FINANCIAL REVIEW
Phillips-Van Heusen's primary strategy is to maximize stockholder value
by maximizing the value of its brands through strong wholesale distribution
coupled with the ability to reach consumers directly through its retail
stores. This strategy was enhanced importantly in early 1995 by the
acquisition of "Gant" and "Izod", two outstanding sportswear brands. The
significance of this acquisition is discussed throughout this report.
The year 1994 proved to be, by far, the most difficult since the
Company's recapitalization in 1987. After six consecutive years of double
digit growth in sales and earnings, Phillips-Van Heusen experienced slower
sales growth in certain key categories and a significant reduction from the
prior year in overall earnings. Virtually all of the Company's businesses
were negatively impacted to some degree by extremely difficult apparel and
footwear markets, a condition that began in late 1992 and worsened throughout
1994.
Despite the difficult environment, the Company achieved another year of
record sales primarily due to the continued expansion of its retail business.
Retail sales were $764.7 million in 1994, up from $679.6 million and $571.8
million in 1993 and 1992, respectively. During 1994, dress shirts, which
represent approximately 25% of the Company's total sales (and 60% of its
wholesale apparel sales) were hit particularly hard. It is the Company's
belief that virtually all of apparel and footwear continue to be strongly
influenced by business and fashion cycles. While this particular down period
in apparel and footwear has lasted longer than usual - it should, like all
business cycles, reverse itself. This report speaks to a variety of
initiatives that Phillips-Van Heusen has taken to position itself to return
with increased strength and balance, no matter when the recovery occurs.
1
RESULTS OF OPERATIONS
The Company analyzes its results of operations by its vertically
integrated apparel and footwear segments. Reference should be made to the
Segment Data footnote on page 34.
APPAREL
Net sales of the Company's apparel segment were $883.9 million in 1994,
$800.5 million in 1993 and $709.4 million in 1992, representing increases of
10.4% and 12.8%, respectively. These increases relate principally to growth
in retail sales, including the expanded offering of apparel at the Bass
Company stores, offset, in part, in 1993, by a small reduction in wholesale
sales caused by a downsizing of the Company's private label dress shirt and
sweater business.
Wholesale shirt sales were negatively impacted by a period of weak
demand following a strong but short-lived fashion surge in 1992. This period
of weak dress shirt demand was somewhat offset by capitalizing on the very
important trend to more casual attire for work as the Company's "Corporate
Casual" Friday-wear business continued to grow in 1994. This positive trend
is expected to continue in 1995 and should accelerate with the Company's
expanded offering of "Beene Unbuttoned" casual dress shirts.
Gross profit on sales was 30.8% in 1994 compared with 33.1% in 1993 and
33.8% in 1992. Both the Company's wholesale and retail divisions experienced
gross profit reductions in 1994 from the prior year. General market
conditions worsened considerably in 1994 and were further disrupted by the
introduction of Wrinkle-Free shirts at Van Heusen and Geoffrey Beene.
2
Three separate issues relating to the introduction of Wrinkle-Free
shirts affected gross margins:
- The decision by most retailers to achieve a very fast transition
into Wrinkle-Free shirts led to increased promotional selling of
non wrinkle-free shirts, thus exacerbating an already weak market.
- Start-up costs of Wrinkle-Free shirts, including accelerated
amortization of new equipment, as well as training and
manufacturing inefficiencies, added some $4 million to 1994 costs.
- Higher production costs associated with the Company's post-cured
vapor phase manufacturing process of its Wrinkle-Free shirts
further reduced 1994 initial gross margins.
At retail, gross margins were negatively impacted by the overall weak
apparel environment resulting in the taking of significant promotional
markdowns to generate sales. The Company's branded store formats of Van
Heusen and Geoffrey Beene had considerably better overall results than the
private label store formats of Cape Isle Knitters and Windsor Shirt. Outlet
stores, as discussed in the Chairman's letter, are generally destination
apparel stores which do, in fact, require extra travel time and therefore are
very much influenced by trends (good and bad) affecting specialty apparel
stores.
Also impacting overall gross margins was a LIFO charge of $1.2 million
in 1994 compared with $0.2 million in 1993 and a credit of $1.7 million in
1992.
3
Selling, general and administrative expenses were 26.7% of sales in
1994, compared with 26.1% in 1993 and 26.8% in 1992. Expense levels in both
1994 and 1993 were negatively impacted by a higher weighing of retail business
as part of the overall apparel sales mix. In addition, 1994 included $3
million of introductory Wrinkle-Free marketing costs. Importantly, two cost
reduction programs initiated late in the fourth quarter should contribute to
expense reductions in 1995 and beyond. The Company implemented a plan to
restructure and consolidate certain managerial, field supervisory and
administrative functions associated with its retail operations. At wholesale,
the Company adopted a plan to realign its four marketing divisions into two -
Dress Shirts and Sportswear. In addition to reducing expenses, this new
structure should improve marketing focus and product supply pipeline
efficiency.
Looking ahead, the Company believes that while 1995 will continue to be
a year of transition, Wrinkle-Free shirts will become established as an
important part of the overall dress shirt business and non Wrinkle-Free shirts
will also be established in a fixed niche, thereby eliminating a good deal of
the uncertainty that existed in 1994. Start-up costs should gradually abate
and gross margins should normalize as production is moved to lower cost
Caribbean plants and pre-cured fabrics requiring lower cost manufacturing are
introduced into overall production - on selected oxford and broadcloth
shirtings where they are able to produce superior results. The Company will
continue to utilize its post-cured vapor phase treatment on lighter weight
fabrics such as pinpoint oxfords where it believes that other wrinkle-free
treatments are not close to the same quality standard.
The Company's sweater business should benefit significantly from the
recently announced licensing agreement to make and market Jantzen sweaters,
the number-one selling sweater brand in the U.S. In addition, ownership of
Izod brings with it the famous Izod cardigan sweater, which also should help
4
to maximize this business. These two new brands, along with Van Heusen and
Geoffrey Beene, make the Company the leading supplier of branded sweaters in
the U.S.
As for men's sportswear, which seems to be on a very solid growth
trajectory, the Company's position in Van Heusen sportswear has been
substantially supplemented by the Jantzen license covering active sportswear
as well as sweaters and, of course, by Izod and Gant. This is clearly an area
targeted for important growth and development in 1995 and beyond.
At retail, all store formats have business initiatives which are viewed
very positively. These include Van Heusen for Her, Geoffrey Beene for Women
and, most importantly, the conversion of the Company's two private label
formats, Cape Isle Knitters and Windsor Shirt, into stores marketing apparel
under the Izod and Gant labels, respectively.
While 1995 appears at this point to be a continuation of the prior
year's generally poor retail environment, the Company believes that its many
initiatives at all levels of business should provide the basis for solid
improvement in the periods ahead.
FOOTWEAR
Net sales of the Company's footwear segment, conducted through its Bass
division (excluding Bass apparel), were $371.5 million in 1994 compared with
$351.9 million in 1993 and $333.2 million in 1992, representing increases of
5.6% in both years.
Footwear sales were negatively impacted in both years by the generally
poor retail environment described above. One particularly successful footwear
category, however, was men's and women's sandals which increased substantially
in 1994 and successfully offset the decline in the exceptionally strong
performance of canvas shoes in 1992 and 1993.
5
International sales grew to $8.2 million in 1994 from $7.1 million in
1993, driven by territory growth in Europe and Asia as well as introductions
in South America and the Caribbean.
