names associated with the business, and $6.7 million has been allocated to
the value of customer relationships. The trademarks and trade names have been
classified as having indefinite lives and will be subject to an annual test for
impairment as required by SFAS No. 142. The value of customer relationships is
being amortized over periods ranging from 9 to 12 years. 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.
On April 7, 2003, the Company acquired 100 percent of the equity interest of
Juicy Couture, Inc. (formerly, Travis Jeans, Inc.) ("Juicy Couture"). The total
purchase price consisted of (a) a payment, including the assumption of debt and
fees, of $53.1 million, and (b) a contingent payment to be determined as a
multiple of Juicy Couture's earnings for one of the years ended 2005, 2006 or
2007. The selection of the measurement year for the contingent payment is at
either party's option. The Company estimates that, if the 2005 measurement year
is selected, the contingent payment would be in the range of approximately $87 -
92 million. Based upon an independent third-party valuation of the tangible and
intangible assets acquired from Juicy Couture, $27.3 million of purchase price
has been allocated to the value of trademarks and trade names associated with
the business. The trademarks and trade names have been classified as having
indefinite lives and will be subject to an annual test for impairment as
required by SFAS No. 142. 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.
On July 9, 2002, the Company acquired 100 percent of the equity interest of Mexx
Canada, Inc., a privately held fashion apparel and accessories company ("Mexx
Canada"). The total purchase price consisted of: (a) an initial cash payment
made at the closing date of $15.2 million; (b) a second payment made at the end
of the first quarter 2003 of 26.4 million Canadian dollars (or $17.9 million
based on the exchange rate in effect as of April 5, 2003); and (c) a contingent
payment to be determined as a multiple of Mexx Canada's earnings and cash flow
performance for the year ended 2004 or 2005. The selection of the measurement
year for the contingent payment is at either party's option. The Company
estimates that if the 2004 measurement year is selected, this payment will be in
the range of 38 - 42 million Canadian dollars (or $29 - 32 million based on the
exchange rate as of October 2, 2004). The fair
12
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
market value of assets acquired was $20.5 million and liabilities assumed were
$17.7 million resulting in Goodwill of $29.6 million.
On May 23, 2001, the Company acquired 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 consisting of:
(a) 295 million euro (or $255.1 million based on the exchange rate in effect on
such date), in cash at closing (including the assumption of debt), and (b) a
contingent payment determined as a multiple of Mexx's earnings and cash flow
performance for either the 2003, 2004 or 2005 year. The 2003 measurement year
was selected for the calculation of the contingent payment, and on August 16,
2004, the Company made the required final payment of $192.4 million (160 million
euro).
3. STOCKHOLDERS' EQUITY
Activity for the nine months ended October 2, 2004 and October 4, 2003 in the
Capital in excess of par value, Retained earnings, Unearned compensation expense
and Common stock in treasury, at cost accounts is summarized as follows:
Capital in Unearned Common stock
excess of par Retained compensation in treasury,
(Dollars in thousands) value earnings expense at cost
- ---------------------- ----------------------------------------------------------------
Balance as of January 3, 2004 $ 124,823 $ 2,539,742 $ (21,593) $ (1,191,231)
Net income -- 230,908 -- --
Additional restricted shares issued, net of
cancellations 13,261 -- (24,832) 8,905
Purchase of common stock -- -- -- (116,817)
Shares returned for taxes -- -- -- --
Stock options exercised 19,186 -- -- 23,756
Tax benefit on stock options exercised 7,500 -- -- --
Dividends declared -- (18,308) -- --
Amortization -- -- 9,228 --
------------ ------------ ------------ ------------
Balance as of October 2, 2004 $ 164,770 $ 2,752,342 $ (37,197) $ (1,275,387)
============ ============ ============ ============
Capital in Unearned Common stock
excess of par Retained compensation in treasury,
(Dollars in thousands) value earnings expense at cost
- ---------------------- ----------------------------------------------------------------
Balance as of December 28, 2002 $ 95,708 $ 2,283,692 $ (10,185) $ (1,230,974)
Net income -- 206,627 -- --
Additional restricted shares issued, net of
cancellations 365 -- (717) 351
Stock options exercised 5,745 -- -- 33,355
Tax benefit on stock options exercised 7,176 -- -- --
Dividends declared -- (24,202) -- --
Amortization -- -- 7,610 --
------------ ------------ ------------ ------------
Balance as of October 4, 2003 $ 108,994 $ 2,466,117 $ (3,292) $ (1,197,268)
============ ============ ============ ============
13
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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
----------------------------------------------------------------
(39 Weeks) (40 Weeks) (13 Weeks) (13 Weeks)
October 2, October 4, October 2, October 4,
(Dollars in thousands) 2004 2003 2004 2003
- ---------------------- ----------------------------------------------------------------
Net income $ 230,908 $ 206,627 $ 111,588 $ 97,879
Other comprehensive income (loss), net of tax:
Foreign currency translation gain (loss) 2,901 28,475 (2,310) 5,690
Foreign currency translation of Eurobonds 6,524 (41,200) (4,012) (4,415)
Changes in unrealized gains (losses) on
securities 1,261 6,848 (3,892) 7,988
Changes in fair value of cash flow hedges 3,965 (1,569) (1,292) 1,119
------------ ------------ ------------- ------------
Total comprehensive income, net of tax $ 245,559 $ 199,181 $ 100,082 $ 108,261
============ ============ ============ ============
Accumulated other comprehensive income (loss) consists of the following:
October 2, January 3, October 4,
(Dollars in thousands) 2004 2004 2003
- ---------------------- ------------------------------------------------
Foreign currency translation (loss) $ (38,767) $ (48,192) $ (34,369)
(Losses) on cash flow hedging derivatives (6,106) (10,071) (7,678)
Unrealized gains on securities 9,317 8,056 6,284
------------ ------------ ------------
Accumulated other comprehensive (loss), net
of tax $ (35,556) $ (50,207) $ (35,763)
============= ============ ============
4. MARKETABLE SECURITIES
The following is a summary of available-for-sale marketable securities at
October 2, 2004, January 3, 2004 and October 4, 2003:
October 2, 2004
--------------------------------------------------------
Unrealized Estimated
----------------------------
(Dollars in thousands) Cost Gains Losses Fair Value
- ---------------------- --------------------------------------------------------
Equity securities $ 29,000 $ 12,475 $ -- $ 41,475
Other holdings 9,268 -- (1,986) 7,282
------------ ------------ ------------ ------------
Total $ 38,268 $ 12,475 $ (1,986) $ 48,757
============ ============ ============ ============
January 3, 2004
--------------------------------------------------------
Unrealized Estimated
----------------------------
(Dollars in thousands) Cost Gains Losses Fair Value
- ---------------------- --------------------------------------------------------
Equity securities $ 29,000 $ 14,725 $ -- $ 43,725
Other holdings 8,785 -- (2,096) 6,689
------------ ------------ ------------ ------------
Total $ 37,785 $ 14,725 $ (2,096) $ 50,414
============ ============ ============ ============
October 4, 2003
--------------------------------------------------------
Unrealized Estimated
----------------------------
(Dollars in thousands) Cost Gains Losses Fair Value
- ---------------------- --------------------------------------------------------
Equity securities $ 29,000 $ 12,415 $ -- $ 41,415
Other holdings 8,753 -- (2,565) 6,188
------------ ------------ ------------ ------------
Total $ 37,753 $ 12,415 $ (2,565) $ 47,603
============ ============ ============ ============
14
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the nine and three months ended October 2, 2004 and October 4, 2003, there
were no realized gains or losses 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 October 2, 2004 and October 4, 2003 were a
loss of $1,261,000 (net of $880,000 in taxes) and a gain of $6,848,000 (net of
$3,882,000 in taxes), respectively, and the net adjustments to unrealized
holding gains and losses on available-for-sale securities for the three months
ended October 2, 2004 and October 4, 2003 were a loss of $6,385,000 (net of
$3,468,000 in taxes) and a gain of $7,988,000 (net of $4,532,000 in taxes),
respectively, which were included in Accumulated other comprehensive loss.
5. INVENTORIES, NET
Inventories are stated at the lower of cost (using the first-in, first-out
method) or market and consist of the following:
October 2, January 3, October 4,
(Dollars in thousands) 2004 2004 2003
- ---------------------- ------------------------------------------------
Raw materials $ 30,089 $ 25,922 $ 25,431
Work in process 13,870 6,085 9,748
Finished goods 577,555 453,175 494,264
------------ ------------ ------------
Total $ 621,514 $ 485,182 $ 529,443
============ ============ ============
6. PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following:
October 2, January 3, October 4,
(Dollars in thousands) 2004 2004 2003
- ---------------------- --------------------------------------------
Land and buildings $ 139,993 $ 140,198 $ 140,311
Machinery and equipment 349,746 328,525 332,066
Furniture and fixtures 167,319 145,423 136,314
Leasehold improvements 323,475 282,373 271,309
------------ ------------ ------------
980,533 896,519 880,000
Less: Accumulated depreciation
and amortization 545,897 485,778 479,299
------------ ------------ ------------
Total property and equipment, net $ 434,636 $ 410,741 $ 400,701
============ ============ ============
7. GOODWILL AND INTANGIBLES, NET
SFAS No. 142, "Goodwill and Other Intangible Assets," 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." Trademarks that are owned are no
longer amortized, as they have been deemed to have indefinite lives. Such
trademarks are reviewed at least annually for potential value impairment. The
Company adopted the provisions of SFAS No. 142 effective December 30, 2001. The
Company is currently performing its annual impairment analysis as of the first
day of the third quarter 2004. No impairment is expected to be recorded as a
result of this evaluation.
15
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table discloses the carrying value of all the intangible assets:
October 2, January 3, October 4,
(Dollars in thousands) 2004 2004 2003
- ---------------------- ------------------------------------------
Amortized intangible assets:
- ----------------------------
Gross Carrying Amount:
Licensed trademarks $ 42,849 $ 42,849 $ 42,849
Customer relationships 6,700 -- --
Merchandising rights 76,282 71,138 79,310
------------ ------------ ------------
Subtotal $ 125,831 $ 113,987 $ 122,159
------------ ------------ ------------
Accumulated Amortization:
Licensed trademarks $ (17,006) $ (13,963) $ (13,033)
Customer relationships (558) -- --
Merchandising rights (56,353) (45,212) (54,242)
------------ ------------ ------------
Subtotal $ (73,917) $ (59,175) $ (67,275)
------------ ------------ ------------
Net:
Licensed trademarks $ 25,843 $ 28,886 $ 29,816
Customer relationships 6,142 -- --
Merchandising rights 19,929 25,926 25,068
------------ ------------ ------------
Total amortized intangible assets, net $ 51,914 $ 54,812 $ 54,884
============ ============ ============
Unamortized intangible assets:
- ------------------------------
Owned trademarks $ 216,356 $ 189,356 $ 189,356
------------ ------------ ------------
Total intangible assets $ 268,270 $ 244,168 $ 244,240
============ ============ ============
Intangible amortization expense was $14.7 million and $15.0 million for the nine
months ended October 2, 2004 and October 4, 2003, respectively, and $5.2 million
and $6.9 million for the three months ended October 2, 2004 and October 4, 2003,
respectively.
The estimated intangible amortization expense for the next five years is as
follows:
(In millions)
Fiscal Year Amortization Expense
- ----------------------------------------------------------------
2004 $ 18.9
2005 12.2
2006 7.8
2007 6.2
2008 4.0
The changes in carrying amount of goodwill for the nine months ended October 2,
2004 are as follows:
Wholesale Wholesale
(Dollars in thousands) Apparel Non-Apparel Total
- ---------------------- ----------------------------------------
Balance January 3, 2004 $ 586,841 $ 9,595 $ 596,436
Enyce:
Reclassification for trademarks (27,000) -- (27,000)
Reclassification for customer
relationships (6,700) -- (6,700)
Additional purchase price 7,571 -- 7,571
Mexx additional purchase price 192,378 -- 192,378
Translation difference 694 -- 694
Other (506) -- (506)
----------- ----------- ----------
Balance October 2, 2004 $ 753,278 $ 9,595 $ 762,873
=========== =========== ==========
There is no goodwill recorded in our retail segment.
16
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8. DEBT
On August 7, 2001, the Company issued 350 million euro (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. Interest on the Eurobonds is being paid on an annual basis
until maturity.
