PHILLIPS-VAN HEUSEN CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
1995 1994 1993
Net sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,464,128 $1,255,466 $1,152,394
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . 987,921 845,655 747,555
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . 476,207 409,811 404,839
Selling, general and administrative expenses . . . . . . . . . . . 428,634 353,109 324,528
Plant and store closing and restructuring expenses . . . . . . . . 27,000 7,000 -
Income before interest and taxes . . . . . . . . . . . . . . . . . 20,573 49,702 80,311
Interest expense, net. . . . . . . . . . . . . . . . . . . . . . . 23,199 12,793 16,679
Income (loss) before taxes . . . . . . . . . . . . . . . . . . . . (2,626) 36,909 63,632
Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . (2,920) 6,894 20,380
Income before extraordinary loss . . . . . . . . . . . . . . . . . 294 30,015 43,252
Extraordinary loss on debt retirement. . . . . . . . . . . . . . . - - (11,394)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 294 $ 30,015 $ 31,858
Net income per share:
Before extraordinary loss. . . . . . . . . . . . . . . . . . . . . $ 0.01 $ 1.11 $ 1.60
Extraordinary loss . . . . . . . . . . . . . . . . . . . . . . . . - - (0.42)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.01 $ 1.11 $ 1.18
See notes to consolidated financial statements.
1
PHILLIPS-VAN HEUSEN CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
January 28, January 29,
1996 1995
ASSETS
Current Assets:
Cash, including cash equivalents of $8,474 and $68,586. . . . . . . . . . . $ 17,533 $ 80,473
Trade receivables, less allowances of $5,514 and $1,617 . . . . . . . . . . 109,866 77,527
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 276,773 255,244
Income tax refund receivable. . . . . . . . . . . . . . . . . . . . . . . . 16,987 -
Other, including deferred taxes of $9,801 and $7,108. . . . . . . . . . . . 23,505 16,426
Total Current Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . 444,664 429,670
Property, Plant and Equipment. . . . . . . . . . . . . . . . . . . . . . . . . 143,398 136,297
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119,914 17,733
Other Assets, including deferred taxes of $22,113 and $9,502 . . . . . . . . . 41,079 12,584
$749,055 $596,284
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 61,590 $ -
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,796 38,759
Accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72,603 75,014
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . 10,137 260
Total Current Liabilities . . . . . . . . . . . . . . . . . . . . . . . 183,126 114,033
Long-Term Debt, less current portion . . . . . . . . . . . . . . . . . . . . . 229,548 169,679
Other Liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61,089 37,112
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 26,979,352 and 26,610,310 . . . . . . . . . . . 26,979 26,610
Additional capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115,977 112,801
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132,336 136,049
Total Stockholders' Equity . . . . . . . . . . . . . . . . . . . . . . . 275,292 275,460
$ 749,055 $ 596,284
See notes to consolidated financial statements.
2
PHILLIPS-VAN HEUSEN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
1995 1994 1993
Operating activities:
Income before extraordinary loss . . . . . . . . . . . . . . . . . . . . .$ 294 $ 30,015 $ 43,252
Adjustments to reconcile to cash provided (used) by operating
activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . 33,740 24,765 19,582
Amortization of contributions from landlords . . . . . . . . . . . . . . (8,198) (5,732) (3,032)
Write-off of property, plant and equipment . . . . . . . . . . . . . . . 13,000 - -
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . (7,051) (6,275) (2,195)
Extraordinary loss on debt retirement. . . . . . . . . . . . . . . . . . - - (11,394)
Changes in operating assets and liabilities:
Receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (13,927) (15,541) (3,168)
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,315 14,627 (11,110)
Accounts payable and accrued expenses. . . . . . . . . . . . . . . . . . (73,483) 3,242 13,428
Other-net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,183) 4,293 (3,297)
Net Cash Provided (Used) By Operating Activities . . . . . . . . . . . (42,493) 49,394 42,066
Investing activities:
Acquisition of the Apparel Group of Crystal Brands, Inc. . . . . . . . . . (114,503) - -
Property, plant and equipment acquired . . . . . . . . . . . . . . . . . . (39,773) (53,140) (47,866)
Investment in Pyramid Sportswear . . . . . . . . . . . . . . . . . . . . . (6,950) - -
Contributions from landlords . . . . . . . . . . . . . . . . . . . . . . . 7,800 15,310 9,983
Other-net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,905 2,438 (678)
Net Cash Used By Investing Activities. . . . . . . . . . . . . . . . . . (149,521) (35,392) (38,561)
Financing activities:
Proceeds from revolving line of credit and long-term borrowings. . . . . . 204,736 - 141,023
Payments on revolving line of credit and long-term borrowings. . . . . . . (73,400) (245) (157,026)
Exercise of stock options. . . . . . . . . . . . . . . . . . . . . . . . . 1,745 2,630 7,425
Cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,007) (3,984) (3,920)
Net Cash Provided (Used) By Financing Activities . . . . . . . . . . . . 129,074 (1,599) (12,498)
Increase (decrease) in cash. . . . . . . . . . . . . . . . . . . . . . . . . (62,940) 12,403 (8,993)
Cash at beginning of period. . . . . . . . . . . . . . . . . . . . . . . . . 80,473 68,070 77,063
Cash at end of period. . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 17,533 $ 80,473 $ 68,070
See notes to consolidated financial statements.