Gross profit on sales was 37.1% in 1994 compared with 39.7% in 1993 and
43.7% in 1992. As in apparel, the Company's footwear business in 1994 was
marked by sluggish consumer demand and a highly promotional environment. At
the same time, 1994 was for Bass a period focused on streamlining inventory,
reducing SKU's and sharpening size offerings. This combination led to
moderate overall growth and significantly reduced gross profit margins as
greater off-price sales at both wholesale and retail depressed margins. At
Retail, Bass Footwear experienced many of the same pressures as the Company's
apparel stores, including a weak specialty store environment and a generally
soft women's career market. This was offset, in part, by good performance in
men's waterproof shoes and sandals.
Selling, general and administrative expenses were 28.6%, compared with
29.1% in 1993 and 33.0% in 1992, which reflects the continued leveraging and
management of footwear's expense structure.
Looking ahead, the Company believes that Bass' well-established product
diversification will be particularly helpful in the coming year, with
continued strong growth in the men's and women's sandal category as well as
good growth in the casual and outdoor shoe categories. The men's Weejun, with
its updated styling of classic looks, enjoyed a 6% increase in 1994 over 1993
and should continue to do well. Internationally, sales are targeted for
continued growth in 1995, principally due to greater penetration in already
existing markets.
RESTRUCTURING CHARGE
In the fourth quarter of 1994, the Company recorded a pre-tax
restructuring charge totaling $7.0 million associated with its apparel
6
business. The Company has restructured and consolidated certain managerial,
field supervisory and administrative functions associated with its retail
operations, and adopted a plan to realign its wholesale apparel business from
four operating divisions into a dress shirt division and a sportswear
division. This new structure will reduce expenses and should improve the
Company's marketing focus and product pipeline efficiency. These expense
reduction initiatives are part of an ongoing process to optimize the Company's
operating structure.
Also, in connection with the acquisition of the Izod and Gant labels,
respectively, the Company adopted a plan to convert its Cape Isle Knitters and
Windsor Shirt private label retail stores to stores that will market branded
apparel under the Izod and Gant labels, respectively. The Company believes
that these store conversions should have a very positive impact on the future
sales and earnings of these two retail companies.
CORPORATE EXPENSES
Corporate expenses were $10.9 million in 1994 compared with $13.4
million in 1993 and $15.5 million in 1992. The primary reason for the
decrease in 1994 was a reduction in the Company's liability for its
supplemental savings plan which is linked to the market value of Phillips-Van
Heusen stock - in addition to a reduction in general corporate spending. In
1992, the Company incurred a one-time cost of $2.4 million in connection with
moving to new facilities in Bridgewater, New Jersey and South Portland, Maine.
Those relocations accounted for most of the higher expense level in that year.
INTEREST EXPENSE
Interest expense was $12.8 million compared with $16.7 million in 1993
and $15.7 million in 1992. The decrease in 1994 relates principally to the
November 1993 refinancing to lower interest rates of a portion of the
Company's long-term debt. In addition, lower average debt and higher interest
rates on invested cash contributed to the interest expense reduction.
7
INCOME TAXES
The Company's effective tax rate was 18.7% in 1994 compared with 32.0%
in 1993 and 30.5% in 1992. The significantly reduced rate in 1994 resulted,
in part, from the reversal of estimated tax liabilities no longer deemed
necessary. In addition, the $7.0 million restructuring charge reduced income
from domestic sources, which is taxed at normal rates, thereby increasing the
proportionate share of tax exempt income earned from the Company's operations
in Puerto Rico.
EXTRAORDINARY LOSS - EARLY RETIREMENT OF DEBT
In 1993, the Company incurred a loss, net of tax, of $11.4 million, or
$.42 per share, in connection with the early retirement of long-term debt.
See "Liquidity and Capital Resources" below for further discussion of this
transaction.
SEASONALITY
The Company's business is seasonal, with higher sales and income during
its third and fourth quarters, which coincide with the Company's two peak
retail selling seasons: the first running from the start of summer vacation in
late May and continuing through September; the second being the Christmas
selling season beginning with weekend following Thanksgiving and continuing
through the week after Christmas.
Also contributing to the strength of the third quarter is the high
volume of fall shipments to wholesale customers which are more profitable than
spring shipments. The slower spring selling season at wholesale combined with
the retail seasonality make the first quarter particularly weak.
8
ACQUISITION
On January 24, 1995 Phillips-Van Heusen Corporation entered into a
binding agreement to acquire the Crystal Brands Apparel Group for $114.7
million in cash. This acquisition, completed on February 17, 1995, adds Gant,
Izod and Salty Dog to its roster of highly regarded brands: Van Heusen, Bass
and Geoffrey Beene.
The acquisition, financed by a combination of invested cash plus use of
the Company's revolving credit bank line, should not be dilutive in the
initial transitional year, and should be quite positive thereafter.
9
LIQUIDITY AND CAPITAL RESOURCES
The following table shows key cash flow elements over the last three
years:
(In thousands) 1994 1993 1992
Income from operations adjusted
for non-cash items $44,256 $59,714 $51,962
Early retirement of debt -- (11,394) --
Change in working capital 5,138 (6,254) (30,448)
Capital spending, net (37,830) (37,883) (32,034)
Cash dividends on common stock (3,983) (3,920) (3,556)
Cash dividends on preferred stock -- -- (2,138)
Issuance of common stock -- -- 133,949
Repurchase of preferred stock -- -- (121,148)
Exercise of stock options 2,629 7,425 8,722
Other changes 2,438 (678) 13,067
Increase in cash, before net
change in debt $12,648 $7,010 $18,376
The Company's ongoing emphasis on achieving a faster inventory turn was
once again the key driver in achieving a positive cash flow. Measured against
an overall sales increase of 8.9%, inventory was reduced 5.4% to $255.2
million from $269.9 million. The Company expects this favorable trend in
inventory turnover to continue.
Capital expenditures in 1994 included the near-completion of the
Company's 500,000 square foot distribution facility in Jonesville, North
Carolina, investment in Wrinkle-Free manufacturing capacity and the continued
upgrading of information systems. Spending in 1993 included the initial
investment in the distribution facility as well as the completion of new
office facilities in South Portland, Maine. During 1992 through 1994, the
Company continued to invest in new retail store openings and refurbishing
existing stores. With the completion of the distribution center in early
1995, capital expenditures for the full year 1995 should be somewhat lower.
During 1993 and 1992, the Company took a number of steps to strengthen
its financial position. On May 4, 1992, the Company completed the sale of 6.4
million shares of its common stock. Approximately $121.1 million of the net
proceeds were used to repurchase the Company's preferred stock, with the
10
remaining $12.8 million used to reduce debt. This transaction improved cash
flow on an annual basis by approximately $8.0 million by eliminating the non-
tax deductible 11.25% dividend on the preferred stock plus interest savings on
the debt reduction (offset in part by the dividends on the common stock issued
in connection with the sale). On October 29, 1992, the Company issued $69
million of Senior Notes due 1996-2002 at a blended rate of 7.75%. The
proceeds were used to repay all the outstanding borrowings under the Company's
revolving credit facility, with the remaining proceeds invested in short-term
instruments.
Concurrent with the Company achieving an investment grade rating from
both Standard & Poor's and Moody's, on November 15, 1993 the Company issued
$100 million of 7.75% debentures due 2023 with a yield to maturity of 7.80%.
The net proceeds were used to redeem the outstanding 11.2% and 9.93% senior
notes. Due to prepayment provisions associated with the redeemed notes, the
Company incurred the extraordinary loss noted earlier. Also in 1993, the
Company entered into a new revolving credit agreement with its existing bank
group; the interest rate on this facility was reduced from LIBOR plus .75% to
LIBOR plus .50%.