On October 21, 2002, the Company entered into a $750 million credit agreement
(the "Agreement") consisting of a $375 million, 364-day unsecured financing
commitment under a bank revolving credit facility, replacing a $500 million,
364-day unsecured credit facility scheduled to mature in November 2002, and a
$375 million, three-year bank revolving credit facility, replacing an existing
$250 million bank revolving credit facility which was scheduled to mature in
November 2003. On October 17, 2003, the Company entered into a $375 million,
364-day unsecured financing commitment under a bank revolving credit facility,
replacing the existing $375 million, 364-day unsecured credit facility scheduled
to mature in October 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 euro. 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
our 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 our 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 October 2, 2004, the Company had $126.0 million of borrowings
outstanding under the Agreement at an average interest rate of 2.0%. 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 October 2, 2004 as the Company intends to
refinance such obligations on a long-term basis and is able to do so.
On October 13, 2004, the Company entered into a $750 million, five-year
revolving credit agreement (the "New Facility"), replacing the $375 million,
364-day unsecured credit facility scheduled to mature in October 2004 and the
existing $375 million bank revolving credit facility scheduled to mature in
October 2005, each of which were part of the Agreement. The terms of the New
Facility are substantially similar to the terms of the Agreement, including
certain customary covenants, including financial covenants requiring us to
maintain specified debt leverage and fixed charge coverage ratios, and covenants
restricting our ability to, among other things, incur indebtedness, grant liens,
make investments and acquisitions, and sell assets. A portion of the funds
available under the New Facility not in excess of $250 million is available for
the issuance of letters of credit. Additionally, at the request of the Company,
the amount of funds available under the New Facility may be increased at any
time or from time to time by an aggregate principal amount of up to $250 million
with only the consent of the lenders (which may include new lenders)
participating in such increase. The New Facility includes a $150 million
multi-currency revolving credit line, which permits the Company to borrow in
U.S. dollars, Canadian dollars and euro. The funds available under the New
Facility may be used to refinance existing debt, provide working capital and for
general corporate purposes of the Company, including, without limitation, the
repurchase of capital stock and the support of the Company's $750 million
commercial paper program.
As of October 2, 2004, January 3, 2004 and October 4, 2003, the Company had
lines of credit aggregating $568 million, $487 million and $411 million,
respectively, which were primarily available to cover trade letters of credit.
At October 2, 2004, January 3, 2004 and October 4, 2003, the Company had
outstanding trade letters of credit of $322 million, $254 million and $264
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.
The Company's Canadian and European subsidiaries have unsecured lines of credit
totaling approximately $112.3 million (based on the exchange rates as October 2,
2004), which is included in the aforementioned $568 million
17
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
available lines of credit. As of October 2, 2004, a total of $28.6 million of
borrowings denominated in foreign currencies was outstanding at an average
interest rate of 2.4%. These lines of credit bear interest at rates based on
indices specified in the contracts plus a margin. The lines of credit are in
effect for less than one year and mature at various dates in 2004 and 2005.
These lines are guaranteed by the Company. With the exception of the Eurobonds,
which mature in 2006, and the New Facility, which expires in 2009, substantially
all of the Company's debt will mature in less than one year and will be
refinanced under existing credit lines.
9. CONTINGENCIES AND COMMITMENTS
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.
The leases expire on November 22, 2006, with renewal subject to the consent of
the lessor. The lessor under the operating lease arrangements is an independent
third-party limited liability company, which has contributed equity of 5.75% of
the $63.7 million project costs. 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 guarantee becomes effective if the Company declines to purchase the
facilities at the end of the lease and the lessor is unable to sell the property
at a price equal to or greater than the original cost. 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. In December 2003, the Financial Accounting
Standards Board ("FASB") issued FASB Interpretation No. 46R, "Consolidation of
Variable Interest Entities" ("FIN 46R"), which amends the same titled FIN 46
that was issued in January 2003. FIN 46R addresses how to identify variable
interest entities and the criteria that requires the consolidation of such
entities. The third party lessor does not meet the definition of a variable
interest entity under FIN 46R, and therefore consolidation by the Company is not
required.
The Company has not entered into any other off-balance sheet arrangements.
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 10 and Note 24 of Notes to Consolidated Financial
Statements in the Company's 2003 Annual Report on Form 10-K.
10. RESTRUCTURING CHARGE
In December 2002, the Company recorded a net restructuring charge of $7.1
million (pretax), representing a charge of $9.9 million in connection with the
closure of the 22 remaining domestic Liz Claiborne brand specialty stores,
offset by a $2.8 million reversal of liabilities recorded in connection with the
December 2001 restructuring that were no longer required. This determination to
close the stores was intended to eliminate redundancy between this retail format
and the wide department store base in which Liz Claiborne products are
available. The $9.9 million charge included costs associated with lease
obligations ($5.4 million), asset write-offs ($3.3 million) and other store
closing costs ($1.2 million); of these amounts, approximately $6.6 million was
expected to be paid out in cash. The remaining balance of the 2002 restructuring
liability as of October 2, 2004 was $124,000. The Company expects that these
activities will be complete by December 2004.
18
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A summary of the changes in the restructuring reserves is as follows:
Estimated
Operating & Occupancy
Store Closure Administrative Costs & Asset
(Dollars in thousands) Costs Exit Costs Write Downs Total
- ---------------------- ----------------------------------------------------------------
Balance at January 3, 2004 $ 1,739 $ 200 $ 30 $ 1,969
Spending for nine months ended October 2, 2004 1,634 76 30 1,740
2004 Reserve Reduction 105 -- -- 105
-------- -------- -------- --------
Balance at October 2, 2004 $ -- $ 124 $ -- $ 124
======== ======== ======== ========
11. 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
----------------------------------------------------------------
October 2, October 4, October 2, October 4,
(Amounts in thousands) 2004 2003 2004 2003
- ---------------------- ----------------------------------------------------------------
Weighted average common shares outstanding 108,293 107,187 106,894 107,959
Effect of dilutive securities:
Stock options and restricted stock grants 1,693 2,088 1,602 2,366
------------ ------------ ------------ ------------
Weighted average common shares outstanding and
common share equivalents 109,986 109,275 108,496 110,325
============ ============ ============ ============
12. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS SUPPLEMENTARY DISCLOSURES
During the nine months ended October 2, 2004, the Company made income tax
payments of $102,187,000 and interest payments of $24,255,000. During the nine
months ended October 4, 2003, the Company made income tax payments of
$89,895,000 and interest payments of $26,980,000.
13. 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 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. The Company also presents its results on a geographic basis between
Domestic (wholesale customers and Company specialty retail and outlet stores
located in the United States) and International (wholesale customers and Company
specialty retail, outlet and concession stores located outside of the United
States) based on selling location. 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
2003 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
19
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
operating profit generated by the Retail segment. The profit credited to the
wholesale segments from the Retail segment is eliminated in consolidation.
Certain items in the Company's International businesses have been reclassified
to conform to current year's classifications. In addition, as the Company is
creating the multi-brand platform in Europe it has the opportunity to reengineer
cost allocation processes to more fairly reflect the operating income for each
of its segments. It is the Company's obligation to reflect these changes and
present historical financial information on a comparable basis.
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 October 2, 2004
--------------------------------------------------------------------------
Wholesale Wholesale Corporate/
(Dollars in thousands) Apparel Non-Apparel Retail Eliminations Total
- ---------------------- -------------- -------------- -------------- -------------- --------------
NET SALES:
Total net sales $ 2,395,621 $ 426,240 $ 732,923 $ (119,512) $ 3,435,272
Intercompany sales (129,001) (17,135) -- 146,136 --
----------- ----------- ----------- ----------- -----------
Sales from external customers $ 2,266,620 $ 409,105 $ 732,923 $ 26,624 $ 3,435,272
=========== =========== =========== =========== ===========
OPERATING INCOME:
Total operating income $ 300,183 $ 64,103 $ 31,795 $ (15,807) $ 380,274
Intercompany segment operating
income (loss) (29,923) (6,895) -- 36,818 --
----------- ----------- ----------- ----------- -----------
Segment operating income from
external customers $ 270,260 $ 57,208 $ 31,795 $ 21,011 $ 380,274
=========== =========== =========== =========== ===========
For the Nine Months Ended October 4, 2003
--------------------------------------------------------------------------
Wholesale Wholesale Corporate/
(Dollars in thousands) Apparel Non-Apparel Retail Eliminations Total
- ---------------------- -------------- -------------- -------------- -------------- --------------
NET SALES:
Total net sales $ 2,327,237 $ 380,170 $ 621,494 $ (119,693) $3,209,208
Intercompany sales (128,416) (13,642) -- 142,058 --
----------- ----------- ----------- ----------- -----------
Sales from external customers $ 2,198,821 $ 366,528 $ 621,494 $ 22,365 $ 3,209,208
=========== =========== =========== =========== ===========
OPERATING INCOME:
Total operating income $ 292,298 $ 45,828 $ 32,978 $ (22,188) $ 348,916
Intercompany segment operating
income (loss) (31,149) (6,530) -- 37,679 --
----------- ----------- ----------- ----------- -----------
Segment operating income from
external customers $ 261,149 $ 39,298 $ 32,978 $ 15,491 $ 348,916
=========== =========== =========== =========== ===========
20
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three Months Ended October 2, 2004
--------------------------------------------------------------------------
Wholesale Wholesale Corporate/
(Dollars in thousands) Apparel Non-Apparel Retail Eliminations Total
- ---------------------- -------------- -------------- -------------- -------------- --------------
NET SALES:
Total net sales $ 905,702 $ 189,360 $ 260,968 $ (49,449) $ 1,306,581
Intercompany sales (49,043) (10,078) -- 59,121 --
----------- ----------- ----------- ----------- -----------
Sales from external customers $ 856,659 $ 179,282 $ 260,968 $ 9,672 $ 1,306,581
=========== =========== =========== =========== ===========
OPERATING INCOME:
Total operating income $ 129,594 $ 43,837 $ 10,803 $ (4,126) $ 180,108
Intercompany segment operating
income (loss) (8,787) (2,797) -- 11,584 --
----------- ----------- ----------- ----------- -----------
Segment operating income from
external customers $ 120,807 $ 41,040 $ 10,803 $ 7,458 $ 180,108
=========== =========== =========== =========== ===========
For the Three Months Ended October 4, 2003
--------------------------------------------------------------------------
Wholesale Wholesale Corporate/
(Dollars in thousands) Apparel Non-Apparel Retail Eliminations Total
- ---------------------- -------------- -------------- -------------- -------------- --------------
NET SALES:
Total net sales $ 852,978 $ 146,409 $ 217,442 $ (42,637) $ 1,174,192
Intercompany sales (44,320) (5,491) -- 49,811 --
----------- ----------- ----------- ----------- -----------
Sales from external customers $ 808,658 $ 140,918 $ 217,442 $ 7,174 $ 1,174,192
=========== =========== =========== =========== ===========
OPERATING INCOME:
Total operating income $ 135,337 $ 26,059 $ 10,243 $ (8,553) $ 163,086
Intercompany segment operating
income (loss) (11,338) (2,837) -- 14,175 --
----------- ----------- ----------- ----------- -----------
Segment operating income from
external customers $ 123,999 $ 23,222 $ 10,243 $ 5,622 $ 163,086
=========== =========== =========== =========== ===========
October 2, January 3, October 4,
(Dollars in thousands) 2004 2004 2003
- ---------------------- ---------------------------------------------
SEGMENT ASSETS:
Wholesale Apparel $ 2,307,646 $ 2,006,673 $ 1,902,791
Wholesale Non-Apparel 213,776 170,315 220,987
Retail 661,738 524,721 510,967
Corporate 189,178 186,390 169,837
Eliminations (301,869) (281,100) (289,201)
----------- ----------- -----------
Total assets $ 3,070,469 $ 2,606,999 $ 2,515,381
=========== =========== ===========
21
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
GEOGRAPHIC DATA:
Nine Months Ended Three Months Ended
------------------------------------------------------------
October 2, October 4, October 2, October 4,
(Dollars in thousands) 2004 2003 2004 2003
- ---------------------- ------------------------------------------------------------
NET SALES:
Domestic sales $ 2,613,763 $ 2,523,280 $ 988,172 $ 906,272
International sales 821,509 685,928 318,409 267,920
----------- ----------- ----------- -----------
Total net sales $ 3,435,272 $ 3,209,208 $ 1,306,581 $ 1,174,192
=========== =========== =========== ===========
OPERATING INCOME:
Domestic operating income $ 318,618 $ 284,573 $ 142,759 $ 125,822
International operating income 61,656 64,343 37,349 37,264
----------- ----------- ----------- -----------
Total operating income $ 380,274 $ 348,916 $ 180,108 $ 163,086
=========== =========== =========== ===========
October 2, January 3, October 4,
(Dollars in thousands) 2004 2004 2003
- ---------------------- ---------------------------------------------
TOTAL ASSETS:
Domestic $ 2,014,436 $ 1,821,706 $ 1,780,353
International 1,056,033 785,293 735,028
----------- ----------- -----------
Total assets $ 3,070,469 $ 2,606,999 $ 2,515,381
=========== =========== ===========
14. ACCOUNTING FOR DERIVATIVES AND HEDGING ACTIVITIES
At October 2, 2004, the Company had forward contracts maturing through December
2005 to sell 48 million euro for $56 million and 2.0 million Pounds Sterling for
2.9 million euro. The notional value of the foreign exchange forward contracts
at the end of the third quarter of 2004 was approximately $60 million, as
compared with approximately $76 million at year-end 2003 and approximately $98
million at the end of the third quarter of 2003. At the end of the third quarter
of 2004, the Company had $10 million in euro currency collars outstanding as
compared to $42 million in euro currency collars at year-end 2003 and $42
million in euro currency collars and $12 million in average rate options at the
end of the third quarter of 2003. Unrealized losses for outstanding foreign
exchange forward contracts were approximately $2.8 million at the end of the
third quarter of 2004, $11.8 million at year-end 2003 and approximately $8.5
million at the end of the third quarter of 2003. The ineffective portion of
these contracts was approximately $262,000 and was expensed in 2004.