3
PHILLIPS-VAN HEUSEN CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands, except share data)
Common Stock
$1 par Additional Retained Treasury Stockholders'
Shares Value Capital Earnings Stock Equity
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 . . . . . . . . . (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 . . . . . . . . . (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
Stock options exercised. . . . . 187,908 188 1,557 1,745
Net income . . . . . . . . . . . 294 294
Cash dividends . . . . . . . . . (4,007) (4,007)
Investment in Pyramid Sportswear 181,134 181 1,619 1,800
January 28, 1996 . . . . . . . . . 26,979,352 $ 26,979 $115,977 $132,336 $ 0 $275,292
See notes to consolidated financial statements.
4
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per 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.
Use of Estimates - The preparation of the financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ from
the estimates.
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 1995, 1994 and 1993 represent the 52 weeks ended
January 28, 1996, January 29, 1995 and January 30, 1994, respectively.
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.
Asset Impairments - The Company records impairment losses on long-lived
assets used in operations when events and circumstances indicate that the
assets might be impaired and the undiscounted cash flows estimated to be
generated by those assets are less than the carrying amounts of those assets.
Inventories - Inventories are stated at the lower of cost or market. Cost
for the apparel business is determined principally using the last-in,
first-out method (LIFO), except for certain sportswear inventories which are
determined using the first-in, first-out method (FIFO). Cost for the footwear
business is determined using 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 $5,474 and $2,405
in 1995 and 1994, 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 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 $23,748 and $24,146 at January 28, 1996 and
January 29, 1995, respectively.
Fair Value of Financial Instruments - Using discounted cash flow analyses,
the Company estimates that the fair value of all financial instruments
approximates their carrying value.
Advertising - The Company expenses advertising costs as incurred.
Advertising expenses totalled $20,165 (1995), $18,532 (1994) and $15,615
(1993).
5
Net Income Per Share - Net income per share has been computed by dividing
net income by the weighted average number of shares outstanding during the
year and, in 1994 and 1993, share equivalents applicable to dilutive stock
options. In 1995, share equivalents applicable to dilutive stock options were
immaterial and have been excluded from the net income per share calculations.
The resulting number of shares used in such computations was 26,725,804
(1995), 27,154,173 (1994) and 27,105,888 (1993).
6
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share data)
Income Taxes
Income taxes consist of:
1995 1994 1993
Federal:
Current. . . . . . . . . . . . . . . . . . . . . . . . . $(8,219) $11,720 $16,628
Deferred . . . . . . . . . . . . . . . . . . . . . . . . 2,995 (5,585) (1,088)
State, foreign and local:
Current. . . . . . . . . . . . . . . . . . . . . . . . . 1,936 1,449 4,945
Deferred . . . . . . . . . . . . . . . . . . . . . . . . 368 (690) (105)
$(2,920) $ 6,894 $20,380
Taxes paid were $3,371 (1995), $12,766 (1994) and $9,936 (1993).
The approximate tax effect of items giving rise to the deferred income tax
asset recognized on the Company's balance sheets is as follows:
1995 1994
Depreciation. . . . . . . . . . . . . . . . . . . . . . . . . $(14,574) $(8,713)
Landlord contributions. . . . . . . . . . . . . . . . . . . . 9,334 9,207
Plant and store closing and restructuring . . . . . . . . . . 7,555 3,084
Employee compensation and benefits. . . . . . . . . . . . . . 8,797 7,175
Tax loss carryforward . . . . . . . . . . . . . . . . . . . . 16,328 -
Other-net . . . . . . . . . . . . . . . . . . . . . . . . . . 4,474 5,857
$ 31,914 $16,610
A deferred tax asset of $18,667 resulting principally from the acquisition
of the Gant and Izod businesses from Crystal Brands is included in the
Company's balance sheet as of January 28, 1996. This asset did not affect
the Company's 1995 tax provision.
A reconciliation of the statutory Federal income tax to the income tax
(benefit) expense is as follows:
1995 1994 1993
Statutory 35% federal tax . . . . . . . . . . . . . . . . . . $ (919) $12,918 $22,271
State, foreign and local income taxes,
net of Federal income tax benefit. . . . . . . . . . . . . . 1,454 1,845 2,736
Income of Puerto Rico subsidiaries(1) . . . . . . . . . . . . (3,298) (2,953) (3,054)
Reversal of estimated tax liabilities(2). . . . . . . . . . . - (4,100) -
Other-net . . . . . . . . . . . . . . . . . . . . . . . . . . (157) (816) (1,573)
Income tax (benefit) expense. . . . . . . . . . . . . . . . . $(2,920) $ 6,894 $20,380
(1)Exemption from Puerto Rico income tax expires in 1998.