In February 1995, in conjunction with the acquisition of the Crystal
Brands Apparel Group, the Company increased the size of its bank credit
facility to $400 million ($200 million in revolving credit lines and $200
million in letter of credit lines) from a total facility of $250 million - and
maintained the same pricing.
Total debt (net of invested cash) as a percentage of total capital was
reduced to 26.9% at year-end 1994 compared to 29.7% and 34.3% at year-end 1993
and 1992, respectively.
This much improved financial position, together with its continued
anticipation of positive cash flow, allowed the Company to accomplish the
acquisition of the Crystal Brands Apparel Group for cash without compromising
its objective of maintaining its investment grade rating.
11
PHILLIPS-VAN HEUSEN CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
1994 1993 1992
Net sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,255,466 $1,152,394 $1,042,565
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . 845,655 747,555 657,040
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 409,811 404,839 385,525
Selling, general and administrative expenses . . . . . . . . . . . . . 353,109 324,528 311,717
Restructuring expenses . . . . . . . . . . . . . . . . . . . . . . . . 7,000 - 3,600
Income before interest and taxes . . . . . . . . . . . . . . . . . . . 49,702 80,311 70,208
Interest expense, net. . . . . . . . . . . . . . . . . . . . . . . . . 12,793 16,679 15,727
Income before taxes. . . . . . . . . . . . . . . . . . . . . . . . . . 36,909 63,632 54,481
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,894 20,380 16,600
Income before extraordinary loss . . . . . . . . . . . . . . . . . . . 30,015 43,252 37,881
Extraordinary loss on debt retirement. . . . . . . . . . . . . . . . . - (11,394) -
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 30,015 $ 31,858 $ 37,881
Net income per share:
Before extraordinary loss. . . . . . . . . . . . . . . . . . . . . . . $ 1.11 $ 1.60 1.42
Extraordinary loss . . . . . . . . . . . . . . . . . . . . . . . . . . - (0.42) -
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.11 $ 1.18 $ 1.42
See notes to consolidated financial statements.
12
PHILLIPS-VAN HEUSEN CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
January 29, January 30,
1995 1994
ASSETS
Current Assets:
Cash, including cash equivalents of $68,586 and $66,064 . . . . . . . . . . $ 80,473 $ 68,070
Trade receivables, less allowances of $1,617 and $2,171 . . . . . . . . . . 77,527 61,986
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255,244 269,871
Other, including deferred taxes of $7,108 and $5,727. . . . . . . . . . . . 16,426 18,775
Total Current Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . 429,670 418,702
Property, Plant and Equipment. . . . . . . . . . . . . . . . . . . . . . . . . 136,297 109,506
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,733 18,189
Other Assets, including deferred taxes of $9,502 and $4,608. . . . . . . . . . 12,584 8,374
$596,284 $554,771
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 38,759 $ 42,188
Accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70,039 60,696
Accrued income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,975 6,027
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . 260 245
Total Current Liabilities . . . . . . . . . . . . . . . . . . . . . . . 114,033 109,156
Long-Term Debt, less current portion . . . . . . . . . . . . . . . . . . . . . 169,679 169,934
Other Liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,112 28,882
Stockholders' Equity:
Preferred stock, par value $100 per share; 150,000 shares
authorized; no shares outstanding . . . . . . . . . . . . . . . . . . . .
Common stock, par value $1 per share; 100,000,000 shares
authorized; shares issued 26,610,310 and 33,190,750 . . . . . . . . . . . 26,610 33,191
Additional capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112,801 118,360
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136,049 269,055
275,460 420,606
Less: 6,728,576 shares of common stock held in
treasury as of January 30, 1994 - at cost . . . . . . . . . . . . . . 0 (173,807)
Total Stockholders' Equity. . . . . . . . . . . . . . . . . . . . . . . 275,460 246,799
$596,284 $554,771
See notes to consolidated financial statements.
13
PHILLIPS-VAN HEUSEN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
1994 1993 1992
Operating activities:
Net Income before extraordinary loss . . . . . . . . . . . . . . . . . . . $ 30,015 $ 43,252 $ 37,881
Adjustments to reconcile to cash provided by operating
activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . 24,309 19,126 15,020
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . (6,275) (2,195) (518)
Extraordinary loss on debt retirement. . . . . . . . . . . . . . . . . . - (11,394) -
Other-net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,793) (469) (421)
Changes in operating assets and liabilities:
Receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (15,541) (3,168) (8,768)
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,627 (11,110) (32,367)
Accounts payable and accrued expenses. . . . . . . . . . . . . . . . . . 1,759 11,321 8,412
Other-net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,293 3,297 2,275
Net Cash Provided By Operating Activities. . . . . . . . . . . . . . . 49,394 42,066 21,514
Investing activities:
Plant and equipment acquired . . . . . . . . . . . . . . . . . . . . . . . (53,140) (47,866) (36,771)
Contributions from landlords . . . . . . . . . . . . . . . . . . . . . . . 15,310 9,983 4,737
Collection of note receivable. . . . . . . . . . . . . . . . . . . . . . . - - 5,100
Sale of property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - 5,964
Other-net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,438 (678) 2,003
Net Cash Used By Investing Activities. . . . . . . . . . . . . . . . . . (35,392) (38,561) (18,967)
Financing activities:
Issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . - - 133,949
Repurchase of preferred stock. . . . . . . . . . . . . . . . . . . . . . . - - (121,148)
Proceeds from revolving line of credit and long-term borrowings. . . . . . - 141,023 146,900
Payments on revolving line of credit and long-term borrowings. . . . . . . (245) (157,026) (95,166)
Exercise of stock options. . . . . . . . . . . . . . . . . . . . . . . . . 2,630 7,425 8,722
Cash dividends on common stock . . . . . . . . . . . . . . . . . . . . . . (3,984) (3,920) (3,556)
Cash dividends on preferred stock. . . . . . . . . . . . . . . . . . . . . - - (2,138)
Net Cash (Used) Provided By Financing Activities . . . . . . . . . . . . (1,599) (12,498) 67,563
Increase (Decrease) in cash. . . . . . . . . . . . . . . . . . . . . . . . . 12,403 (8,993) 70,110
Cash at beginning of period. . . . . . . . . . . . . . . . . . . . . . . . . 68,070 77,063 6,953
Cash at end of period. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 80,473 $ 68,070 $ 77,063
See notes to consolidated financial statements.
14
PHILLIPS-VAN HEUSEN CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
(In thousands, except share data)
Common Stock Common
$1 par Additional Retained Treasury Stockholders'
Shares Value Capital Earnings Stock Equity
February 2, 1992 . . . . . . . . . 25,518,344 $25,518 $24,285 $208,930 $(173,830) $84,903
Issuance of common stock and
repurchase of preferred stock. 6,440,000 6,440 79,161 85,601
Stock options exercised. . . . . 786,047 786 9,036 9,822
Net income . . . . . . . . . . . 37,881 37,881
Cash dividends:
Common stock . . . . . . . . . (3,556) (3,556)
Preferred stock. . . . . . . . (2,138) (2,138)
Stock repurchased and cancelled (40,223) (40) (1,060) (1,100)
January 31, 1993 . . . . . . . . . 32,704,168 32,704 111,422 241,117 (173,830) 211,413
Stock options exercised. . . . . 486,647 487 6,940 7,427
Net income . . . . . . . . . . . 31,858 31,858
Cash dividends on common stock (3,920) (3,920)
Issue 150 shares from treasury . 23 23
Stock repurchased and cancelled (65) (2) (2)
January 30, 1994 . . . . . . . . . 33,190,750 33,191 118,360 269,055 (173,807) 246,799
Stock options exercised. . . . . 148,471 148 2,493 2,641
Net income . . . . . . . . . . . 30,015 30,015
Cash dividends on common stock . (3,984) (3,984)
Retirement of treasury stock . . (6,728,576) (6,729) (8,041) (159,037) 173,807 0
Stock repurchased and cancelled (335) (11) (11)
January 29, 1995 . . . . . . . . . $26,610,310 $ 26,610 $112,801 $136,049 $ 0 $275,460
See notes to consolidated financial statements.