In connection with the variable rate financing under the synthetic lease
agreement, the Company has entered into interest rate swap agreements with an
aggregate notional amount of $40.0 million that began in January 2003 and will
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 income (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
October 2, 2004.
On February 11, 2004, the Company entered into interest rate swap agreements for
the notional amount of 175 million euro in connection with its 350 million
Eurobonds maturing August 7, 2006. This converted a portion of the fixed rate
Eurobonds interest expense to floating rate at a spread over six month EURIBOR.
The first interest rate setting occurred on August 7, 2004 and will be reset
each six-month period thereafter until maturity. This is designated as a fair
value hedge. The favorable interest accrual was not material for the nine months
ended October 2, 2004.
22
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
15. NEW ACCOUNTING PRONOUNCEMENTS
In March 2004, the FASB published an Exposure Draft, "Share-Based Payment," an
amendment of FASB Statements No. 123 and 95. Under this FASB proposal, all forms
of share-based payment to employees, including employee stock options, would be
treated as compensation and recognized in the income statement. This proposed
statement would be effective for fiscal periods beginning after June 15, 2005.
The FASB has indicated that it will issue a final statement in late 2004. The
Company currently accounts for stock options under APB No. 25. The pro-forma
impact of expensing options is disclosed in Note 1 of Notes to Condensed
Consolidated Financial Statements.
In December 2003, the FASB issued FASB Interpretation No. 46R, "Consolidation of
Variable Interest Entities" ("FIN 46R"), which amends the same titled FIN 46
that was issued in January 2003. FIN 46R addresses how to identify variable
interest entities and the criteria that requires the consolidation of such
entities. This statement did not have an impact on the Company's Condensed
Consolidated Financial Statements.
In March 2004, the Emerging Issues Task Force ("EITF") reached a consensus on
recognition and measurement guidance previously discussed under EITF 03-01. The
consensus clarifies the meaning of "other-than-temporary impairment" and its
application to investments classified as either available-for-sale or
held-to-maturity under SFAS 115, "Accounting for Certain Investments in Debt and
Equity Securities," and investments accounted for under the cost method or the
equity method. In September 2004 the FASB issued a final FASB Staff Position,
FSP EITF Issue 03-01-1, that delays the effective date for the measurement and
recognition guidance of EITF 03-01. The implementation of EITF 03-01 is not
expected to have a material impact on our results of operations or financial
condition.
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
- --------
Business/Segments
- -----------------
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
businesses in our LIZ CLAIBORNE brand along with our better-priced
specialty apparel (INTUITIONS, SIGRID OLSEN and REALITIES), bridge-priced
(DANA BUCHMAN and ELLEN TRACY), men's (CLAIBORNE), moderate-priced special
markets (AXCESS, CRAZY HORSE, EMMA JAMES, FIRST ISSUE, VILLAGER and J.H.
COLLECTIBLES), premium denim (LUCKY BRAND DUNGAREES) and contemporary
sportswear and dress (LAUNDRY, JUICY COUTURE, JANE STREET, ENYCE and SWE)
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 (as previously announced, our KENNETH COLE apparel
license will expire at the end of the year). 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 our 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, TRIFARI and MARVELLA
labels.
o Retail consists of our worldwide retail operations that sell most of these
------
apparel and non-apparel products to the public through our 282 outlet
stores, 256 specialty retail stores and 619 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, ELLEN TRACY, SIGRID OLSEN, LAUNDRY and MONET, as well
as our Special Brands Outlets which include products from our Special
Markets divisions. On February 20, 2003, we announced our decision to close
our 22 LIZ CLAIBORNE domestic Specialty Retail stores (see Note 10 of Notes
to Condensed Consolidated Financial Statements).
The Company, as licensor, also licenses to third parties the right to produce
and market products bearing certain Company-owned trademarks. The resulting
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 13 of Notes to Condensed Consolidated Financial
Statements.
Certain items in our International businesses have been reclassified to conform
to current year's classifications. In addition, as we are creating a multi-brand
platform in Europe from which we recently launched a number of our brands
utilizing the MEXX corporate platform, including ENYCE and LUCKY BRAND
DUNGAREES, we have the opportunity to reengineer cost allocation processes to
more fairly reflect the operating income for each of our segments. It is our
obligation to reflect these changes and present historical financial information
on a comparable basis.
Competitive Profile
- -------------------
We operate in global fashion markets that are highly competitive. Our ability to
continuously evaluate and respond to changing consumer demands and tastes,
across multiple market segments, distribution channels and geographies, is
critical to our success. Although our brand portfolio approach is aimed at
diversifying our risks in this regard, misjudging shifts in consumer preferences
could have a negative effect. Other key aspects of competition include quality,
brand image, distribution methods, price, customer service and intellectual
property protection. Our size and global operating strategies help us to
successfully compete by positioning us to take advantage of synergies in product
design, development, sourcing and distributing of our products throughout the
world. We believe we owe much of our recent success to our having successfully
leveraged our competencies in technology and supply chain management for the
benefit of existing and new (both acquired and internally developed) businesses.
Our success in the future will depend on our ability to continue to design
products that are acceptable to the marketplaces that we
24
serve and to source the manufacture of our products on a competitive basis,
particularly in light of the possible impact of the elimination of quota for
apparel products scheduled for 2005. We expect that if the anticipated
elimination of quota occurs as scheduled a general reduction in the cost of
sourcing and manufacturing apparel products will result. We note, however, that
there are initiatives underway to establish new quota levels for China in 2005;
accordingly, it is possible that the elimination of quota for China may not
transpire as originally planned. There can be no assurances that quota will be
fully eliminated, that there will be any cost savings as a result of the
reduction or elimination of quota, or that any such cost savings will be
reflected in the Company's gross profit rate. In addition, any changes to the
quota regime may present operational challenges to the Company and other apparel
companies.
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 under "Statement Regarding Forward-Looking
Disclosure" below and in our 2003 Annual Report on Form 10-K, including, without
limitation, those set forth under the heading "Business-Competition; Certain
Risks."
2004 Nine Months Overall Results
- --------------------------------
Net Sales
- ---------
Net sales for the nine months of 2004 were a record $3.435 billion, an increase
of $226.1 million, or 7.0%, over 2003 nine months net sales, as we continued the
disciplined execution of our brand portfolio strategy, under which we strive to
offer consumers apparel and non-apparel products across a range of styles, price
points and channels of distribution.
The sales results reflect the inclusion of $167.4 million of additional sales
from our recently acquired ENYCE and JUICY COUTURE businesses. Approximately
$71.4 million of the sales increase was due to the impact of foreign currency
exchange rates, primarily as a result of the strengthening euro on the reported
results of our international businesses. We also experienced sales increases in
our, MEXX Europe, DKNY(R) Jeans and Juniors, LUCKY BRAND DUNGAREES, SIGRID
OLSEN, Cosmetics and ELLEN TRACY businesses.
These increases more than offset planned sales decreases in our LIZ CLAIBORNE
better-priced department store business and our moderate-priced Special Markets
businesses. Our LIZ CLAIBORNE business continues to be challenged by
increasingly conservative buying patterns of our retail store customers as they
focus on inventory productivity and seek to differentiate their offerings from
those of their competitors, the growth in department store private label brands
and increased competition in the department store channel as a result of the
introduction of new offerings by our competitors. Looking forward, we expect
that our retail partners will continue a conservative approach to planning
inventory levels, with continued focus on inventory productivity and an
increasing emphasis on reorder (quick turn) business. Our state-of-the-art
technology coupled with modern business models and an evolving supply chain
enable to us partner with our customers, to quickly identify and reorder those
items that are trending well with consumers. With our acquisitions and the
growth in our moderate, non-apparel business and specialty retail business, we
have diversified our business by channels of distribution and target consumer.
We have also diversified geographically, with our international operations
representing over 20% of our sales. We continue to view international as an
important area of growth for us and are working to build the capability to
launch brands from our domestic portfolio in markets outside the United States
while continuing to evaluate growth opportunities available through business
development efforts outside the United States.
Gross Profit and Net Income
- ---------------------------
Our gross profit improved in the nine months of 2004 reflecting continued focus
on inventory management and lower sourcing costs. Our gross profit also
benefited from the acquisition of JUICY COUTURE and the continued growth of our
MEXX Europe business, as each of these businesses run at gross profit rates
higher than the Company average. Overall net income increased to $230.9 million
in the nine months of 2004 from $206.6 million in 2003, reflecting the benefit
received from our sales and gross profit rate improvements.
Balance Sheet
- -------------
Our financial position continues to be strong. We ended the nine months of 2004
with a net debt position of $461.9 million as compared to $323.4 million at
October 4, 2003. We generated $429.9 million in cash from operations over the
past 12 months, which enabled us to fund our $116.8 million share repurchase in
the second quarter, the acquisition of ENYCE, the final payment $192.4 million
(160 million euro) for MEXX Europe, and our capital
25
expenditures, while increasing our net debt position by only $138.5 million. The
foreign currency exchange translation on our Eurobond added $27.3 million to our
debt balance.
International Operations
- ------------------------
In the nine months of 2004, sales from our international segment represented
23.9% of our overall sales, as opposed to 21.4% in the 2003 nine months. We
expect our international sales will continue to represent an increasingly higher
percentage of our overall sales volume as a result of further anticipated growth
in our MEXX Europe business and the recent launch of a number of our brands in
Europe utilizing the MEXX corporate platform, including ENYCE and LUCKY BRAND
DUNGAREES. Accordingly, our overall results can be greatly impacted by changes
in foreign currency exchange rates. For example, the impact of foreign currency
exchange rates represented $71.4 million, or 52.7%, of the increase of
international sales from the 2003 nine months. Over the past few years, the Euro
and the Canadian dollar have strengthened against the US dollar. While this
trend has benefited our sales results and earnings in light of the growth of our
MEXX Europe and MEXX Canada businesses, these businesses' inventory, accounts
receivable and debt balances have likewise increased. Although we use foreign
currency forward contracts and options to hedge against our exposure to exchange
rate fluctuations affecting the actual cash flows associated with our
international operations, unanticipated shifts in exchange rates could have an
impact on our financial results.
Recent Acquisitions
- -------------------
On May 23, 2001, we acquired 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 consisting of:
(a) $255.1 million (295 million euro), in cash at closing (including the
assumption of debt), and (b) a contingent payment determined as a multiple of
Mexx's earnings and cash flow performance for either the 2003, 2004 or 2005
year. The 2003 measurement year was selected for the calculation of the
contingent payment, and on August 16, 2004, the Company made the required final
payment of $192.4 million (160 million euro).
In July 2002, we acquired 100 percent of the equity interest of Mexx Canada,
Inc., a privately held fashion apparel and accessories company ("MEXX Canada").
The total purchase price consisted of: (a) an initial cash payment made at the
closing date of $15.2 million; (b) a third payment made at the end of the first
nine months 2003 of 26.4 million Canadian dollars (or $17.9 million based on the
exchange rate in effect as of April 5, 2003); and (c) a contingent payment to be
determined as a multiple of MEXX Canada's earnings and cash flow performance for
the year ended either 2004 or 2005. The selection of the measurement year for
the contingent payment is at either party's option. We estimate that if the 2004
measurement year is selected the payment would be in the range of 38 - 42
million Canadian dollars (or $30 - 33 million based on the exchange rate in
effect at October 2, 2004).
In September 2002, we acquired 100 percent of the equity interest of Ellen
Tracy, Inc., a privately held fashion apparel company, and related companies
(collectively "Ellen Tracy") for a purchase price of $177.0 million, including
the assumption of debt and fees. Ellen Tracy designs, wholesales and markets
women's sportswear. Founded in 1949 and based in New York City, Ellen Tracy
sells its products predominantly to select specialty stores and upscale
department stores at bridge price points which are somewhat higher than the
Company's core better-priced businesses. Brands include ELLEN TRACY, LINDA
ALLARD ELLEN TRACY and COMPANY ELLEN TRACY.