(2)During 1994, the Company reversed estimated tax liabilities which
were no longer deemed necessary.
During 1995 and 1994, the Company recognized tax benefits of $397 and
$1,568, respectively, related to the exercise of stock options. These
benefits were credited to additional capital.
7
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share data)
Inventories
Inventories are summarized as follows:
1995 1994
Raw materials. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,194 $ 19,849
Work in process. . . . . . . . . . . . . . . . . . . . . . . . . . 13,145 17,026
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . 249,434 218,369
$276,773 $255,244
Inventories would have been $12,923 and $12,700 higher than reported at
January 28, 1996 and January 29, 1995, respectively, if the FIFO method of
inventory accounting had been used for the entire apparel business.
Property, Plant and Equipment
Property, plant and equipment, at cost, are summarized as follows:
1995 1994
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,814 $ 1,710
Buildings and building improvements. . . . . . . . . . . . . . . . 37,661 32,961
Machinery and equipment, furniture and
fixtures and leasehold improvements. . . . . . . . . . . . . . . 228,729 210,688
268,204 245,359
Less: Accumulated depreciation and
amortization . . . . . . . . . . . . . . . . . . . . . . . 124,806 109,062
$143,398 $136,297
8
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share data)
Long-Term Debt and Extraordinary Loss
Long-term debt, exclusive of current portion, is as follows:
1995 1994
Revolving Credit Facilities. . . . . . . . . . . . . . . . . . . . . . . $ 70,000 $ -
7.75% Debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99,435 99,429
7.75% Senior Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . 59,143 69,000
Other debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 970 1,250
$229,548 $169,679
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.
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.
9
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share data)
Long-Term Debt and Extraordinary Loss - (Continued)
The Company has a credit agreement which includes a revolving credit
facility under which the Company may, at its option, borrow and repay amounts
within certain limits. The credit agreement also includes a letter of credit
facility. The total amount available to the Company under each of the
revolving credit and the letter of credit facility is $250,000, provided,
however, that the aggregate maximum amount outstanding at any time under both
facilities is $400,000. All outstanding borrowings and letters of credit
under the credit agreement are due February 13, 1999. Interest on amounts
borrowed under the revolving credit facility is payable quarterly at the prime
rate or at LIBOR plus .25%. A commitment fee of .25% is payable quarterly on
the $250,000 revolving credit facility. The amount outstanding at January 28,
1996 and January 29, 1995 under the letter of credit facility was $115,462 and
$98,469, respectively.
The Company has 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.
The weighted average interest rate on outstanding borrowings from both
revolving credit facilities at January 28, 1996 was 5.95%.
Interest paid was $22,949 (1995), $14,131 (1994) and $18,007 (1993).
Scheduled maturities of long-term debt, including current portion, for the
next five years are as follows: 1996-$10,137, 1997-$10,157, 1998-$10,182,
1999-$10,202 and 2000-$9,857.
Investment in Pyramid Sportswear
During the fourth quarter of 1995, the Company acquired 25% of Pyramid
Sportswear ("Pyramid") for $6,950 in cash and $1,800 in the Company's stock.
Pyramid, headquarted in Sweden, designs, develops and sources Gant sportswear
under a license from the Company and markets such sportswear in 20 countries
around the world. In connection with this investment, the Company also
acquired an option to purchase the remaining 75% of Pyramid in the year 2000.
10
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per 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.
The Company accounts for its stock options under the provisions of APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and intends to
continue to do so.
11
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share data)
Stockholders' Equity - (Continued)
Other data with respect to stock options follows:
Option Price
Shares Per Share
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
Granted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 568,390 10.75- 17.50
Exercised. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187,908 4.75- 10.69
Cancelled. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131,383 4.75- 34.75
Outstanding at January 28, 1996. . . . . . . . . . . . . . . . . . . 1,803,348 $ 4.75- $36.25
Of the outstanding options at January 28, 1996 and January 29, 1995,
options covering 842,912 and 900,242 shares were exercisable, respectively.