15
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
Summary of Significant Accounting Policies
Principles of Consolidation - The consolidated financial statements
include the accounts of the Company and its subsidiaries. Significant
intercompany accounts and transactions have been eliminated in consolidation.
Fiscal Year - Fiscal years are designated in the financial statements and
notes by the calendar year in which the fiscal year commences. Accordingly,
results for fiscal years 1994, 1993 and 1992 represent the 52 weeks ended
January 29, 1995, January 30, 1994 and January 31, 1993.
Cash and Cash Equivalents - The Company considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents.
Inventories - Inventories are stated at the lower of cost or market. Cost
for the apparel segment is determined principally using the last-in, first-out
method (LIFO). Cost for the footwear segment is determined using the first-in,
first-out method (FIFO).
Property, Plant and Equipment - Depreciation is computed principally by
the straight line method over the estimated useful lives of the various
classes of property.
Goodwill - Goodwill, net of accumulated amortization of $2,405 and $1,949
in 1994 and 1993, respectively, is being amortized principally by the straight
line method over 40 years. The Company assesses the recoverability of
goodwill based on the estimated future non-discounted cash flows over the
remaining amortization period.
Contributions from Landlords - The Company receives contributions from
landlords for fixturing new retail stores which the Company leases. Such
amounts are amortized as a reduction of rent expense over the life of the
related lease. Unamortized contributions are included in accrued expenses and
other liabilities and amounted to $24,146 and $14,568 at January 29, 1995 and
January 30, 1994, respectively.
Fair Value of Financial Instruments - The Company estimates that the fair
value of all financial instruments approximates their carrying value, except
as noted in the footnote entitled "Long-Term Debt and Extraordinary Loss."
Advertising - The Company expenses advertising costs as incurred.
Advertising expenses totalled $18,532 in 1994, $15,615 in 1993 and $13,791 in
1992.
Net Income Per Share - Primary net income per share has been computed by
dividing net income, adjusted for the Series B Convertible Redeemable
Preferred Stock ("preferred stock") dividend requirement of $2,138 in 1992, by
the weighted average number of common shares outstanding during the year and
common share equivalents applicable to dilutive stock options; the number of
shares used in such computation was 27,154,173 (1994), 27,105,888 (1993) and
25,253,170 (1992).
Fully diluted net income per share in 1994, 1993 and 1992 is not
materially different from primary net income per share and is not presented.
16
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data)
Income Taxes
Income taxes from continuing operations consist of:
1994 1993 1992
Federal:
Current. . . . . . . . . . . . . . . . . . . . . . . . . $11,720 $16,628 $11,945
Deferred . . . . . . . . . . . . . . . . . . . . . . . . (5,585) (1,088) (518)
State, foreign and local:
Current. . . . . . . . . . . . . . . . . . . . . . . . . 1,449 4,945 5,173
Deferred . . . . . . . . . . . . . . . . . . . . . . . . (690) (105) -
$ 6,894 $20,380 $16,600
Taxes paid were $12,766 (1994), $9,936 (1993) and $14,858 (1992).
The approximate tax effect of items giving rise to the deferred income tax
asset recognized on the Company's balance sheet at January 29, 1995 and
January 30, 1994 is as follows:
1994 1993
Depreciation. . . . . . . . . . . . . . . . . . . . . . . $(8,713) $(10,535)
Landlord contributions. . . . . . . . . . . . . . . . . . 9,207 6,227
Restructuring costs . . . . . . . . . . . . . . . . . . . 3,084 1,732
Employee compensation and benefits. . . . . . . . . . . . 7,175 6,790
Other-net . . . . . . . . . . . . . . . . . . . . . . . . 5,857 6,121
$16,610 $ 10,335
A reconciliation of the statutory Federal income tax rate to the effective
income tax rate is as follows:
1994 1993 1992
Statutory Federal tax rate. . . . . . . . . . . . . . . . . . 35.0% 35.0% 34.0%
State, foreign and local income taxes,
net of Federal income tax benefit. . . . . . . . . . . . . . 5.0 4.3 4.9
Income of Puerto Rico subsidiaries(1) . . . . . . . . . . . . (8.0) (4.8) (7.3)
Reversal of estimated tax liabilities(2). . . . . . . . . . . (11.1) - -
Other-net . . . . . . . . . . . . . . . . . . . . . . . . . . (2.2) (2.5) (1.1)
Effective income tax rate . . . . . . . . . . . . . . . . . . 18.7% 32.0% 30.5%
(1)Exemption from Puerto Rico income tax expires in 1998.
(2)During 1994, the Company reversed estimated tax liabilities totalling
$4,100 where were no longer deemed necessary.
During 1994 and 1993, the Company recognized a tax benefit of $1,568 and
$1,972 related to the exercise of stock options. These benefits were
credited to additional capital.
17
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data)
Inventories
Inventories are summarized as follows:
1994 1993
Raw materials. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 19,849 $ 16,710
Work in process. . . . . . . . . . . . . . . . . . . . . . . . . . 17,026 13,941
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . 218,369 239,220
$255,244 $269,871
Inventories would have been $12,700 and $11,500 higher than reported at
January 29, 1995 and January 30, 1994, respectively, if the FIFO method of
inventory accounting had been used for the apparel segment.
Property, Plant and Equipment
Property, plant and equipment, at cost, are summarized as follows:
1994 1993
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,710 $ 1,716
Buildings and building improvements. . . . . . . . . . . . . . . . 32,961 27,996
Machinery and equipment, furniture and
fixtures and leasehold improvements. . . . . . . . . . . . . . . 210,688 169,527
245,359 199,239
Less: Accumulated depreciation and
amortization . . . . . . . . . . . . . . . . . . . . . . . 109,062 89,733
$136,297 $109,506
18
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data)
Long-Term Debt and Extraordinary Loss
Long-term debt, exclusive of current portion, is as follows:
1994 1993
7.75% Debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 99,429 $ 99,424
7.75% Senior Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . 69,000 69,000
Other debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,250 1,510
$169,679 $169,934
The Company issued $100,000 of 7.75% Debentures due 2023 on November 15,
1993 with a yield to maturity of 7.80%. Interest is payable semi-annually.
The net proceeds from the sale of these debentures, together with cash from
the Company's working capital, were used to redeem the Company's then
outstanding 11.2% Senior Note and 9.93% Senior Notes. Due to certain
prepayment provisions associated with the redeemed Notes, the Company
recognized a one-time extraordinary loss of $11,394, net of a $7,025 tax
benefit, in the fourth quarter of 1993.
Due to increases in long-term interest rates since the Company's issuance
of the 7.75% Debentures, the Company estimates that the present value of these
Debentures on January 29, 1995, using discounted cash flow analyses, was
approximately $82,827.