On April 7, 2003, we acquired 100 percent of the equity interest of Juicy
Couture, Inc. (formerly, Travis Jeans Inc.) ("JUICY COUTURE"), a privately held
fashion apparel company. The total purchase price consisted of (a) a payment,
including the assumption of debt and fees, of $53.1 million, and (b) a
contingent payment to be determined as a multiple of JUICY COUTURE's earnings
for one of the years ended 2005, 2006 or 2007. The selection of the measurement
year for the contingent payment is at either party's option. We estimate that if
the 2005 measurement year is selected, the contingent payment would be in the
range of $87-92 million.
On December 1, 2003, we acquired 100 percent of the equity interest of ENYCE
HOLDING LLC ("ENYCE"), a privately held fashion apparel company, for a purchase
price at closing of approximately $121.9 million, including fees and the
retirement of debt at closing, and an additional $4.8 million for certain
post-closing adjustments.
26
RESULTS OF OPERATIONS
- ---------------------
We present our results based on the three business segments discussed in the
Overview section, as well as on the following geographic basis based on selling
location:
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,
primarily MEXX Europe and MEXX Canada.
All data and discussion with respect to our specific segments included within
this "Management's Discussion and Analysis" is presented after applicable
intercompany eliminations. This presentation reflects a change instituted
effective with the first nine months of Fiscal 2003, from our prior practice of
presenting specific segment information prior to intercompany eliminations.
THREE MONTHS ENDED OCTOBER 2, 2004 COMPARED TO THREE MONTHS ENDED OCTOBER 4,
- --------------------------------------------------------------------------------
2003
- ----
The following table sets forth our operating results for the three months ended
October 2, 2004 compared to the three months ended October 4, 2003:
Three months ended Variance
------------------------------------------------------------------
October 2, October 4,
Dollars in millions 2004 2003 $ %
- -------------------------------------------------------------------------------------------------------
Net Sales $ 1,306.6 $ 1,174.2 $ 132.4 11.3%
Gross Profit 593.6 519.9 73.7 14.2%
Selling, general & administrative
expenses 413.6 356.8 56.8 15.9%
Restructuring (gain) charge (0.1) -- (0.1) N/A
Operating Income 180.1 163.1 17.0 10.4%
Other income (expense) - net (0.0) (1.8) 1.8 100.0%
Interest (expense) - net (7.9) (7.9) (0.0) (0.0)%
Provision for income taxes 60.6 55.5 5.1 9.2%
Net Income $ 111.6 $ 97.9 $ 13.7 14.0%
Net Sales
- ---------
Net sales for the third quarter of 2004 were a record $1.307 billion, an
increase of $132.4 million, or 11.3%, over net sales for the third quarter of
2003. The acquisition of ENYCE (acquired December 1, 2003) added approximately
$34.0 million in net sales for the quarter. The impact of foreign currency
exchange rates, primarily as a result of the strengthening of the euro, added
approximately $23.7 million in sales during the quarter. Net sales results for
our business segments are provided below:
o Wholesale Apparel net sales increased $48.0 million, or 5.9%, to $856.7
------------------
million. This result reflected the following:
- The addition of $34.0 million of sales from our recently acquired
ENYCE business;
- A $14.1 million increase resulting from the impact of foreign currency
exchange rates in our international businesses; and
- Virtually flat net sales in the balance of our portfolio, reflecting
continued growth in our JUICY COUTURE (due to continued increases in
demand), licensed DKNY(R) Jeans (due to volume increases
27
resulting from additional store locations within existing accounts),
SIGRID OLSEN (due to volume growth resulting from new accounts in the
better department store channel) and our MEXX Europe businesses,
(exclusive of the impact of foreign currency exchange rates), offset
by a 17.4% decrease in our LIZ CLAIBORNE business (a 15.5% sales
decrease excluding the impact of lower shipments to the off-price
channel). The planned decrease in our LIZ CLAIBORNE business resulted
from a continued focus by our retail customers on inventory
productivity and conservative planning, lower volume due to the upward
migration of certain retailers to exclusive and differentiated product
offerings, growth in department store private label brands and the
introduction of new competitive offerings.
o Wholesale Non-Apparel net sales increased $38.4 million, or 27.2%, to
----------------------
$179.3 million. The increase was primarily due to new products representing
the extension of our JUICY COUTURE brand into the Non-Apparel segment, as
well as notable growth in our Cosmetics business, due primarily to the
continued popularity of our CURVE and CRUSH CURVE fragrances and the launch
of our REALITIES fragrance, and continued growth in our Jewelry, Handbags
and Fashion Accessories businesses. The impact of foreign currency exchange
rates in our international businesses was not material in this segment.
o Retail net sales increased $43.5 million, or 20.0%, to $261.0 million. The
------
increase reflected the following:
- A $9.3 million increase resulting from the impact of foreign currency
exchange rates in our international businesses; and
- A $34.2 million net increase primarily driven by higher comparable
store sales in our Specialty Retail business (including a 19.2%
comparable store sales increase in our LUCKY BRAND business and an
11.3% comparable store sales increase in our MEXX Europe business),
the net addition of 12 new LUCKY BRAND stores, 7 new domestic LIZ
CLAIBORNE outlet stores, 10 new specialty retail and outlet stores in
our MEXX Europe business and 9 new specialty retail and outlet stores
in our MEXX Canada business, in addition to the opening of 6 MEXX USA
and 15 SIGRID OLSEN specialty retail stores over the last twelve
months. We also opened 106 net new international concession stores in
Europe over the last twelve months.
Overall comparable store sales increased by 1.3%, primarily due to an
increase of 9.9% in comparable store sales in our Specialty Retail
business, partially offset by a comparable store sales decrease of 3.4% in
our Outlet business. We ended the quarter with a total of 282 Outlet
stores, 256 Specialty Retail stores and 619 international concession
stores.
o Corporate net sales, consisting of licensing revenue, increased $2.5
---------
million to $9.7 million as a result of revenues from new licenses and
growth from our existing license portfolio.
Viewed on a geographic basis, Domestic net sales increased by $81.9 million, or
--------
9.0%, to $988.2 million, reflecting the contributions of new product launches
and recent acquisitions, partially offset by planned declines in our LIZ
CLAIBORNE business. International net sales increased $50.5 million, or 18.8%,
-------------
to $318.4 million, reflecting the results of our MEXX Europe business;
approximately $23.7 million of this increase was due to the impact of currency
exchange rates.
Gross Profit
- ------------
Gross profit increased $73.7 million, or 14.2%, to $593.6 million in the third
quarter of 2004 over the third quarter of 2003. Gross profit as a percent of net
sales increased to 45.4% in 2004 from 44.3% in 2003. Approximately $12.6 million
of the increase in the quarter was due to the impact of foreign currency
exchange rates, primarily as a result of the strengthening of the euro. The
increased gross profit rate reflected a continued focus on inventory management,
lower sourcing costs and higher overall sell-through of our products at retail.
Growth in our MEXX Europe business also contributed to the rate increase, as
this business runs at a higher gross profit rate than the Company average.
Selling, General & Administrative Expenses
- ------------------------------------------
Selling, general & administrative expenses ("SG&A") increased $56.8 million, or
15.9%, to $413.6 million in the third quarter of 2004 over the third quarter of
2003 and as a percent of net sales increased to 31.7% from 30.4%. Approximately
$9.9 million of the increase was due to the impact of foreign currency exchange
rates, primarily as a result of the strengthening of the euro, while
approximately $9.2 million of the increase in the quarter was related to the
acquisition of ENYCE and the start-up of new businesses. The higher SG&A rate
primarily reflected reduced
28
expense leverage resulting from the sales decreases in our LIZ CLAIBORNE
business, the increased proportion of expenses related to our MEXX Europe
business, which runs at a higher SG&A rate than the Company average, and
additional costs associated with the creation of a multi-brand platform in
Europe discussed above, partially offset by the favorable impact of Company-wide
expense control initiatives.
Restructuring (Gain)
- --------------------
In the third quarter, we recorded a pretax restructuring gain of $105,000
($68,000 after tax), representing the reversal of the portion of the $7.1
million pretax ($4.5 million after tax) 2002 restructuring reserve (established
to cover the costs associated with the closure of all 22 domestic specialty
retail stores operating under the LIZ CLAIBORNE brand name) that was no longer
required due to the completion of the activities associated with the reserve.
Operating Income
- ----------------
Operating income for the third quarter of 2004 was $180.1 million, an increase
of $17.0 million, or 10.4%, over last year. The impact of foreign currency
exchange rates in our international businesses accounted for $2.7 million of the
increase. Operating income as a percent of net sales decreased to 13.8% in 2004
compared to 13.9% in 2003. The increase was the result of increased sales, lower
sourcing costs and improved inventory management, partially offset by increased
expenses related to the start up of new businesses and retail expansion.
Operating income by business segment is provided below:
o Wholesale Apparel operating income decreased $3.2 million to $120.8 million
-----------------
(14.1% of net sales) in 2004 compared to $124.0 million (15.3% of net
sales) in 2003, principally reflecting increased costs associated with the
creation of a multi-brand platform in Europe discussed above and reduced
profits in our LIZ CLAIBORNE business as a result of the lower sales
volume, partially offset by the inclusion of our recently acquired ENYCE
business and increased profits in our JUICY COUTURE and Special Markets
businesses. $2.6 million of the increase resulted from the impact of
foreign currency exchange rates in our international businesses.
o Wholesale Non-Apparel operating income was $41.0 million (22.9% of net
----------------------
sales) in 2004 compared to $23.2 million (16.5% of net sales) in 2003,
principally due to increases in our Cosmetics business, the addition of our
recently launched JUICY COUTURE accessories business, and increases in our
Jewelry, Fashion Accessories and Handbags businesses.
o Retail operating income was $10.8 million (4.1% of net sales) in 2004
------
compared to $10.2 million (4.7% of net sales) in 2003, principally
reflecting increased profits as a result of better performance in our MEXX
Europe and MEXX Canada businesses, partially offset by losses in our LIZ
CLAIBORNE Europe concession business (due to weak consumer response in the
European markets and investments associated with a new management structure
and new product design team put into place in the fourth quarter of 2003)
and costs associated with our direct to consumer initiatives (namely, the
MEXX USA and SIGRID OLSEN specialty retail formats and our LIZ.COM
website).
o Corporate operating income, primarily consisting of licensing operating
---------
income, increased $1.9 million to $7.5 million in 2004 compared to $5.6
million in 2003.
Viewed on a geographic basis, Domestic operating profit increased by $16.9
million, or 13.5%, to $142.8 million, predominantly reflecting the contribution
of new and recent acquisitions, offset by reduced profits in our LIZ CLAIBORNE
business. International operating profit was flat at $37.3 million, reflecting
losses in our LIZ CLAIBORNE Europe business and the incremental costs associated
with the creation of the multi-brand platform in Europe, and well as the reasons
discussed above.
Net Other Expense
- -----------------
Net other expense in the third quarter of 2004 was $9,000 compared to $1.8
million in the third quarter of 2003. In 2004 net other expense was comprised of
$0.5 million 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.), mostly offset by other non-operating income. In 2003, net other
expense was principally comprised of $0.6 million of minority interest expense
and other non-operating expenses.
Net Interest Expense
- --------------------
Net interest expense in the third quarter of 2004 was flat at $7.9 million
compared to the third quarter of 2003.
29
Provision for Income Taxes
- --------------------------
The income tax rate in the third quarter of 2004 decreased to 35.2% from 36.2%
in the prior year as a result of change to the European organizational structure
and the integration of our LIZ CLAIBORNE Europe and MEXX operations in nine
European countries. On October 22, 2004, President Bush signed the American Jobs
Creation Act of 2004 ("the Act"). The Internal Revenue Service has not issued
the applicable regulations related to the implementation of the Act's
provisions, and the Financial Accounting Standards Board is expected to issue
guidance to account for the impact of the Act. As such, the company is currently
not able to quantify the impact of the Act.
Net Income
- ----------
Net income in the third quarter of 2004 increased to $111.6 million, or 8.5% of
net sales, from $97.9 million in the third quarter of 2003, or 8.3% of net
sales. Diluted earnings per common share ("EPS") increased to $1.03 in 2004 from
$0.89 in 2003, a 15.7% increase.
Average diluted shares outstanding decreased by 1.8 million shares to 108.5
million in the third quarter of 2004 on a period-to-period basis as a result of
the impact of shares repurchased during the second quarter partially offset by
the exercise of stock options and the effect of dilutive securities.