Stock options available for grant at January 28, 1996 and January 29, 1995
amounted to 532,041 and 219,748 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 28, 1996, minimum annual rental commitments under
non-cancellable operating leases, including leases for new retail stores which
had not begun operating at January 28, 1996, are as follows:
1996. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 66,383
1997. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,007
1998. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,304
1999. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,769
2000. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,051
Thereafter. . . . . . . . . . . . . . . . . . . . . . . . . . . 71,256
Total minimum lease payments. . . . . . . . . . . . . . . . . . $312,770
12
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share data)
Leases - (Continued)
Rent expense, principally for real estate, is as follows:
1995 1994 1993
Minimum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $69,988 $56,089 $46,275
Percentage and other. . . . . . . . . . . . . . . . . . . . . . . 11,807 10,435 12,232
$81,795 $66,524 $58,507
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:
1995 1994 1993
Defined Benefit Plans:
Service cost - benefits earned during the period . . . . . . . . . $ 2,145 $2,294 $1,828
Interest cost on projected benefit obligation. . . . . . . . . . . 7,107 2,922 2,429
Actual (gain) loss on plan assets. . . . . . . . . . . . . . . . . (19,533) 1,854 (2,074)
Net amortization and deferral of actuarial gains (losses). . . . . 12,028 (3,048) 612
Net pension cost of defined benefit plans. . . . . . . . . . . . . 1,747 4,022 2,795
Multi-employer plans . . . . . . . . . . . . . . . . . . . . . . . 219 214 215
Total pension expense . . . . . . . . . . . . . . . . . . . . . . . $ 1,966 $4,236 $3,010
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:
1995 1994 1993
Discount rate used in determining projected benefit obligation. . . . 7.50% 8.75% 7.50%
Rate of increase in compensation levels . . . . . . . . . . . . . . . 4.00% 5.25% 5.00%
Long-term rate of return on assets. . . . . . . . . . . . . . . . . . 8.75% 8.75% 7.50%
13
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share data)
Retirement and Benefit Plans - (Continued)
The following table sets forth the plans' funded status and amounts
recognized on the Company's balance sheets for defined benefit plans:
1995 1994
Actuarial present value of benefit obligations:
Vested benefit obligation . . . . . . . . . . . . . . . . . . . . . . $ 95,815 $29,358
Accumulated benefit obligation. . . . . . . . . . . . . . . . . . . . $ 98,087 $30,680
Projected benefit obligation for services rendered to date. . . . . . . $106,568 $36,401
Less: plan assets at fair value . . . . . . . . . . . . . . . . . . . . (103,797) (26,012)
Projected benefit obligation in excess of plan assets . . . . . . . . . 2,771 10,389
Unrecognized prior service cost . . . . . . . . . . . . . . . . . . . . (3,302) (4,209)
Unrecognized net actuarial loss . . . . . . . . . . . . . . . . . . . . (7,370) (2,485)
Unrecognized net asset at adoption date of FAS Statement No. 87 . . . . 374 442
Net pension (asset) liability recognized on the balance sheet . . . . . $ (7,527) $ 4,137
The projected benefit obligation in excess of plan assets at January 28,
1996 is net of $4,375 for certain overfunded plans.
The 1995 increases in the actuarial present value of the vested,
accumulated and projected benefit obligations, as well as the plan assets at
fair value, relate to the acquisition of the Gant and Izod businesses from
Crystal Brands.
The Company has an unfunded supplemental defined benefit plan covering 24
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 28, 1996 and January 29, 1995, $6,696 and $6,127, 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
generally may elect to contribute up to 15% 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 with respect to the first
6% of compensation and were $2,668 (1995), $2,406 (1994) and $2,303 (1993).
In accordance with the terms of the Associates Investment Plan, Company
matching contributions 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.
14
Net post-retirement benefit cost includes the following components:
1995 1994 1993
Service cost $ 466 $ 402 $ 275
Interest cost 2,128 850 739
Amortization of net loss 37 - -
Amortization of transition obligation 273 273 273
$2,904 $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:
1995 1994
Retirees receiving benefits $22,877 $ 7,086
Fully eligible active plan participants 2,104 1,065
Active plan participants not eligible for benefits 4,980 2,300
29,961 10,451
Unrecognized transition obligation (4,643) (4,916)
Unrecognized net loss (6,432) (709)
Post-retirement liability recognized on the
balance sheet $18,886 $ 4,826
The increases in the interest cost and accumulated post-retirement benefit
obligation relate primarily to the acquisition of the Gant and Izod businesses
from Crystal Brands.
The weighted average annual assumed rate of increase in the cost of covered
benefits (i.e., health care cost trend rate) is 8.0% for 1996 and is assumed
to decrease gradually to 5.5% by 2010 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 28, 1996 by $2,823, and the aggregate of the service and interest cost
components of net post-retirement benefit cost for 1995 by $260. The discount
rate used in determining the accumulated post-retirement benefit obligation at
January 28, 1996 and January 29, 1995 was 7.5% and 8.75%, respectively.
15
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per 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.