The Company issued a series of Senior Notes due 1996-2002 with an average
interest rate of 7.75% to a group of investors on October 29, 1992. The notes
are payable in seven equal annual installments commencing November 1, 1996.
Interest is payable semi-annually.
19
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data)
Long-Term Debt and Extraordinary Loss - (Continued)
In connection with the acquisition of the Apparel Group of Crystal Brands,
Inc., the Company amended its primary revolving credit agreement on February
13, 1995. The amended agreement provides that the Company may, at its option,
borrow and repay amounts up to a maximum of $185,000, except that for the
Company's third quarter, during which period its borrowings peak, the maximum
amount available to the Company is $200,000. All outstanding borrowings under
this agreement are due February 13, 1999. Interest on amounts borrowed under
the revolving credit agreement is payable quarterly at the prime rate or at
LIBOR plus .50%. A commitment fee of .25% is payable quarterly on the
unutilized portion of the facility.
On February 13, 1995, the Company entered into a secondary revolving
credit agreement under which the Company may, at its option, borrow and repay
amounts up to a maximum of $15,000. Borrowings under this agreement bear
interest at prevailing market rates as determined by the lending bank.
Interest paid was $14,131 (1994), $18,007 (1993), $15,357 (1992).
Scheduled maturities of long-term debt, including current portion, for the
next five years are as follows: 1995-$260, 1996-$10,137, 1997-$10,157,
1998-$10,182 and 1999-$10,202.
Issuance of Common Stock and Repurchase of Series B Convertible Redeemable
Preferred Stock
On May 4, 1992, the Company completed the sale of 6,440,000 shares of its
common stock with net proceeds of $133,949. On the same day, the Company used
$121,148 of these proceeds to repurchase its preferred stock (with a
liquidation value of $72,800) from The Prudential Insurance Company of
America. The price paid for the preferred stock reflects both a reduction in
interest rates since the time of the original issue of the preferred stock as
well as the value of its conversion feature. The net effect of these two
transactions was to increase the Company's stockholders' equity by $85,601.
While it was outstanding, the preferred stock was entitled to receive
cumulative cash dividends at the annual rate of 11.25% per $100 of liquidation
value (equivalent to an annual dividend of $675 per share).
If the issuance of the common stock and repurchase of the preferred stock
had been completed on February 3, 1992, instead of May 4, 1992, the Company's
net income per share for 1992 of $1.42 would have been unchanged.
20
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data)
Stockholders' Equity
Preferred Stock Rights - On June 10, 1986, the Board of Directors declared
a distribution of one Right (the "Rights") to purchase Series A Cumulative
Participating Preferred Stock, par value $100 per share, for each outstanding
share of common stock. As a result of subsequent stock splits, each
outstanding share of common stock now carries with it one-fifth of one Right.
Under certain circumstances, each Right will entitle the registered holder
to acquire from the Company one one-hundredth (1/100) of a share of said
Series A Preferred Stock at an exercise price of $100. The Rights will be
exercisable, except in certain circumstances, commencing ten days following a
public announcement that (i) a person or group has acquired or obtained the
right to acquire 20% or more of the common stock, in a transaction not
approved by the Board of Directors or (ii) a person or group has commenced or
intends to commence a tender offer for 30% or more of the common stock (the
"Distribution Date").
If the Company is the surviving corporation in a merger or other business
combination then, under certain circumstances, each holder of a Right will
have the right to receive upon exercise the number of shares of common stock
having a market value equal to two times the exercise price of the Right.
In the event the Company is not the surviving corporation in a merger or
other business combination, or more than 50% of the Company's assets or
earning power is sold or transferred, each holder of a Right will have the
right to receive upon exercise the number of shares of common stock of the
acquiring company having a market value equal to two times the exercise price
of the Right.
At any time prior to the close of business on the Distribution Date, the
Company may redeem the Rights in whole, but not in part, at a price of $.05
per Right. The Rights will expire June 16, 1996, unless such date is extended
or the Rights are earlier redeemed by the Company.
Stock Options - Under the Company's stock option plans, non-qualified and
incentive stock options ("ISOs") may be granted. Options are granted at fair
market value at the date of grant. ISOs and non-qualified options granted have
a ten year duration. All options are cumulatively exercisable in three
installments commencing two years after the date of grant for grants issued
prior to March 30, 1993, and commencing three years after the date of grant
for grants issued after that date.
21
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data)
Stockholders' Equity - (Continued)
Other data with respect to stock options follows:
Option Price
Shares Per Share
Outstanding at February 2, 1992. . . . . . . . . . . . . . . . . . . 2,279,784 $3.55- $20.00
Granted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 235,370 22.15- 27.00
Exercised. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 786,047 3.55- 11.00
Cancelled. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65,006 4.75- 22.38
Outstanding at January 31, 1993. . . . . . . . . . . . . . . . . . . 1,664,101 3.80- 27.00
Granted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 479,029 28.00- 36.00
Exercised. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 486,647 3.80- 28.00
Cancelled. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98,023 4.75- 31.63
Outstanding at January 30, 1994. . . . . . . . . . . . . . . . . . . 1,558,460 3.80- 36.00
Granted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196,907 15.25- 36.25
Exercised. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148,471 4.75- 22.38
Cancelled. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52,647 4.75- 33.25
Outstanding at January 29, 1995. . . . . . . . . . . . . . . . . . . 1,554,249 $4.75- $36.25
Of the outstanding options at January 29, 1995, and January 30, 1994,
options covering 900,242 and 778,362 shares were exercisable, respectively.
Stock options available for grant at January 29, 1995 and January 30, 1994
amounted to 219,748 and 364,208 shares, respectively.
Leases
The Company leases retail stores, manufacturing facilities, office space
and equipment. The leases generally are renewable and provide for the payment
of real estate taxes and certain other occupancy expenses. Retail store leases
generally provide for the payment of percentage rentals based on store sales,
and other costs associated with the leased property.
At January 29, 1995, minimum annual rental commitments under
non-cancellable operating leases, including leases for new retail stores which
had not begun operating at January 29, 1995, are as follows:
1995. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61,685
1996. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56,343
1997. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,270
1998. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,042
1999. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,611
Thereafter. . . . . . . . . . . . . . . . . . . . . . . . . . . 78,937
Total minimum lease payments. . . . . . . . . . . . . . . . . . $316,888
22
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data)
Leases - (Continued)
Rent expense, principally for real estate, is as follows:
1994 1993 1992
Minimum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $56,089 $46,275 $39,809
Percentage and other. . . . . . . . . . . . . . . . . . . . . . . 10,435 12,232 9,067
$66,524 $58,507 $48,876
Retirement and Benefit Plans
Defined Benefit Plans - The Company has noncontributory, defined benefit
pension plans covering substantially all U.S. employees meeting certain age
and service requirements. For those vested (after five years of service), the
plans provide monthly benefits upon retirement based on career compensation
and years of credited service. It is the Company's policy to fund pension cost
annually in an amount consistent with Federal law and regulations. The assets
of the plans are principally invested in a mix of fixed income and equity
investments. In addition, the Company also participates in multi-employer
plans, which provide defined benefits to their union employees.