NINE MONTHS ENDED OCTOBER 2, 2004 COMPARED TO NINE MONTHS ENDED OCTOBER 4, 2003
- -------------------------------------------------------------------------------
The following table sets forth our operating results for the nine months ended
October 2, 2004 (comprised of 39 weeks) compared to the nine months ended
October 4, 2003 (comprised of 40 weeks):
Nine months ended Variance
------------------------------------------------------------------
October 2, October 4,
Dollars in millions 2004 2003 $ %
- -------------------------------------------------------------------------------------------------------
Net Sales $ 3,435.3 $ 3,209.2 $ 226.1 7.0%
Gross Profit 1,584.0 1,401.4 182.6 13.0%
Selling, general & administrative
expenses 1,203.8 1,052.5 151.3 14.4%
Restructuring (gain) charge (0.1) -- (0.1) N/A
Operating Income 380.3 348.9 31.4 9.0%
Other income (expense) - net (1.5) (2.4) (0.9) (37.5%)
Interest (expense) - net (22.4) (22.7) (0.3) (1.3%)
Provision for income taxes 125.5 117.2 8.3 7.1%
Net Income $ 230.9 $ 206.6 $ 24.3 11.8%
Net Sales
- ---------
Net sales for the nine months of 2004 (which was comprised of 39 weeks) were a
record $3.435 billion, an increase of $226.1 million, or 7.0%, over net sales
for the nine months of 2003 (which was comprised of 40 weeks). The recent
acquisitions of JUICY COUTURE (acquired April 7, 2003) and ENYCE (acquired
December 1, 2003) added approximately $167.4 million in net sales in the nine
months. Approximately $71.4 million of the year-over-year increase was due to
the impact of foreign currency exchange rates, primarily as a result of the
strengthening of the euro. Net sales results for our business segments are
provided below:
o Wholesale Apparel net sales increased $67.8 million, or 3.1%, to $2.267
------------------
billion. This result reflected:
- A $146.3 million increase resulting from the acquisitions of JUICY
COUTURE and ENYCE;
30
- A $41.7 million increase resulting from the impact of foreign currency
exchange rates in our international businesses; and
- A $120.2 million net decrease primarily reflecting a 22.2% decrease in
our LIZ CLAIBORNE business (an 18.5% sales decrease excluding the
impact of lower shipments to the off-price channel) and a 9.8%
decrease in our Special Markets business (due to the challenging
retail environment and conservative inventory management of retailers
in this sector), partially offset by increases, exclusive of the
impact of foreign currency exchange rates, in our MEXX Europe business
(due to continued growth), ELLEN TRACY (due to increased volume in the
higher-priced Collection business), licensed DKNY(R) Men's and Women's
Jeans (due to volume increases resulting from additional store
locations within existing accounts) and SIGRID OLSEN (due to volume
growth resulting from new accounts in the better department store
channel). The planned decrease in our LIZ CLAIBORNE business resulted
from lower volume due to the factors described above in the Overview
section and a lower amount of shipments to off-price channels
resulting from conservative inventory planning and management.
o Wholesale Non-Apparel net sales increased by $42.6 million, or 11.6%, to
----------------------
$409.1 million. The increase primarily reflected the addition of our
recently launched JUICY COUTURE accessories business, increases in our
Cosmetics business, driven primarily by the launch of our REALITIES
fragrance and continued growth in our CURVE fragrances, increases our MONET
Jewelry business, and the introduction of products under our KENNETH COLE
jewelry license. The impact of foreign currency exchange rates in our
international businesses was not material in this segment.
o Retail net sales increased $111.4 million, or 17.9%, to $732.9 million. The
------
increase reflected the following:
- A $28.9 million increase resulting from the impact of foreign currency
exchange rates in our international businesses; and
- An $82.5 million net increase primarily driven by higher comparable
store sales in our Specialty Retail business (including a 16.2%
comparable store sales increase in our LUCKY BRAND business) and the
net store openings and new concessions mentioned above.
Overall comparable store sales increased by 2.0%. Comparable store sales
increased 7.5% in our Specialty Retail business and decreased 1.3% in our
Outlet business.
o Corporate net sales, consisting of licensing revenue, increased $4.3
---------
million to $26.6 million as a result of revenues from new licenses and
growth from our existing license portfolio.
Viewed on a geographic basis, Domestic net sales increased by $90.5 million, or
--------
3.6%, to $2.614 billion, reflecting the contributions of new product launches
and recent acquisitions, partially offset by declines in our LIZ CLAIBORNE and
Special Markets businesses. International net sales increased $135.6 million, or
-------------
19.8%, to $821.5 million, reflecting the results of our MEXX Europe and MEXX
Canada businesses; approximately $71.4 million of this increase was due to the
impact of currency exchange rates.
Gross Profit
- ------------
Gross profit increased $182.6 million, or 13.0%, to $1.584 billion in the nine
months of 2004 over the nine months of 2003. Gross profit as a percent of net
sales increased to 46.1% in 2004 from 43.7% in 2003. Approximately $38.4 million
of the increase in the nine months was due to the impact of foreign currency
exchange rates, primarily as a result of the strengthening of the euro. The
increased gross profit rate reflected a continued focus on inventory management
and lower sourcing costs. Growth in our MEXX Europe and JUICY COUTURE businesses
also contributed to the rate increase, as each of these businesses run at a
higher gross profit rate than the Company average.
Selling, General & Administrative Expenses
- ------------------------------------------
SG&A increased $151.3 million, or 14.4%, to $1.204 billion in the nine months of
2004 over the nine months of 2003 and as a percent of net sales increased to
35.0 % from 32.8%. Approximately $52.3 million of the increase resulted from the
acquisitions of JUICY COUTURE and ENYCE and the start-up of new businesses,
while approximately $32.8 million of the increase resulted from the impact of
foreign currency exchange rates in our international businesses, primarily as a
result of the strengthening of the euro. The remainder of the increase resulted
from higher volume-related expenses and other expense increases, including new
store openings.
31
SG&A as a percent of sales increased due to reduced expense leverage resulting
from the sales decreases in our LIZ CLAIBORNE and Special Markets businesses,
the increased proportion of expenses related to our MEXX Europe business, which
runs at a higher SG&A rate than the Company average, and additional costs
associated with the creation of a multi-brand platform in Europe, partially
offset by the favorable impact of Company-wide expense control initiatives.
Restructuring (Gain)
- --------------------
In the third quarter, we recorded a pretax restructuring gain of $105,000
($68,000 after tax), representing the reversal of the portion of the $7.1
million pretax ($4.5 million after tax) 2002 restructuring reserve (established
to cover the costs associated with the closure of all 22 domestic specialty
retail stores operating under the LIZ CLAIBORNE brand name) that was no longer
required due to the completion of the activities associated with the reserve.
Operating Income
- ----------------
Operating income in the nine months of 2004 was $380.3 million, an increase of
$31.4 million, or 9.0%, over 2003. Operating income as a percent of net sales
increased to 11.1% in the nine months of 2004 compared to 10.9% in 2003,
primarily as a result of increased net sales and the improved gross margin rate
discussed above. Approximately $5.6 million of the increase was due to the
impact of foreign currency exchange rates, primarily as a result of the
strengthening of the euro. Operating income by business segment is provided
below:
o Wholesale Apparel operating income increased $9.2 million to $270.3 million
-----------------
(11.9% of net sales) in the nine months of 2004 compared to $261.1 million
(11.9% of net sales) in 2003, principally reflecting the acquisitions of
JUICY COUTURE and ENYCE and increased profits in our licensed DKNY(R)
Jeans, ELLEN TRACY, CLAIBORNE Men's, LUCKY BRAND and SIGRID OLSEN
businesses, partially offset by reduced profits in our LIZ CLAIBORNE
business as a result of the lower sales volume discussed above.
o Wholesale Non-Apparel operating income increased by $17.9 million to $57.2
----------------------
million (14.0% of net sales) in the nine months of 2004 compared to $39.3
million (10.7% of net sales) in 2003, reflecting increases in our Jewelry
and department store Fashion Accessories businesses and the addition of our
recently launched JUICY COUTURE accessories business, as well as strong
performance in our Cosmetics business primarily due to the re-launch of our
REALITIES fragrance and continued strong performance in our CURVE
fragrances.
o Retail operating income decreased $1.2 million to $31.8 million (4.3% of
------
net sales) in the nine months of 2004 compared to $33.0 million (5.3% of
net sales) in 2003, principally reflecting losses in our LIZ CLAIBORNE
Europe concession business as well as costs associated with our
direct-to-consumer initiatives (namely, the MEXX USA and SIGRID OLSEN
specialty retail formats and our LIZ.COM website), partially offset by an
increase in profits from our LUCKY BRAND business and the impact of the
closure of our domestic LIZ CLAIBORNE specialty stores in 2003.
o Corporate operating income, primarily consisting of licensing operating
---------
income, increased $5.5 million to $21.0 million in the nine months of 2004
compared to $15.5 million in 2003.
Viewed on a geographic basis, Domestic operating profit increased by $34.0
--------
million, or 11.9%, to $318.6 million, predominantly reflecting the contribution
of recent acquisitions, offset by reduced profits in our LIZ CLAIBORNE business.
International operating profit decreased $2.7 million, or 4.2% to $61.7 million,
- -------------
reflecting the results of losses in our LIZ CLAIBORNE Europe business and the
incremental costs associated with the creation of a multi-brand platform in
Europe, partially offset by the favorable impact of foreign exchange rates of
$5.6 million.
Net Other Expense
- -----------------
Net other expense in the nine months of 2004 was $1.5 million compared to $2.4
million in the nine months of 2003. In 2004 net other expense was comprised of
$2.6 million 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. In 2003, net
other expense was principally comprised of $1.7 million of minority interest
expense and other non-operating expense.
Net Interest Expense
- --------------------
Net interest expense in the nine months of 2004 was $22.4 million, compared to
$22.7 million in the nine months of 2003.
32
Provision for Income Taxes
- --------------------------
The income tax rate in the nine months of 2004 decreased to 35.2% from 36.2% in
the prior year as a result of change to the European organizational structure
and the integration of our LIZ CLAIBORNE Europe and MEXX operations in nine
European countries. On October 22, 2004, President Bush signed the American Jobs
Creation Act of 2004 ("the Act"). The Internal Revenue Service has not issued
the applicable regulations related to the implementation of the Act's
provisions, and the Financial Accounting Standards Board is expected to issue
guidance to account for the impact of the Act. As such, the company is currently
not able to quantify the impact of the Act.
Net Income
- ----------
Net income in the nine months of 2004 increased to $230.9 million, or 6.7% of
net sales, from $206.6 million in the nine months of 2003, or 6.4% of net sales.
Diluted earnings per common share ("EPS") increased 11.1% to $2.10 in 2004, from
$1.89 in 2003.
Average diluted shares outstanding increased by 0.7 million shares to 110.0
million in the nine months of 2004 on a year-over-year basis, as a result of the
exercise of stock options and the effect of dilutive securities, partially
offset by the impact of shares repurchased during the third quarter of 2004.
FORWARD OUTLOOK
- ---------------
Retailers continue to be focused on inventory productivity to drive sales and
avoid excess inventory. This planned increase in productivity, the overall
negative retail sales trends in 2003 and the focus on brand differentiation have
resulted in very conservative planned retailer receipts in all sectors for 2004.
While improving sales trends for our brands drove our higher than planned sales
performance in the third quarter, we continue to take a conservative and prudent
approach in planning our business.
For the fourth quarter of 2004, we forecast a net sales increase of 9 - 11%, an
operating margin in the range of 11.5% - 11.8% and EPS in the range of $0.71 -
$0.74. We project that the impact of foreign currency exchange rates on net
sales will be immaterial in the fourth quarter 2004.
o In our wholesale apparel segment, we expect fourth quarter 2004 net sales
to increase in the range of 8 - 9%, primarily driven by the acquisition of
ENYCE and increases in our domestic LIZ CLAIBORNE, MEXX Europe, JUICY
COUTURE, licensed DKNY(R) Jeans and SIGRID OLSEN businesses.
o In our wholesale non-apparel segment, we expect fourth quarter 2004 net
sales to increase in the range of 4 - 7%, primarily driven by the addition
of our recently launched JUICY COUTURE accessories business as well as
increases in our Handbags business.
o In our retail segment, we expect fourth quarter 2004 net sales to increase
in the range of 15 - 18%, primarily driven by increases in our LUCKY BRAND,
MEXX Europe and Outlet businesses as well as the conservative rollout of
the MEXX USA and SIGRID OLSEN formats which were introduced in the second
half of fiscal 2003.
o In our corporate segment, we expect fourth quarter 2004 licensing revenue
to increase by 15%.