1995 1994 1993
Net Sales
Apparel . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,100,040 $ 883,949 $ 800,454
Footwear. . . . . . . . . . . . . . . . . . . . . . . . . . . . 364,088 371,517 351,940
Total Net Sales . . . . . . . . . . . . . . . . . . . . . . . . $1,464,128 $1,255,466 $1,152,394
Operating Income
Apparel(1). . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,948 $ 28,676 $ 55,724
Footwear(2) . . . . . . . . . . . . . . . . . . . . . . . . . . 25,510 31,525 37,559
Total Operating Income. . . . . . . . . . . . . . . . . . . . . 33,458 60,201 93,283
Corporate Expenses . . . . . . . . . . . . . . . . . . . . . . . . (12,885) (10,499) (12,972)
Interest Expense, net. . . . . . . . . . . . . . . . . . . . . . . (23,199) (12,793) (16,679)
Income (Loss) Before Taxes. . . . . . . . . . . . . . . . . . . $ (2,626) $ 36,909 $ 63,632
Identifiable Assets
Apparel . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 468,618 $ 307,111 $ 305,132
Footwear. . . . . . . . . . . . . . . . . . . . . . . . . . . . 165,390 176,261 164,197
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . 115,047 112,912 85,442
$ 749,055 $ 596,284 $ 554,771
Depreciation and Amortization
Apparel . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 25,526 $ 18,433 $ 13,299
Footwear. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,986 4,125 4,405
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,228 2,207 1,878
$ 33,740 $ 24,765 $ 19,582
Identifiable Capital Expenditures
Apparel . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 23,627 $ 36,176 $ 29,449
Footwear. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,209 6,152 16,038
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,937 10,812 2,379
$ 39,773 $ 53,140 $ 47,866
(1) Operating income of the apparel segment includes charges for plant and
store closing and restructuring expenses of $25,000 (1995) and $7,000
(1994).
(2) Operating income of the footwear segment includes charges for store
closing and restructuring expenses of $2,000 in 1995.
16
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share data)
Segment Data - (Continued)
Apparel inventories as of January 28, 1996 and January 29, 1995 of
$166,606 and $132,875, respectively, were determined using the LIFO method.
Acquisition
On February 17, 1995, the Company completed the acquisition of the Apparel
Group of Crystal Brands, Inc. (Gant and Izod) for $114,503 in cash, net of
cash acquired, and subject to certain adjustments. This acquisition was
accounted for as a purchase. The acquired operations are included in the
Company's consolidated financial statements since February 17, 1995.
In connection with the acquisition, the Company acquired assets with a
fair value estimated to be $207,101 (including $104,504 of excess of cost over
net assets acquired) and assumed liabilities estimated to be $92,598.
If the acquisition had occurred on the first day of fiscal 1994 instead of
on February 17, 1995, the Company's proforma consolidated results of
operations would have been:
1995 1994
Net sales $1,470,259 $1,486,476
Net income $ 231 $ 31,011
Net income per share $ 0.01 $ 1.14
Plant and Store Closing and Restructuring Expenses
During 1995, the Company adopted and began to implement a plan designed to
reduce costs and realign the product distribution mix primarily within the
Company's apparel business. Significant components of the plan included the
closure of three domestic shirt manufacturing facilities, closing
approximately 300 unprofitable retail outlet stores and reorganizing the
Company's management structure which combines the Company's wholesale and
retail businesses into eight discrete operating units, each with total
marketing and profit responsibility for its brand. As a result, the Company
recorded a pre-tax charge of $27,000 during 1995. Approximately $13,000 of
this charge relates to the write-off of fixed assets located in such factories
and retail outlet stores. The remaining $14,000 relates to termination
benefits, including pension settlements and curtailments of $1,200, for
approximately 1,250 employees impacted by this restructuring. As of January
28, 1996, approximately $6,490 of employee termination benefits and
approximately $13,000 of fixed asset write-offs had been charged against the
$27,000 reserve.
17
During 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. Also, in connection with the acquisition of the Gant
and Izod businesses from Crystal Brands, the Company adopted a plan to convert
its Cape Isle Knitters and Windsor Shirt private label retail stores to stores
which market branded apparel under the Izod and Gant labels, respectively.
As a result, the Company eliminated approximately 85 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
of $5,300 were recognized. Included in the 1994 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. Accordingly, $7,000 was recognized as
a net restructuring charge during 1994. As of January 28, 1996, substantially
all of the 1994 reserve had been expended in completing this restructuring
plan.
As part of its ongoing expense reduction initiatives, the Company
continues to evaluate its operating structure.
18
PHILLIPS-VAN HEUSEN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share data)
Other Comments
One of the Company's directors, Mr. Harry N.S. Lee, is a director of TAL
Apparel Limited, an apparel manufacturer and exporter based in Hong Kong.
During 1995, the Company purchased approximately $45,000 of products from TAL
Apparel Limited and certain related companies.
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 1995, 1994 and 1993 the Company paid a $0.0375 per share cash
dividend each quarter on its common stock.
Certain items in 1994 and 1993 have been reclassified to present these
items on a basis consistent with 1995.
19
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 Executive Vice President and
Chief Executive Officer Chief Financial Officer
20
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 28, 1996 and January 29,
1995, 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 28, 1996. 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 28, 1996 and January 29, 1995,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended January 28, 1996 in conformity with
generally accepted accounting principles.