A summary of the components of net pension cost for the defined benefit
plans and the total contributions charged to pension expense for the
multi-employer plans follows:
1994 1993 1992
Defined Benefit Plans:
Service cost - benefits earned during the period . . . . . . . . . $2,294 $1,828 $ 1,453
Interest cost on projected benefit obligation. . . . . . . . . . . 2,922 2,429 2,039
Actual loss (gain) on plan assets. . . . . . . . . . . . . . . . . 1,854 (2,074) (2,255)
Net amortization and deferral of actuarial gains . . . . . . . . . (3,048) 612 771
Net pension cost of defined benefit plans. . . . . . . . . . . . . 4,022 2,795 2,008
Multi-employer plans. . . . . . . . . . . . . . . . . . . . . . . . 214 215 222
Total pension expense . . . . . . . . . . . . . . . . . . . . . . . $4,236 $3,010 $ 2,230
Significant rate assumptions used in determining pension obligations at
the end of each year, as well as pension cost in the following year, were
as follows:
1994 1993 1992
Discount rate used in determining projected benefit obligation. . . . 8.75% 7.5% 8.0%
Rate of increase in compensation levels . . . . . . . . . . . . . . . 5.25% 5.0% 5.5%
Long-term rate of return on assets. . . . . . . . . . . . . . . . . . 8.75% 7.5% 7.5%
23
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data)
Retirement and Benefit Plans - (Continued)
The following table sets forth the plans' funded status and amounts
recognized on the Company's balance sheet at January 29, 1995 and January 30,
1994 for defined benefit plans:
1994 1993
Actuarial present value of benefit obligations:
Vested benefit obligation . . . . . . . . . . . . . . . . . . . . . . $29,358 $ 30,884
Accumulated benefit obligation. . . . . . . . . . . . . . . . . . . . $30,680 $ 32,171
Projected benefit obligation for services rendered to date. . . . . . . $36,401 $ 39,318
Less: plan assets at fair value . . . . . . . . . . . . . . . . . . . . (26,012) (26,011)
Projected benefit obligation in excess of plan assets . . . . . . . . . 10,389 13,307
Unrecognized prior service cost . . . . . . . . . . . . . . . . . . . . (4,209) (4,771)
Unrecognized net actuarial loss . . . . . . . . . . . . . . . . . . . . (2,485) (5,435)
Unrecognized net asset at adoption date of FAS Statement No. 87 . . . . 442 509
Net pension liability recognized on the balance sheet . . . . . . . . . $ 4,137 $ 3,610
The net pension liability is included in accrued expenses and other
liabilities.
The Company has an unfunded supplemental defined benefit plan covering 25
current and retired executives under which the participants will receive a
predetermined amount during the 10 years following the attainment of age 65,
provided that prior to the termination of employment with the Company, the
participant has been in the plan for at least 10 years and has attained age
55. The Company does not intend to admit new participants in the future. At
January 29, 1995 and January 30, 1994, $6,127 and $5,343, respectively, are
included in other liabilities as the accrued cost of this plan.
Savings and Retirement Plans - The Company has a savings and retirement
plan (the "Associates Investment Plan") and a supplemental savings plan for
the benefit of its eligible employees who elect to participate. Participants
may elect to contribute up to 6% of their annual compensation, as defined, to
the plans. Company contributions to the plans are equal to 50% of the amounts
contributed by participating employees and were 2,406 in 1994, $2,303 in 1993
and $2,206 in 1992. In accordance with the terms of the Associates
Investment Plan, a portion of its assets are invested in the Company's common
stock.
Post-retirement Benefits - The Company and its domestic subsidiaries
provide certain health care and life insurance benefits to retired employees.
Employees become eligible for these benefits if they reach retirement age
while working for the Company. Retirees contribute to the cost of this plan,
which is unfunded.
24
On February 1, 1993, the Company adopted FAS Statement No. 106 which requires
that the cost of this plan be recognized as an expense as employees render
service instead of when the benefits are paid. Post-retirement benefit cost
for 1992, which was recorded on a cash basis and totalled $459 in that year,
has not been restated.
Net post-retirement benefit cost includes the following components:
1994 1993
Service cost $ 402 $ 275
Interest cost 850 739
Amortization of transition obligation 273 273
$1,525 $1,287
The following reconciles the plan's accumulated post-retirement benefit with
amounts recognized in the Company's balance sheet:
Accumulated post-retirement benefit obligation:
1994 1993
Retirees receiving benefits 7,086 $7,481
Fully eligible active plan participants 1,065 1,092
Active plan participants not eligible for benefits 2,300 2,053
10,451 10,626
Unrecognized transition obligation (4,916) (5,189)
Unrecognized net loss (709) (1,011)
Post-retirement liability recognized on the
balance sheet $ 4,826 $4,426
The weighted average annual assumed rate of increase in the cost of covered
benefits (i.e., health care cost trend rate) is 9.0% for 1995 and is assumed
to decrease gradually to 5.0% by 2040 and remain at that level thereafter.
Increasing the assumed health care cost trend rate by one percentage point
would increase the accumulated post-retirement benefit obligation as of
January 29, 1995 by $1,045, and the aggregate of the service and interest cost
components of net post-retirement benefit cost for 1994 by $163. The discount
rate used in determining the accumulated post-retirement benefit obligation
was 8.75%.
25
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data)
Segment Data
The Company operates in two industry segments: (i) apparel - the
manufacture, procurement for sale and marketing of a broad range of men's,
women's and children's apparel to traditional wholesale accounts as well as
through Company-owned retail stores, and (ii) footwear - the manufacture,
procurement for sale and marketing of a broad range of men's, women's and
children's shoes to traditional wholesale accounts as well as through
Company-owned retail stores.
Operating income represents net sales less operating expenses. Excluded
from operating results of the segments are interest expense, net, corporate
expenses and income taxes.
1994 1993 1992
Net Sales
Apparel . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 883,949 $ 800,454 $709,361
Footwear. . . . . . . . . . . . . . . . . . . . . . . . . . . . 371,517 351,940 333,204
Total Net Sales . . . . . . . . . . . . . . . . . . . . . . . . $1,255,466 $1,152,394 $1,042,565
Operating Income
Apparel(1). . . . . . . . . . . . . . . . . . . . . . . . . . . $ 29,091 $ 56,139 $ 49,931
Footwear(2) . . . . . . . . . . . . . . . . . . . . . . . . . . 31,525 37,559 35,786
Total Operating Income. . . . . . . . . . . . . . . . . . . . . 60,616 93,698 85,717
Corporate Expenses(3). . . . . . . . . . . . . . . . . . . . . . . (10,914) (13,387) (15,509)
Interest Expense, net. . . . . . . . . . . . . . . . . . . . . . . (12,793) (16,679) (15,727)
Income Before Taxes . . . . . . . . . . . . . . . . . . . . . . $ 36,909 $ 63,632 $ 54,481
Identifiable Assets
Apparel . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 307,111 $ 305,132 $283,256
Footwear. . . . . . . . . . . . . . . . . . . . . . . . . . . . 176,261 164,197 140,091
483,372 469,329 423,347
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . 110,966 85,442 94,015
$ 594,338 $ 554,771 $517,362
Depreciation and Amortization
Apparel . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,977 $ 12,843 $ 10,700
Footwear. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,125 4,405 3,066
22,102 17,248 13,766
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,207 1,878 1,254
$ 24,309 $ 19,126 $ 15,020
Identifiable Capital Expenditures
Apparel . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 36,176 $ 29,449 $ 23,488
Footwear. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,152 16,038 6,453
42,328 45,487 29,941
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,812 2,379 6,830
$ 53,140 $ 47,866 $ 36,771
(1) Operating income of the apparel segment includes net charges for
restructuring of $7,000 in 1994 and $2,000 in 1992.
(2) In 1992, reserves of $1,600 for closing the Company's footwear catalog
business were charged to operating income of the footwear segment.