For fiscal 2004, we are now forecasting a net sales increase of 7.5 - 8%
(including a 1.7% sales increase due to the projected impact of foreign currency
exchange rates), an operating margin in the range of 11.2% - 11.3% and EPS in
the range of $2.81 - $2.84.
o In our wholesale apparel segment, we expect fiscal 2004 net sales to
increase in the range of 4 - 5%, primarily driven by the inclusion of a
full year's sales in our JUICY COUTURE and ENYCE businesses and increases
in our MEXX Europe, SIGRID OLSEN, licensed DKNY(R) Jeans, ELLEN TRACY and
LUCKY BRAND businesses, offset by a mid-teens decrease in our domestic LIZ
CLAIBORNE business and an approximate 10% decrease in our Special Markets
business.
o In our wholesale non-apparel segment, we expect fiscal 2004 net sales to
increase in the range of 9 - 10%, primarily driven by increases in our
JUICY COUTURE accessories, MONET and Cosmetics businesses.
o In our retail segment, we expect fiscal 2004 net sales to increase in the
range of 17 - 18%, primarily driven by increases in our LUCKY BRAND and
MEXX Europe businesses as well as the conservative rollout of the MEXX USA
and SIGRID OLSEN formats which were introduced in the second half of fiscal
2003, partially offset by decreases related to the fiscal 2003 closure of
our domestic LIZ CLAIBORNE specialty stores.
o In our corporate segment, we expect fiscal 2004 licensing revenue to
increase by 20% over fiscal 2003.
33
For fiscal 2005, we are forecasting a net sales increase of 6 - 8%, an operating
margin in the range of 11.4% - 11.6% and EPS in the range of $3.05 - $3.12. We
project that the impact of foreign currency exchange rates on net sales will be
immaterial in fiscal 2005.
o In our wholesale apparel segment, we expect fiscal 2005 net sales to
increase in the range of 4 - 6%, primarily driven by increases in our MEXX
Europe, Special Markets, JUICY COUTURE, LUCKY BRAND, SIGRID OLSEN, DANA
BUCHMAN and licensed DKNY(R) Jeans businesses, partially offset by the
impact of the discontinuation of our Kenneth Cole womenswear license. We
expect net sales in our domestic Liz Claiborne business to be in the range
of plus or minus low single digits year over year.
o In our wholesale non-apparel segment, we expect fiscal 2005 net sales to
increase in the range of 6 - 8%, primarily driven by increases in our
Cosmetics, JUICY COUTURE accessories, Handbags and Jewelry businesses.
o In our retail segment, we expect fiscal 2005 net sales to increase in the
range of 13 - 15%, primarily driven by increases in our LUCKY BRAND, MEXX
Europe, SIGRID OLSEN, MEXX USA and Outlet businesses. We project comparable
store sales to increase low single digits over fiscal 2004.
o In our corporate segment, we expect fiscal 2005 licensing revenue to
increase by 15% over fiscal 2004.
All of these forward-looking statements exclude the impact of any future
acquisitions or additional stock repurchases. The foregoing forward-looking
statements are qualified in their entirety by reference to the risks and
uncertainties set forth under the heading "STATEMENT REGARDING FORWARD-LOOKING
DISCLOSURE" below.
FINANCIAL POSITION, CAPITAL RESOURCES AND LIQUIDITY
- ---------------------------------------------------
Cash Requirements. Our primary ongoing cash requirements are to fund growth in
- -------------------
working capital (primarily accounts receivable and inventory) to support
projected sales increases, 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. We also require cash to fund our acquisition program. In addition,
the Company will require cash to fund any repurchase of Company stock under its
previously announced share repurchase program; as of November 5, 2004, the
Company had $101.5 million remaining in buyback authorization under the program.
Sources of Cash. Our historical sources of liquidity to fund ongoing cash
- ----------------
requirements include cash flows from operations, cash and cash equivalents and
securities on hand, as well as borrowings through our commercial paper program
and bank lines of credit (which include revolving and trade letter of credit
facilities); in 2001, we issued euro-denominated bonds (the "Eurobonds") to fund
the initial payment in connection with our acquisition of MEXX Europe. These
bonds are designated as a hedge of our net investment in MEXX (see Note 2 of
Notes to Condensed Consolidated Financial Statements). We anticipate that cash
flows from operations, our commercial paper program and bank and letter of
credit facilities will be sufficient to fund our next twelve months' liquidity
requirements and that we will be able to adjust the amounts available under
these facilities if necessary (see "Commitments and Capital Expenditures" for
more information on future requirements). Such sufficiency and availability may
be adversely affected by a variety of factors, including, without limitation,
retailer and consumer acceptance of our products, which may impact our financial
performance, maintenance of our investment-grade credit rating, as well as
interest rate and exchange rate fluctuations.
2004 vs. 2003
- -------------
Cash and Debt Balances. We ended the third quarter of 2004 with $134.4 million
- ------------------------
in cash and marketable securities, compared to $129.1 million at October 4, 2003
and $343.9 million at January 3, 2004, and with $596.3 million of debt
outstanding at October 2, 2004 compared to $452.6 million at October 4, 2003 and
$459.2 million at January 3, 2004. The $138.4 million increase in our net debt
position on a year-over-year basis is primarily attributable to the $192.4
million (160 million euro) required final contingent payment to complete the
purchase of MEXX Europe, $126.7 million payment made to acquire ENYCE, $116.8
million in share repurchases, and the effect of foreign currency translation on
our Eurobond, which added $27.3 million to our debt balance, partially offset by
cash flow from operations for the trailing twelve months of $429.9 million. The
increase in our net debt position from year-end of $346.6 million was also
attributable to the $192.4 million (160 million euro) required final contingent
payment to complete the purchase of MEXX Europe, $116.8 million in share
repurchases and $96.0 million for capital and in-store expenditures partially
offset by cash flows from operations. We ended the third quarter of 2004
34
with $1.745 billion in stockholders' equity, giving us a total debt to total
capital ratio of 25.5% compared to $1.515 billion in stockholders' equity last
year with a debt to total capital ratio of 23.0% and $1.578 billion in
stockholders' equity at year end with a debt to total ratio of 22.5%. As of the
end of the third quarter, we had approximately $101.5 million remaining on our
share repurchase authorization.
Accounts Receivable increased $87.9 million, or 14.7%, at October 2, 2004
- --------------------
compared to October 4, 2003, primarily due to the timing of invoicing of
shipments, an additional $18.7 million from our recently acquired ENYCE business
and the impact of foreign currency exchange rates of $9.0 million, primarily
related to the strengthening of the euro, also impacted our receivable balance.
Accounts receivable increased $293.2 million, or 75.0%, at October 2, 2004
compared to January 3, 2004, and days' sales outstanding increased to 72.8 from
65.4 on a year over year basis due primarily to volume increases and the timing
of shipments in our domestic operations.
Inventories increased $92.1 million, or 17.4% at October 2, 2004 compared to
- -----------
October 4, 2003, and increased $136.3 million, or 28.1% at October 2, 2004
compared to January 3, 2004. The acquisitions of ENYCE as well as other new
business initiatives, including the incremental rollout of our new MEXX USA and
SIGRID OLSEN specialty store businesses, were responsible for $28.2 million of
the increase in inventory over October 4, 2003. Inventories in our comparable
domestic businesses increased by $26.0 million, primarily due to our
acceleration of shipments from our suppliers in response to continued delays at
the West Coast ports resulting from capacity issues; thus in-transit inventory
increased $33.6 million. We are managing through the problem by using
alternative shipping methods and reducing time off the manufacturing process,
allowing our suppliers to ship earlier, ultimately offsetting the increased time
to warehouse and distribute. Our international inventories grew by $37.9
million. Approximately $11.5 million of the international increase is related to
the impact of currency exchange rates, primarily relating to the strengthening
of the euro. The increase of $136.3 million compared to January 3, 2004 is
primarily due to a shift in timing of our current season and in-transit
inventories within our domestic wholesale apparel businesses. Our average
inventory turnover rate decreased slightly to 4.5 times for the twelve-month
period ended October 2, 2004 as compared to 4.8 times for the twelve-month
period ended October 4, 2003 and 4.7 times for the twelve-month period ended
January 3, 2004, reflecting a slight increased proportion of retail business in
our mix. We continue to take a conservative approach to inventory management in
2004.
Borrowings under our revolving credit facility and other credit facilities
- ----------
peaked at $203.3 million during the nine months of 2004; at the end of the nine
months of 2004, our borrowings under these facilities were $154.6 million.
Net cash provided by operating activities was $42.1 million in the nine months
- ------------------------------------------
of 2004, compared to $4.2 million provided by operating activities in the nine
months of 2003. This $37.9 million increase in cash flow was primarily due to a
$24.3 million increase in net income as well as a $11.8 million increase in cash
flow due to changes in working capital in 2004 compared to 2003, driven
primarily by year-over-year changes in accounts payable due to timing of
payments for inventory purchases and in the accrued expenses due to payment of
certain employment-related obligations, partially offset by year-over-year
changes in the accounts receivable balances as described above.
Net cash used in investing activities was $294.1 million in the nine months of
- --------------------------------------
2004, compared to $178.7 million in the nine months of 2003. Net cash used in
the nine months of 2004 primarily attributable to the $192.4 million (160
million euro) required final contingent payment to complete the purchase of MEXX
Europe, as well as $96.0 million for capital and in-store expenditures. Net cash
used in the nine months of 2003 primarily reflected $101.1 million for the
additional payments made in connection with the acquisitions of JUICY COUTURE,
LUCKY BRAND DUNGAREES and MEXX Canada and $77.9 million in capital and in-store
expenditures.
Net cash provided by financing activities was $43.3 million in the nine months
- ------------------------------------------
of 2004, compared to $32.6 million in the nine months of 2003. The $10.7 million
year-over-year increase primarily reflected the increase of short term
borrowings and commercial paper, partially offset by the purchase of common
stock.
Commitments and Capital Expenditures
- ------------------------------------
We may be required to make additional payments in connection with our
acquisitions. The LUCKY BRAND DUNGAREES and Segrets acquisition agreements could
require us to purchase the minority interest shares in these businesses. These
payments could be triggered by either the buyer or the seller and may occur in
2004 or in subsequent years. Additionally, pursuant to provisions in the MEXX
Canada and JUICY COUTURE acquisition agreements that call for contingent
purchase price payments (see Note 2 of Notes to Condensed Consolidated
35
Financial Statements), the contingent payments could occur respectively for MEXX
Canada (in 2005 or 2006) and JUICY COUTURE (in 2005, 2006, 2007 or 2008). These
payments become due when triggered by the buyer or the seller.
We estimate that if the eligible payments for LUCKY BRAND DUNGAREES and Segrets
are triggered in 2004, they would fall in the range of $55 - 65 million and $2 -
4 million, respectively. These payments will be made in either cash or shares of
our common stock at the option of either the Company or the seller.
We estimate that if the 2004 measurement year is selected, the MEXX Canada
contingent payment in 2005 would be in the range of 38 - 42 million Canadian
dollars (or $30 - 33 million based on the exchange rate in effect at October 2,
2004). This payment will be made in cash.
We estimate that if the 2005 measurement year is selected, the JUICY COUTURE
contingent payment in 2006 would be in the range of $87 - 92 million. This
payment will be made in either cash or shares of our common stock at the option
of the Company.
If paid in cash, these payments will be funded with net cash provided by
operating activities, our revolving credit and other credit facilities and/or
the issuance of debt.
We note that with respect to the MEXX payment, the 2003 measurement year was
selected for the calculation of the contingent payment triggered under the
process provided for in the MEXX acquisition agreement. On August 16, 2004, the
Company made the required final payment of $192.4 million (160 million euro).
Our anticipated capital expenditures for 2004 are expected to approximate $130
million. These expenditures will consist primarily of the continued
technological upgrading and expansion of our management information systems and
distribution facilities (including certain building and equipment expenditures)
and the opening of retail stores and in-store merchandise shops. Capital
expenditures and working capital cash needs will be financed with net cash
provided by operating activities and our revolving credit and other credit
facilities.
Financing Arrangements
- ----------------------
On August 7, 2001, we issued 350 million euro (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. Interest on the Eurobonds is being paid on an annual basis
until maturity.