As discussed in the notes to the consolidated financial statements, in
1995 the Company adopted Financial Accounting Standards Board Statement No.
121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of."
E&Y SIGNATURE STAMP
New York, New York
March 12, 1996
21
PHILLIPS-VAN HEUSEN CORPORATION
SELECTED QUARTERLY FINANCIAL DATA - UNAUDITED
(In thousands, except per share data)
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
1995 1994 1995 1994 1995(1) 1994 1995(2) 1994(3)
Net sales. . . . . . . . . $282,987 $238,897 $349,493 $283,771 $448,007 $379,406 $383,641 $353,392
Gross profit . . . . . . . 97,404 79,162 119,597 94,761 139,055 123,387 120,151 112,501
Net income (loss). . . . . (3,360) (3,531) 3,894 5,735 (4,374) 17,850 4,134 9,961
Net income (loss) per
share (4) . . . . . . . (0.13) (0.13) 0.15 0.21 (0.16) 0.66 0.15 0.37
Price range of common
stock
High. . . . . . . . . . 18 39 17 33 1/2 15 7/8 23 3/4 11 3/4 16 3/8
Low . . . . . . . . . . 15 32 7/8 14 18 1/2 9 1/8 14 9 1/4 14
(1) Net loss for the third quarter of 1995 includes a pre-tax charge of
$25,000 for plant and store closing and restructuring expenses.
(2) Net income for the fourth quarter of 1995 includes a pre-tax charge of
$2,000 for plant and store closing and restructuring expenses.
(3) 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 $4,100 resulting from the reversal of estimated tax liabilities.
(4) Fully diluted net income per share has not been presented since the
results are not materially different from primary net income per share.
22
PHILLIPS-VAN HEUSEN CORPORATION
NINE 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.
1995(1) 1994 1993 1992 1991
Summary of Operations
Net sales
Apparel. . . . . . . . . . . . . . . . . . . . . . $1,100,040 $ 883,949 $ 800,454 $ 709,361 $596,383
Footwear . . . . . . . . . . . . . . . . . . . . . 364,088 371,517 351,940 333,204 307,717
1,464,128 1,255,466 1,152,394 1,042,565 904,100
Cost of goods sold and expenses. . . . . . . . . . . 1,443,555 1,205,764 1,072,083 972,357 843,367
Interest expense, net. . . . . . . . . . . . . . . . 23,199 12,793 16,679 15,727 16,686
Income (loss) before taxes . . . . . . . . . . . . . (2,626) 36,909 63,632 54,481 44,047
Income tax expense (benefit) . . . . . . . . . . . . (2,920) 6,894 20,380 16,600 12,910
Income from continuing operations. . . . . . . . . . 294 30,015 43,252 37,881 31,137
Income (loss) from discontinued
operations . . . . . . . . . . . . . . . . . . . . - - - - -
Extraordinary loss, net of tax . . . . . . . . . . . - - (11,394) - -
Net income. . . . . . . . . . . . . . . . . . . $ 294 $ 30,015 $ 31,858 $ 37,881 $ 31,137
Per Share Statistics(3)
Income from continuing operations. . . . . . . . . . $ 0.01 $ 1.11 $ 1.60 $ 1.42 $ 1.15
Discontinued operations. . . . . . . . . . . . . . . - - - - -
Extraordinary loss . . . . . . . . . . . . . . . . . - - (0.42) - -
Net income . . . . . . . . . . . . . . . . . . . . . $ 0.01 $ 1.11 $ 1.18 $ 1.42 $ 1.15
Dividends paid per share . . . . . . . . . . . . . . $ 0.15 $ 0.15 $ 0.15 $ 0.15 $ 0.1425
Stockholders' equity per share.. . . . . . . . . . . 10.20 10.35 9.33 8.14 4.52
Financial Position
Invested cash. . . . . . . . . . . . . . . . . . . . $ 8,474 $ 68,586 $ 66,064 $ 75,862 $ 5,326
Current assets . . . . . . . . . . . . . . . . . . . 444,664 429,670 418,702 410,522 303,143
Current liabilities. . . . . . . . . . . . . . . . . 183,126 114,033 109,156 115,208 102,976
Working capital. . . . . . . . . . . . . . . . . . . 261,538 315,637 309,546 295,314 200,167
Total assets . . . . . . . . . . . . . . . . . . . . 749,055 596,284 554,771 517,362 398,969
Long-term debt . . . . . . . . . . . . . . . . . . . 229,548 169,679 169,934 170,235 121,455
Convertible redeemable preferred stock . . . . . . . - - - - 72,800
Stockholders' equity . . . . . . . . . . . . . . . . 275,292 275,460 246,799 211,413 84,903
Other Statistics
Total debt to total capital (5). . . . . . . . . . . 52.3% 38.2% 40.8% 46.8% 46.0%
Net debt to net capital (6). . . . . . . . . . . . . 51.5% 26.9% 29.7% 34.3% 45.0%
Market value of stockholders' equity . . . . . . . . $ 270,000 $ 426,000 $ 949,000 $ 753,000 $392,000
Current ratio. . . . . . . . . . . . . . . . . . . . 2.4 3.8 3.8 3.6 2.9
Average shares and equivalents outstanding . . . . . 26,726 27,154 27,106 25,253 19,897
(1) 1995 includes the operations of Gant and Izod from date of acquisition, February 17, 1995, and includes a
$27,000 pre-tax restructuring charge.