(3) In 1992, corporate expenses include $2,400 for relocating the Company's
administrative offices to Bridgewater, New Jersey and South Portland,
Maine.
26
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data)
Segment Data - (Continued)
Apparel inventories as of January 29, 1995 and January 30, 1994 of
$132,875 and $150,857, respectively, were determined using the LIFO method.
Acquisition
On January 24, 1995, the Company entered into a binding agreement to
acquire the Apparel Group of Crystal Brands, Inc. for $114,700 in cash,
subject to certain adjustments. This acquisition was completed on February
17, 1995. The cash used for the acquisition was provided in part from the
Company's invested cash, and in part from borrowings under the Company's
revolving credit agreements. The assets acquired relate principally to the
production and distribution of men's and women's sportswear under the brand
names Izod, Gant and Salty Dog.
Restructuring
During the fourth quarter of 1994, the Company implemented a plan to
restructure and consolidate certain managerial, field supervisory and
administrative functions associated with its retail operations, and adopted a
plan to realign its wholesale apparel business from four operating divisions
into a dress shirt division and a sportswear division. This new structure
will reduce expenses while improving the Company's marketing focus.
Also, in connection with the acquisition of Crystal Brands, the Company
adopted a plan to convert its Cape Isle Knitters and Windsor Shirt private
label retail stores to stores which will market branded apparel under the Izod
and Gant labels. The Company believes that these store conversions will have
a positive impact on the future sales and earnings of these two retail
companies.
As a result, the Company eliminated approximately eighty five positions at
a cost of $3,300. Also, various other costs associated with the retail and
wholesale consolidations and with the Cape Isle Knitters and Windsor Shirt
conversions estimated at $5,300 have been recognized. Included in the current
year's restructuring charge is a reversal of $1,600 of prior year's
restructuring reserves, related to the Company's wholesale sweater operations,
which were determined to be no longer required as a result of certain events
in the fourth quarter. Accordingly, $7,000 has been recognized as a net
restructuring charge during the fourth quarter of 1994. Prior to January 29,
1995, approximately $847 of termination benefits had been charged against the
$8,600 restructuring reserve.
As part of its ongoing expense reduction initiatives, the Company
continues to evaluate its operating structure.
27
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In thousands, except share data)
Other Comments
The Company has available a letter of credit facility from its lending
banks totaling $200,000 of which $98,469 was utilized at January 29, 1995.
The Company is a party to certain litigation which, in management's
judgment based in part on the opinion of legal counsel, will not have a
material adverse effect on the Company's financial position.
During 1994, 1993 and 1992 the Company has paid $0.0375 quarterly cash
dividends per share on its common stock.
Certain items in 1993 and 1992 have been reclassified to present these
items on a basis consistent with 1994.
28
MANAGEMENT'S REPORT ON RESPONSIBILITY FOR FINANCIAL REPORTING
Management of the Company has the responsibility for preparing the
accompanying financial statements and for their integrity and objectivity.
The statements have been prepared by management in conformity with generally
accepted accounting principles. The financial statements include some amounts
that are based on management's best estimates and judgements. Management also
prepared the other information in the annual report and is responsible for its
accuracy and consistency with the financial statements.
The Company maintains a system of internal accounting controls designed to
provide management with reasonable assurance that transactions are executed in
accordance with management's authorization and recorded properly. The concept
of reasonable assurance is based on the recognition that the cost of a system
of internal control should not exceed the benefits derived and that the
evaluation of those factors requires estimates and judgements by management.
Further, because of inherent limitations in any system of internal accounting
control, errors or irregularities may occur and not be detected.
Nevertheless, management believes that a high level of internal control is
maintained by the Company through the selection and training of qualified
personnel, the establishment and communication of accounting and business
policies, and its internal audit program.
The Audit Committee of the Board of Directors, composed solely of outside
directors, meets periodically with management and the Company's internal
auditors and independent auditors to review matters relating to the quality of
financial reporting and internal accounting control and the nature, extent and
results of their audits. The Company's internal auditors and independent
auditors have complete access to the Audit Committee.
SIGNATURE STAMP SIGNATURE STAMP
BRUCE J. KLATSKY IRWIN W. WINTER
Chairman, President and Vice President and
Chief Executive Officer Chief Financial Officer
29
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Stockholders and the Board of Directors
Phillips-Van Heusen Corporation
We have audited the accompanying consolidated balance sheets of Phillips-
Van Heusen Corporation and subsidiaries as of January 29, 1995 and January 30,
1994, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the three years in the period
ended January 29, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Phillips-Van
Heusen Corporation and subsidiaries at January 29, 1995 and January 30, 1994,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended January 29, 1995 in conformity with
generally accepted accounting principles.
E&Y SIGNATURE STAMP
New York, New York
March 14, 1995
30
PHILLIPS-VAN HEUSEN CORPORATION
SELECTED QUARTERLY FINANCIAL DATA - UNAUDITED
(In thousands, except per share data)
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
1994 1993 1994 1993(1) 1994 1993 1994(2) 1993(3)
Net sales. . . . . . . . . $238,897 $221,924 $283,771 $264,016 $379,406 $357,389 $353,392 $309,065
Gross profit . . . . . . . 79,162 78,124 94,761 94,893 123,387 124,272 112,501 109,656
Income (loss) before
extraordinary loss . . . (3,531) (2,208) 5,735 7,757 17,850 24,520 9,961 13,183
Net income . . . . . . . . (3,531) (2,208) 5,735 7,757 17,850 24,520 9,961 1,789
Net income (loss) per
share:
Before extraordinary
loss. . . . . . . . . . . (0.13) (.08) 0.21 0.29 0.66 0.91 0.37 0.48
Extraordinary loss (4) . . - - - - - - - (0.42)
Net income (5). . . . . . (0.13) (.08) 0.21 0.29 0.66 0.91 0.37 0.06
Price range of common
stock
High. . . . . . . . . . 39 32 3/4 33 1/2 33 3/8 23 3/4 34 1/2 16 3/8 37 5/8
Low . . . . . . . . . . 32 7/8 26 5/8 18 1/2 25 3/4 14 25 7/8 14 32 1/4
(1) Net income for the second quarter of 1993 includes a pre-tax credit of
$1,700 for the adjustment of certain fringe benefit accruals.
(2) Net income for the fourth quarter of 1994 includes a net pre-tax charge
of $7,000 for restructuring, a pre-tax LIFO credit of $1,991 and a credit
of $4,209 which resulted from an adjustment to the estimated tax rate
used in the first three quarters.
(3) Net income for the fourth quarter of 1993 includes a pre-tax LIFO credit
of $1,699.
(4) Net income for the fourth quarter of 1993 includes an extraordinary loss,
net of tax, of $11,394 related to the prepayment of certain debt.
(5) Fully diluted net income per share has not been presented since the
results are not materially different from primary net income per share.
31
PHILLIPS-VAN HEUSEN CORPORATION
EIGHT YEAR FINANCIAL SUMMARY
(In thousands, except per share data, percents and ratios)
The Company's financial summary is presented from 1987, the year in which the
Company recapitalized its balance sheet and acquired G.H. Bass & Co.