On October 21, 2002, we entered into a $750 million credit agreement (the
"Agreement") consisting of a $375 million, 364-day unsecured financing
commitment under a bank revolving credit facility, replacing a $500 million,
364-day unsecured credit facility scheduled to mature in November 2002, and a
$375 million, three-year bank revolving credit facility, replacing an existing
$250 million bank revolving credit facility which was scheduled to mature in
November 2003. On October 17, 2003, we entered into a $375 million, 364-day
unsecured financing commitment under a bank revolving credit facility, replacing
the existing $375 million, 364-day unsecured credit facility scheduled to mature
in October 2003. The three-year facility includes a $75 million multi-currency
revolving credit line, which permits us to borrow in U.S. dollars, Canadian
dollars and euro. 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 our long-term
credit rating. The Agreement contains certain customary covenants, including
financial covenants requiring us to maintain specified debt leverage and fixed
charge coverage ratios, and covenants restricting our ability to, among other
things, incur indebtedness, grant liens, make investments and acquisitions, and
sell assets. We believe we are in compliance with such covenants. The Agreement
may be directly drawn upon, or used, to support our $750 million commercial
paper program, which is used from time to time to fund working capital and other
general corporate requirements. Our ability to obtain funding through its
commercial paper program is subject to, among other things, the Company
maintaining an investment-grade credit rating. At October 2, 2004, we had $126.0
million of borrowings outstanding under the Agreement at an average interest
rate of 2.0%. 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 October 2, 2004 as the
Company intends to refinance such obligations on a long-term basis and is able
to do so.
36
On October 13, 2004, we entered into a $750 million, five-year revolving credit
agreement (the "New Facility"), replacing the $375 million, 364-day unsecured
credit facility scheduled to mature in October 2004 and the existing $375
million bank revolving credit facility which was scheduled to mature in October
2005, each of which were part of the Agreement. The terms of the New Facility
are substantially similar to the terms of the Agreement, including certain
customary covenants, including financial covenants requiring us to maintain
specified debt leverage and fixed charge coverage ratios, and covenants
restricting our ability to, among other things, incur indebtedness, grant liens,
make investments and acquisitions, and sell assets. A portion of the funds
available under the New Facility not in excess of $250 million is available for
the issuance of letters of credit. Additionally, at the request of the Company,
the amount of funds available under the New Facility may be increased at any
time or from time to time by an aggregate principal amount of up to $250 million
with only the consent of the lenders (which may include new lenders)
participating in such increase. The New Facility includes a $150 million
multi-currency revolving credit line, which permits the Company to borrow in
U.S. dollars, Canadian dollars and Euros. The funds available under the New
Facility may be used to refinance existing debt, provide working capital and for
general corporate purposes of the Company, including, without limitation, the
repurchase of capital stock and the support of the Company's $750 million
commercial paper program.
As of October 2, 2004, January 3, 2004 and October 4, 2003, we had lines of
credit aggregating $568 million, $487 million and $411 million, respectively,
which were primarily available to cover trade letters of credit. At October 2,
2004, January 3, 2004 and October 4, 2003, we had outstanding trade letters of
credit of $322 million, $254 million and $264 million, respectively. These
letters of credit, which have terms ranging from one to ten months, primarily
collateralize our obligations to third parties for the purchase of inventory.
The fair value of these letters of credit approximates contract values.
Our Canadian and European subsidiaries have unsecured lines of credit totaling
approximately $112.3 million (based on the exchange rates as of October 2,
2004), which is included in the aforementioned $568 million available lines of
credit. As of October 2, 2004, a total of $28.6 million of borrowings
denominated in foreign currencies was outstanding at an average interest rate of
2.4%. These lines of credit bear interest at rates based on indices specified in
the contracts plus a margin. The lines of credit are in effect for less than one
year and mature at various dates in 2004 and 2005. These lines are guaranteed by
the Company. With the exception of the Eurobonds, which mature in 2006, and the
New Facility, which expires in 2009, substantially all of our debt will mature
in less than one year and will be refinanced under existing credit lines.
Off-Balance Sheet Arrangements
- ------------------------------
On May 22, 2001, we 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. The leases
expire on November 22, 2006 with renewal subject to the consent of the lessor.
The lessor under the operating lease arrangements is an independent third-party
limited liability company, which has contributed equity of 5.75% of the $63.7
million project costs. The leases include guarantees by us for a substantial
portion of the financing and options to purchase the facilities at original
cost; the maximum guarantee is approximately $54 million. The guarantee becomes
effective if we decline to purchase the facilities at the end of the lease and
the lessor is unable to sell the property at a price equal to or greater than
the original cost. We 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.
In December 2003, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 46R, "Consolidation of Variable Interest Entities", ("FIN
46R"), which amends the same titled FIN 46 that was issued in January 2003. FIN
46R addresses how to identify variable interest entities and the criteria that
requires the consolidation of such entities. The third party lessor does not
meet the definition of a variable interest entity under FIN 46R, and therefore
consolidation by the Company is not required.
37
Hedging Activities
- ------------------
At October 2, 2004, we had forward contracts maturing through December 2005 to
sell 48 million euro for $56 million and 2.0 million Pounds Sterling for 2.9
million euro. The notional value of the foreign exchange forward contracts at
the end of the third quarter of 2004 was approximately $60 million, as compared
with approximately $76 million at year-end 2003 and approximately $98 million at
the end of the third quarter of 2003. At the end of the third quarter of 2004,
we had $10 million in euro currency collars outstanding as compared to $42
million in euro currency collars at year-end 2003 and $42 million in euro
currency collars and $12 million in average rate options at the end of the third
quarter of 2003. Unrealized losses for outstanding foreign exchange forward
contracts were approximately $2.8 million at the end of the third quarter of
2004, $11.8 million at year-end 2003 and approximately $8.5 million at the end
of the third quarter of 2003. The ineffective portion of these contracts was
approximately $262,000 and was expensed in 2004.
In connection with the variable rate financing under the synthetic lease
agreement, we have entered into two interest rate swap agreements with an
aggregate notional amount of $40.0 million that began in January 2003 and will
terminate in May 2006, in order to fix the interest component of rent expense at
a rate of 5.56%. We have 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 Income (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 October 2,
2004.
On February 11, 2004, we entered into interest rate swap agreements for the
notional amount of 175 million euro in connection with our 350 million Eurobonds
maturing August 7, 2006. This converted a portion of the fixed rate Eurobonds
interest expense to floating rate at a spread over six month EURIBOR. The first
interest rate setting occurred on August 7, 2004 and will be reset each
six-month period thereafter until maturity. This is designated as a fair value
hedge. The favorable interest accrual was not material as of October 2, 2004.
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 2003 Annual Report on Form 10-K.
Use of Estimates
- ----------------
Estimates by their nature are based on judgments and available information. The
estimates that we make are based upon historical factors, current circumstances
and the experience and judgment of our management. We evaluate our assumptions
and estimates on an ongoing basis and may employ outside experts to assist in
our evaluations. Therefore, actual results could materially differ from those
estimates under different assumptions and conditions.
Critical Accounting Policies are those that are most important to the portrayal
of our 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. Our most critical accounting policies, discussed below, pertain to
revenue recognition, income taxes, accounts receivable - trade, net,
inventories, net, the valuation of goodwill and intangible assets with
indefinite lives, 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. Changes in such estimates, based on more accurate
future information, may affect amounts reported in future periods.
For accounts receivable, we estimate the net collectibility, considering both
historical and anticipated trends as well as an evaluation of economic
conditions and the financial positions of our customers. For inventory, we
review the aging and salability of our inventory and estimate the amount of
inventory that we will not be able to sell in the normal course of business.
This distressed inventory is written down to the expected recovery value to be
realized through off-price channels. If we incorrectly anticipate these trends
or unexpected events occur, our results of operations could be materially
affected. We use independent third-party appraisals to estimate the fair values
of
38
both our goodwill and intangible assets with indefinite lives. These appraisals
are based on projected cash flows, interest rates and other competitive market
data. Should any of the assumptions used in these projections differ
significantly from actual results, material impairment losses could result where
the estimated fair values of these assets become less than their carrying
amounts. For accrued expenses related to items such as employee insurance,
workers' compensation and similar items, accruals are assessed based on
outstanding obligations, claims experience and statistical trends; should these
trends change significantly, actual results would likely be impacted. Derivative
instruments in the form of forward contracts and options are used to hedge the
exposure to variability in probable future cash flows associated with inventory
purchases and sales collections primarily associated with our European and
Canadian entities. If fluctuations in the relative value of the currencies
involved in the hedging activities were to move dramatically, such movement
could have a significant impact on our results. Changes in such estimates, based
on more accurate information, may affect amounts reported in future periods. We
are not aware of any reasonably likely events or circumstances which would
result in different amounts being reported that would materially affect our
financial condition or results of operations.
Revenue Recognition
- -------------------
Revenue within our wholesale operations is recognized at the time title passes
and risk of loss is transferred to customers. Wholesale revenue is recorded net
of returns, discounts and allowances. Returns and allowances require
pre-approval from management. Discounts are based on trade terms. Estimates for
end-of-season allowances are based on historic trends, seasonal results, an
evaluation of current economic conditions and retailer performance. We review
and refine these estimates on a monthly basis based on current experience,
trends and retailer performance. Our historical estimates of these costs have
not differed materially from actual results. Retail store revenues are
recognized net of estimated returns at the time of sale to consumers. Licensing
revenues are recorded based upon contractually guaranteed minimum levels and
adjusted as actual sales data is received from licensees.
Income Taxes
- ------------
Income taxes are accounted for under Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes." In accordance with SFAS No.
109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, as measured by enacted tax rates that are expected to be in effect in the
periods when the deferred tax assets and liabilities are expected to be settled
or realized. Significant judgment is required in determining the worldwide
provisions for income taxes. In the ordinary course of a global business, there
are many transactions for which the ultimate tax outcome is uncertain. It is our
policy to establish provisions for taxes that may become payable in future years
as a result of an examination by tax authorities. We establish the provisions
based upon management's assessment of exposure associated with permanent tax
differences, tax credits and interest expense applied to temporary difference
adjustments. The tax provisions are analyzed periodically (at least annually)
and adjustments are made as events occur that warrant adjustments to those
provisions.
Accounts Receivable - Trade, Net
- --------------------------------
In the normal course of business, we extend credit to customers that satisfy
pre-defined credit criteria. Accounts Receivable - Trade, Net, as shown on the
Condensed 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 an evaluation of historic and anticipated
trends, the financial condition of our customers, 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 products as well as
allowable customer markdowns and operational charge backs, net of expected
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 seasonal negotiations with our customers as well as
historic deduction trends net of expected recoveries and the evaluation of
current market conditions. Should circumstances change or economic or
distribution channel conditions deteriorate significantly, we may need to
increase its provisions. Our historical estimates of these costs have not
differed materially from actual results.
Inventories, Net
- ----------------
Inventories are stated at lower of cost (using the first-in, first-out method)
or market. We continually evaluate the composition of our inventories assessing
slow-turning, ongoing product as well as prior seasons' fashion product. Market
value of distressed inventory is determined based on historical sales trends for
the category of inventory involved, 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. Estimates may differ from actual results due to
quantity, quality and mix
39
of products in inventory, consumer and retailer preferences and market
conditions. We review our inventory position on a monthly basis and adjust our
estimates based on revised projections and current market conditions. If
economic conditions worsen, we incorrectly anticipate trends or unexpected
events occur, our estimates could be proven overly optimistic, and required
adjustments could materially adversely affect future results of operations. Our
historical estimates of these costs and our provisions have not differed
materially from actual results.
Goodwill and Other Intangibles
- ------------------------------
SFAS No. 142, "Goodwill and Other Intangible Assets," requires that goodwill and
intangible assets with indefinite lives no longer be amortized, but rather be
tested at least annually for impairment. This pronouncement also requires that
intangible assets with finite lives be amortized over their respective 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."
A two-step impairment test is performed on goodwill. In the first step, we
compare the fair value of each reporting unit to its carrying value. Our
reporting units are consistent with the reportable segments identified in Note
13 of Notes to Condensed Consolidated Financial Statements. We determine the
fair value of our reporting units using the market approach as is typically used
for companies providing products where the value of such a company is more
dependent on the ability to generate earnings than the value of the assets used
in the production process. Under this approach we estimate the fair value based
on market multiples of revenues and earnings for comparable companies. If the
fair value of the reporting unit exceeds the carrying value of the net assets
assigned to that unit, goodwill is not impaired and we are not required to
perform further testing. If the carrying value of the net assets assigned to the
reporting unit exceeds the fair value of the reporting unit, then we must
perform the second step in order to determine the implied fair value of the
reporting unit's goodwill and compare it to the carrying value of the reporting
unit's goodwill. The activities in the second step include valuing the tangible
and intangible assets of the impaired reporting unit, determining the fair value
of the impaired reporting unit's goodwill based upon the residual of the summed
identified tangible and intangible assets and the fair value of the enterprise
as determined in the first step, and determining the magnitude of the goodwill
impairment based upon a comparison of the fair value residual goodwill and the
carrying value of goodwill of the reporting unit. If the carrying value of the
reporting unit's goodwill exceeds the implied fair value, then we must record an
impairment loss equal to the difference.