(2) 1990 includes 53 weeks of operations.
(3) 1987 includes the operations of G.H. Bass & Co. from date of acquisition, August 21, 1987.
(4) 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.
(5) Total capital equals interest-bearing debt, preferred stock and stockholders' equity.
(6) Net debt and net capital are total debt and total capital reduced by invested cash.
23
PHILLIPS-VAN HEUSEN CORPORATION
NINE 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(2) 1989 1988 1987(3)
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
Income before taxes. . . . . . . . . . . . . . . . . 35,179 32,694 27,386 35,973
Income tax expense (benefit) . . . . . . . . . . . . 8,795 8,502 6,565 14,655
Income from continuing operations. . . . . . . . . . 26,384 24,192 20,821 21,318
Income (loss) from discontinued
operations . . . . . . . . . . . . . . . . . . . . - - (152) 8,691
Extraordinary loss, net of tax . . . . . . . . . . . - - - -
Net income. . . . . . . . . . . . . . . . . . . $ 26,384 $ 24,192 $ 20,669 $ 30,009
Per Share Statistics(4)
Income from continuing operations. . . . . . . . . . $ 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 (5). . . . . . . . . . . 53.2% 52.6% 55.1% 56.9%
Net debt to net capital (6). . . . . . . . . . . . . 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) 1995 includes the operations of Gant and Izod from date of acquisition, February 17, 1995, and
includes a $27,000 pre-tax restructuring charge.
(2) 1990 includes 53 weeks of operations.
(3) 1987 includes the operations of G.H. Bass & Co. from date of acquisition, August 21, 1987.
(4) 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.
(5) Total capital equals interest-bearing debt, preferred stock and stockholders' equity.
(6) Net debt and net capital are total debt and total capital reduced by invested cash.
24
FINANCIAL REVIEW
The Company's primary strategy is and has been to build the value of its brands.
Events of the year 1995, while they underscored the importance of that strategy,
also marked the beginning of a major change in the execution of that strategy.
For the past decade, PVH's growth has been driven by committing the majority of
its resources to a single channel of distribution - outlet retailing. However
successful that tactic was in growing the Company and strengthening its balance
sheet, it led to an overextension in that area of the business. This, in turn,
exacerbated the very significant "hit" experienced by the Company in the apparel
and footwear downturn, which began as long as four years ago and worsened
considerably in 1995. Although retail sales reached $872.5 million in 1995
compared with $764.7 million in 1994 and $679.6 million in 1993, most of the
increases were the result of new store openings and store expansions to carry
brand extensions, offset in part, by lower sales in existing stores. In
addition, a disproportionate amount of sales was driven by intense promotional
activity. This was, by far, the most difficult aspect of 1995's operations.
Whether the current down cycle in apparel and footwear is or is not nearing
an end is a matter of conjecture. What is not conjecture, however, is that
strong brand equity is the key to successful marketing. And apparel and
footwear are no exception to the importance of having a global presence in the
marketplace. Also not conjecture is the increasing importance of men's
casualwear to the total apparel market.
As noted in the Chairman's letter, all of these strategic issues were the
subject of specific initiatives addressed by PVH in 1995.
Acquisition of the Crystal Brands Apparel Group (Gant and Izod), together
with other changes in product, have significantly broadened PVH's sportswear
mix and increased its branded position. This can be seen readily in the
following:
1995 1994 1993
Casual Footwear &
Accessories 24% 29% 31%
Sportswear 56 46 42
Dress Wear 20 25 27
100% 100% 100%
Branded 88% 79% 78%
Private Label 12 21 22
100% 100% 100%
These trends should continue into 1996 and beyond as the Company continues
to emphasize its branded men's sportswear business.
The Company's presence in the global market has been significantly
increased with its 25% investment in Pyramid Sportswear. Pyramid, the
international licensee of Gant, markets over $80 million in Gant sportswear
products in 20 countries around the world. PVH has an option to acquire the
balance of Pyramid in four years.