1994 1993 1992 1991
Summary of Operations
Net sales
Apparel. . . . . . . . . . . . . . . . . . . . . .$ 883,949 $ 800,454 $ 709,361 $596,383
Footwear . . . . . . . . . . . . . . . . . . . . . 371,517 351,940 333,204 307,717
1,255,466 1,152,394 1,042,565 904,100
Cost of goods sold and expenses. . . . . . . . . . . 1,205,764 1,072,083 972,357 843,367
Interest expense, net. . . . . . . . . . . . . . . . 12,793 16,679 15,727 16,686
1,218,557 1,088,762 988,084 860,053
Income before taxes. . . . . . . . . . . . . . . . . 36,909 63,632 54,481 44,047
Income taxes . . . . . . . . . . . . . . . . . . . . 6,894 20,380 16,600 12,910
Income from continuing operations
before extraordinary loss. . . . . . . . . . . . . 30,015 43,252 37,881 31,137
(Loss) income from discontinued
operations . . . . . . . . . . . . . . . . . . . . - - - -
Extraordinary loss, net of tax . . . . . . . . . . . - (11,394) - -
Net income. . . . . . . . . . . . . . . . . . .$ 30,015 $ 31,858 $ 37,881 $ 31,137
Per Share Statistics(3)
Income from continuing operations
before extraordinary loss. . . . . . . . . . . . .$ 1.11 $ 1.60 $ 1.42 $ 1.15
Discontinued operations. . . . . . . . . . . . . . . - - - -
Extraordinary loss . . . . . . . . . . . . . . . . . - (0.42) - -
Net income . . . . . . . . . . . . . . . . . . . . .$ 1.11 $ 1.18 $ 1.42 $ 1.15
Dividends paid per share . . . . . . . . . . . . . . 0.15 0.15 0.15 0.1425
Stockholders' equity per share.. . . . . . . . . . . 10.35 9.33 8.14 4.52
Financial Position
Invested cash. . . . . . . . . . . . . . . . . . . .$ 68,586 $ 66,064 $ 75,862 $ 5,326
Current assets . . . . . . . . . . . . . . . . . . . 429,670 418,702 410,522 303,143
Current liabilities. . . . . . . . . . . . . . . . . 114,033 109,156 115,208 102,976
Working capital. . . . . . . . . . . . . . . . . . . 315,637 309,546 295,314 200,167
Total assets . . . . . . . . . . . . . . . . . . . . 596,284 554,771 517,362 398,969
Long-term debt . . . . . . . . . . . . . . . . . . . 169,679 169,934 170,235 121,455
Series B convertible redeemable
preferred stock. . . . . . . . . . . . . . . . . . - - 72,800
Stockholders' equity . . . . . . . . . . . . . . . . 275,460 246,799 211,413 84,903
Other Statistics
Total debt to total capital (4). . . . . . . . . . . 38.2% 40.8% 46.8% 46.0%
Net debt to net capital (5). . . . . . . . . . . . . 26.9% 29.7% 34.3% 45.0%
Market value of stockholders' equity . . . . . . . .$ 426,000 $ 949,000 $ 753,000 $392,000
Current ratio. . . . . . . . . . . . . . . . . . . . 3.8 3.8 3.6 2.9
Average shares and equivalents outstanding . . . . . 27,154 27,106 25,253 19,897
(1) 1990 includes 53 weeks of operations.
(2) 1987 includes the operations of G.H. Bass & Co. from date of acquisition, August 21, 1987,
and includes a gain on settlement of pension plans of $3,415, or $0.13 per share.
(3) Fully diluted net income per share has not been presented since the results are either not
materially different from primary net income per share or are anti-dilutive.
(4) Total capital equals interest-bearing debt, preferred stock and stockholders' equity.
(5) Net debt and net capital are total debt and total capital reduced by invested cash.
32
PHILLIPS-VAN HEUSEN CORPORATION
EIGHT YEAR FINANCIAL SUMMARY (CONTINUED)
(In thousands, except per share data, percents and ratios)
The Company's financial summary is presented from 1987, the year in which
the Company recapitalized its balance sheet and acquired G.H. Bass & Co.
1990(1) 1989 1988 1987(2)
Summary of Operations
Net sales
Apparel. . . . . . . . . . . . . . . . . . . . . . $536,352 $493,395 $460,342 $416,407
Footwear . . . . . . . . . . . . . . . . . . . . . 269,963 239,541 180,696 83,618
806,315 732,936 641,038 500,025
Cost of goods sold and expenses. . . . . . . . . . . 752,252 682,687 597,543 457,842
Interest expense, net. . . . . . . . . . . . . . . . 18,884 17,555 16,109 6,210
771,136 700,242 613,652 464,052
Income before taxes. . . . . . . . . . . . . . . . . 35,179 32,694 27,386 35,973
Income taxes . . . . . . . . . . . . . . . . . . . . 8,795 8,502 6,565 14,655
Income from continuing operations
before extraordinary loss. . . . . . . . . . . . . 26,384 24,192 20,821 21,318
(Loss) income from discontinued
operations . . . . . . . . . . . . . . . . . . . . - - (152) 8,691
Extraordinary loss, net of tax . . . . . . . . . . . - - - -
Net income. . . . . . . . . . . . . . . . . . . $ 26,384 $ 24,192 $ 20,669 $ 30,009
Per Share Statistics(3)
Income from continuing operations
before extraordinary loss. . . . . . . . . . . . . $ 0.95 $ 0.84 $ 0.68 $ 0.66
Discontinued operations. . . . . . . . . . . . . . . - - (0.01) 0.33
Extraordinary loss . . . . . . . . . . . . . . . . . - - - -
Net income . . . . . . . . . . . . . . . . . . . . . $ 0.95 $ 0.84 $ 0.67 $ 0.99
Dividends paid per share . . . . . . . . . . . . . . 0.14 0.14 0.14 0.125
Stockholders' equity per share.. . . . . . . . . . . 3.38 2.53 1.79 1.24
Financial Position
Invested cash. . . . . . . . . . . . . . . . . . . . $ 5,796 $ 3,551 $ 7,191 $ 8,979
Current assets . . . . . . . . . . . . . . . . . . . 285,315 266,867 265,039 258,135
Current liabilities. . . . . . . . . . . . . . . . . 90,748 84,190 88,191 86,741
Working capital. . . . . . . . . . . . . . . . . . . 194,567 182,677 176,848 171,394
Total assets . . . . . . . . . . . . . . . . . . . . 376,790 333,108 323,133 317,773
Long-term debt . . . . . . . . . . . . . . . . . . . 140,259 118,776 116,400 120,848
Series B convertible redeemable
preferred stock. . . . . . . . . . . . . . . . . . 72,800 72,800 72,800 72,800
Stockholders' equity . . . . . . . . . . . . . . . . 62,324 46,085 32,476 22,456
Other Statistics
Total debt to total capital (4). . . . . . . . . . . 53.2% 52.6% 55.1% 56.9%
Net debt to net capital (5). . . . . . . . . . . . . 52.2% 51.9% 53.7% 55.1%
Market value of stockholders' equity . . . . . . . . $173,000 $132,000 $127,000 $ 86,000
Current ratio. . . . . . . . . . . . . . . . . . . . 3.1 3.2 3.0 3.0
Average shares and equivalents outstanding . . . . . 19,094 19,140 18,572 26,258
(1) 1990 includes 53 weeks of operations.
(2) 1987 includes the operations of G.H. Bass & Co. from date of acquisition, August 21, 1987,
and includes a gain on settlement of pension plans of $3,415, or $0.13 per share.
(3) Fully diluted net income per share has not been presented since the results are either not
materially different from primary net income per share or are anti-dilutive.
(4) Total capital equals interest-bearing debt, preferred stock and stockholders' equity.
(5) Net debt and net capital are total debt and total capital reduced by invested cash.
33