SFAS No. 142 also requires that the fair value of the purchased intangible
assets, primarily trademarks and trade names, with indefinite lives be estimated
and compared to the carrying value. We estimate the fair value of these
intangible assets using independent third parties who apply the income approach
using the relief-from-royalty method, based on the assumption that in lieu of
ownership, a firm would be willing to pay a royalty in order to exploit the
related benefits of these types of assets. This approach is dependent on a
number of factors including estimates of future growth and trends, estimated
royalty rates in the category of intellectual property, discounted rates and
other variables. We base our fair value estimates on assumptions we believe to
be reasonable, but which are unpredictable and inherently uncertain. Actual
future results may differ from those estimates. We recognize an impairment loss
when the estimated fair value of the intangible asset is less than the carrying
value.
Owned trademarks that have been determined to have indefinite lives are not
subject to amortization and are reviewed at least annually for potential value
impairment as mentioned above. Trademarks that are licensed by the Company from
third parties are amortized over the individual terms of the respective license
agreements, which range from 5 to 15 years. Intangible merchandising rights are
amortized over a period of four years. Customer relationships are amortized
assuming gradual attrition over time. Existing relationships are being amortized
over periods ranging from 9 to 12 years.
The recoverability of the carrying values of all long-lived assets with definite
lives is reevaluated when changes in circumstances indicate the assets' value
may be impaired. Impairment testing is based on a review of forecasted operating
cash flows and the profitability of the related business. For the three months
ended October 2, 2004, there were no adjustments to the carrying values of any
long-lived assets resulting from these evaluations.
Accrued Expenses
- ----------------
Accrued expenses for employee insurance, workers' compensation, profit sharing,
contracted advertising, professional fees, and other outstanding Company
obligations are assessed based on claims experience and statistical trends, open
contractual obligations, and estimates based on projections and current
requirements. If these trends change significantly, then actual results would
likely be impacted. Our historical estimates of these costs and our provisions
have not differed materially from actual results.
40
Derivative Instruments
- ----------------------
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended and interpreted, requires that each derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability and 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
whether the derivative qualifies for hedge accounting treatment.
We use foreign currency forward contracts and options for the specific purpose
of hedging the exposure to variability in forecasted cash flows associated
primarily with inventory purchases mainly with our European and Canadian
entities and other specific activities and the swapping of floating interest
rate debt for fixed rate debt in connection with the synthetic lease as well as
the swapping of 175 million euro of fixed rate debt to floating rate debt in
connection with our 350 million Eurobonds. These instruments are designated as
cash flow and fair value hedges and, in accordance with SFAS No. 133, to the
extent the hedges are highly effective, the 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 portions of the cash flow and fair value hedges, if any, are
recognized in current-period earnings. Amounts recorded in Accumulated Other
Comprehensive Income (Loss) are reflected in current-period earnings when the
hedged transaction affects earnings. If fluctuations in the relative value of
the currencies involved in the hedging activities were to move dramatically,
such movement could have a significant impact on our results of operations. We
are 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.
Hedge accounting requires that at the beginning of each hedge period, we justify
an expectation that the hedge will be highly effective. This effectiveness
assessment involves an estimation of the probability of the occurrence of
transactions for cash flow hedges. The use of different assumptions and changing
market conditions may impact the results of the effectiveness assessment and
ultimately the timing of when changes in derivative fair values and underlying
hedged items are recorded in earnings.
We hedge our net investment position in euro-functional subsidiaries by
borrowing directly in foreign currency and designating 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, a component of Accumulated Other Comprehensive Income (Loss), to
offset the change in the value of the net investment being hedged.
Occasionally, we purchase short-term foreign currency contracts and options to
hedge quarter-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 recognized in current period
earnings. No gains or losses were incurred during the quarter.
RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------
In March 2004, the FASB published an Exposure Draft, "Share-Based Payment," an
amendment of FASB Statements No. 123 and 95. Under this FASB proposal, all forms
of share-based payment to employees, including employee stock options, would be
treated as compensation and recognized in the income statement. This proposed
statement would be effective for fiscal periods beginning after June 15, 2005.
The FASB has indicated that it will issue a final statement in late 2004. The
Company currently accounts for stock options under APB No. 25. The pro-forma
impact of expensing options is disclosed in Note 1 of Notes to Condensed
Consolidated Financial Statements.
In December 2003, the FASB issued FASB Interpretation No. 46R, "Consolidation of
Variable Interest Entities", ("FIN 46R"), which amends the same titled FIN 46
that was issued in January 2003. FIN 46R addresses how to identify variable
interest entities and the criteria that requires the consolidation of such
entities. This statement did not have an impact on the Company's Condensed
Consolidated Financial Statements.
In March 2004, the Emerging Issues Task Force ("EITF") reached a consensus on
recognition and measurement guidance previously discussed under EITF 03-01. The
consensus clarifies the meaning of "other-than-temporary impairment" and its
application to investments classified as either available-for-sale or
held-to-maturity under SFAS
41
115, "Accounting for Certain Investments in Debt and Equity Securities," and
investments accounted for under thecost method or the equity method. In
September 2004 the FASB issued a final FASB Staff Position, FSP EITF Issue
03-01-1, that delays the effective date for the measurement and recognition
guidance of EITF 03-01. The implementation of EITF 03-01 is not expected to have
a material impact on our results of operations or financial condition.
STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE
- ----------------------------------------------
Statements contained herein and in future filings by the Company with the
Securities and Exchange Commission (the "S.E.C."), 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 fiscal 2004, any fiscal quarter of 2004 or
any other future period, including those herein under the heading "Forward
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," "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, and a continuation of the deflationary trend for
apparel products;
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 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;
42
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, and currency devaluations in countries
in which we source product;
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 Any significant disruption in the Company's relationships with its
suppliers, manufacturers and employees, including its union employees;
o Work stoppages or slowdowns by any suppliers or service providers or by the
Company's union employees;
o The impact of the anticipated elimination of quota for apparel products in
2005;
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 the January 1,
2005 elimination of quota, which may significantly impact sourcing
patterns; 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 New Product Lines and Markets
- --------------------------------------------------------------------
The Company, as part of its growth strategy, from time to time acquires new
product lines and/or enters new markets, including through licensing
arrangements. These activities (which also include the development and launch of
new product categories and product lines) are accompanied by a variety of risks
inherent in any such new business venture, including the following:
o Risks that the new product lines or 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, these
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 a new business will not be generated;
o Risks involving the Company's ability to retain and appropriately motivate
key personnel of an 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.
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
We have exposure to interest rate volatility relating to interest rate changes
applicable to our revolving credit facility, other credit facilities and our 175
million euro fixed rate to floating rate swap associated with our 350 million
Eurobonds. These loans and swaps bear interest at rates which vary with changes
in prevailing market rates.
43
We do not speculate on the future direction of interest rates. As of October 2,
2004, January 3, 2004 and October 4, 2003 our exposure to changing market rates
was as follows:
Dollars in millions October 2, 2004 January 3, 2004 October 4, 2003
- --------------------------------------------------------------------------------
Floating rate debt $154.6 $18.9 $44.7
Average interest rate 2.1% 2.8% 2.8%
Notional amount of interest rate $216.9 -- --
swap
Current implied interest rate 5.738% -- --
A ten percent change in the average rate would have resulted in a $1.0 million
change in interest expense during the nine months of 2004.
We finance our capital needs through available cash and marketable securities,
operating cash flows, letters of credit, synthetic lease and bank revolving
credit facilities, other credit facilities and commercial paper issuances. Our
floating rate bank revolving credit facility, bank lines, euro interest rate
swap and commercial paper program expose us to market risk for changes in
interest rates.
The acquisition of MEXX, which transacts business in multiple currencies, has
increased our exposure to exchange rate fluctuations. We mitigate the risks
associated with changes in foreign currency rates through foreign exchange
forward contracts and collars to hedge transactions denominated in foreign
currencies for periods of generally less than one year and to hedge expected
payment of intercompany transactions with our non-U.S. subsidiaries, which now
include MEXX. Gains and losses on contracts, which hedge specific foreign
currency denominated commitments, are recognized in the period in which the
transaction is completed.
At October 2, 2004, we had forward contracts maturing through December 2005 to
sell 48 million euro for $56 million and 2.0 million Pounds Sterling for 2.9
million euro. The notional value of the foreign exchange forward contracts at
the end of the third quarter of 2004 was approximately $60 million, as compared
with approximately $76 million at year-end 2003 and approximately $98 million at
the end of the third quarter of 2003. At the end of the third quarter of 2004,
we had $10 million in euro currency collars outstanding as compared to $42
million in euro currency collars at year-end 2003 and $42 million in euro
currency collars and $12 million in average rate options at the end of the third
quarter of 2003. Unrealized losses for outstanding foreign exchange forward
contracts were approximately $2.8 million at the end of the third quarter of
2004, $11.8 million at year-end 2003 and approximately $8.5 million at the end
of the third quarter of 2003. The ineffective portion of these contracts was
approximately $262,000 and was expensed in 2004.
The table below presents the amount of contracts outstanding, the contract rate
and unrealized gain or (loss), as of October 2, 2004:
U.S. Dollar Euro Contract Unrealized
Currency in thousands Amount Amount Rate Gain (Loss)
- --------------------------------------------------------------------------------
Forward Contracts:
Euro $56,000 1.0665 to 1.2650 $(2,852)
Pounds Sterling 2,958 0.6771 to 0.6799 5
Foreign Exchange Collar Contracts:
Euro $10,000 1.1900 to 1.2800 $ 7
44
The table below presents the amount of contracts outstanding, the contract rate
and unrealized gain or (loss), as of January 3, 2004:
U.S. Dollar Contract Unrealized
Currency in thousands Amount Rate Gain (Loss)
- --------------------------------------------------------------------------------
Forward Contracts:
Euro $64,000 1.0670 to 1.1450 $(6,715)
Canadian Dollars 12,066 0.7254 to 0.7622 (298)
Foreign Exchange Collar Contracts:
Euro $42,000 1.0500 to 1.1400 $(4,793)
ITEM 4. CONTROLS AND PROCEDURES
The Company's management, under the supervision and with the participation of
the Company's Chief Executive Officer and Chief Financial Officer, has evaluated
the Company's disclosure controls and procedures as of October 2, 2004, and has
concluded that the Company's 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 was no change in
the Company's internal controls over financial reporting during the first nine
months of fiscal 2004 that has materially affected, or is reasonably likely to
materially affect, the Company's internal controls over financial reporting.
45
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 10 and Note 24 of Notes to Consolidated Financial
Statements in our 2003 Annual Report on Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table summarizes information about purchases by the Company during
the nine months ended October 2, 2004 of equity securities that are registered
by the Company pursuant to Section 12 of the Exchange Act:
(d) Maximum
(a) Total (c) Total Number of Approximate Dollar
Number of Shares Purchased as Value of Shares that May
Shares (b) Average Part of Publicly Yet Be Purchased Under
Purchased Price Paid Per Announced Plans or the Plans or Programs
Period (in thousands) Share Programs (in thousands) (2)
- ------------------------------------------------------------------------------------------------------------------------
January 4, 2004 - January 31, 2004 5.7 (1) $ 34.97 -- $ 218,334
February 1, 2004 - March 6, 2004 -- -- -- $ 218,334
March 7, 2004 - April 3, 2004 67.1 (1) $ 36.48 -- $ 218,334
April 4, 2004 - May 1, 2004 -- -- -- $ 218,334
May 2, 2004 - June 5, 2004 1,963.8 $ 33.78 1,963,800 $ 151,995
June 6, 2004 - July 3, 2004 1,447.7 $ 34.87 1,447,700 $ 101,516
July 4, 2004 - July 31, 2004 -- -- -- $ 101,516
August 1, 2004 - September 4, 2004 -- -- -- $ 101,516
September 5, 2004 - October 2, 2004 -- -- -- $ 101,516
Total nine months 3,484.3 $ 34.29 3,411,500 $ 101,516
(1) Represents shares withheld to cover tax-withholding requirements relating
to the vesting of restricted stock issued to employees pursuant to the
Company's shareholder-approved stock incentive plans. Excludes the
forfeiture of an aggregate of 5,000 restricted shares.
(2) The Company initially announced the authorization of a share buyback
program in December 1989. Since its inception, the Company's Board of
Directors has authorized the purchase under the program of an aggregate of
$1.675 billion. As of October 2, 2004, the Company had $101.5 million
remaining in buyback authorization under its program.
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 audit related and tax planning services.
46
ITEM 6. EXHIBITS
(a) Exhibits
31(a) Certification of Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31(b) Certification of Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32(a)* 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.
32(b)* 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.
* A signed original of the written statement required by Section 906 has been
provided to the Company and will be retained by the Company and forwarded
to the S.E.C. or its staff upon request.
47
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 10, 2004
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)