25
The Company has taken a $27 million pre-tax restructuring charge which has
allowed it to move aggressively forward on the following issues:
o Closing 300 of PVH's retail stores (about one-third of total stores). These
closings should free-up some $40 million of capital, eliminate the weakest
and worst trending stores and accelerate the realignment of PVH's sales
towards a more balanced wholesale/retail mix.
o Closing three domestic shirt manufacturing facilities, which should trigger
increasing annual cost reductions exceeding $6.0 million by 1998.
o Reorganizing PVH's management structure to intensify focus on PVH's five
leading brands, improve logistics and lower costs.
Clearly 1996 will be a year of "new beginnings." All of the 1995
initiatives should begin to take hold. The full realignment of the Company
into a brand marketing organization should be completed by early Spring. At
that point, the Company will begin to execute its new strategic direction with
eight discrete operating units seeking to leverage fully all of PVH's core
competencies and to maximize the equity and financial potential of each of its
brands.
The Company recognizes that the current environment for apparel and
footwear offers a considerable challenge, but it believes it has the resources
and the wherewithal to "stay the course" and that the rewards of success will
be substantial.
This report deals with all of these initiatives and describes how they are
being harnessed to reverse the negative trends of the past several years.
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 $1.1 billion in 1995,
$883.9 million in 1994 and $800.5 million in 1993, representing increases of
24.4% and 10.4%, respectively. The increase in 1995 was due entirely to the
acquisition of the Gant and Izod businesses on February 17, 1995. The 1994
increase was principally related to the growth in retail sales, including the
expanded offering of Bass Apparel at Bass Company stores.
While 1995 sales, excluding the Gant and Izod acquisition, were about flat,
the Company's wholesale division achieved significant improvement in the gross
margin of all operating divisions. In dress shirts, gross margins showed
increasing improvement throughout the year as the introductory costs and
market disruptions caused by the new wrinkle-free product abated. In addition,
the creation early in the year of a dress shirt group housing all branded and
private label dress shirt business helped significantly to leverage the
Company's cost base and add to the gross margin improvement.
26
The sweater group also improved its gross margin by leveraging an
increasing percentage of higher margin branded goods into its product mix and
by maximizing the use of its production facilities in Puerto Rico. Sportswear
margins, particularly from the new Gant and Izod businesses, also contributed
to this improvement, despite a very significant restructuring of the sourcing
base for the new companies. Going forward, a much improved sourcing position
together with the further leveraging of these costs should be a major plus as
these new businesses begin to reach their full sales potential.
The retail division, on the other hand, experienced a significant reduction
in gross margin as promotional selling became considerably more intense.
The gross margin improvement at wholesale offset the reduced margin at
retail and overall gross margin in apparel increased slightly to 30.9% in 1995
from 30.8%. This compared with 33.1% in 1993 when retail operated in a far
less promotional environment.
Selling, general and administrative expenses were 27.9% of sales in 1995
compared with 26.7% in 1994 and 26.1% in 1993. Expense levels at wholesale
increased in 1995 with the inclusion of the Gant and Izod businesses which,
while providing a higher level of gross margin, also have higher selling and
marketing expenses. For example, Gant maintains a growing staff of field
coordinators and exclusive selling specialists to maximize the impact and
effectiveness of its in-store shops. As PVH's sportswear companies grow, their
expected higher gross margins will be increasingly leveraged with resulting
improvement in overall profitability.
Expense levels in 1995 were also negatively impacted by the overall
weakness in retail sales. Lower retail store sales per square foot caused an
increase in the relationship of in-store expenses to sales and further
weakened bottom line results. The increase in 1994 expense levels came from a
higher weighting of retail business as part of the overall apparel sales mix.
Closing 200 of PVH's weakest performing apparel retail stores should have a
very positive impact on in-store expense levels. Also, the realignment of
channel mix with a much greater emphasis on wholesale growth should serve to
reduce overall expense levels.
FOOTWEAR
Net sales of the Company's footwear segment were $364.1 million in 1995
compared with $371.5 million in 1994 and $351.9 million in 1993, representing
a 2% decrease in the current year following a 5.6% increase in 1994. While
individual product categories (Weejuns in 1995, Sandals in 1994) achieved
added growth, the sluggish retail environment for footwear kept overall sales
about flat. Bass Apparel is included in the apparel segment.
Gross margin on sales was 37.4% in 1995 compared with 37.1% in 1994 and
39.7% in 1993. In general, the factors influencing footwear were much the
same as those affecting apparel and their impact was similar. The wholesale
division achieved considerable gross margin improvement from an ongoing
program of cost cutting and sourcing initiatives. Price promotions in the
retail division principally offset the wholesale improvements.
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Selling, general and administrative expenses were 29.8% of sales in 1995
compared with 28.6% in 1994 and 29.1% in 1993. As in apparel, the key feature
of the 1995 increased expense level was a slowdown in retail store sales per
square foot with a corresponding increase in in-store expense levels. Here
too, closing 100 of the weakest performing footwear stores should have a very
positive effect.
Looking ahead, combining the wholesale and retail divisions of PVH into
eight discrete operating units, each with total marketing and profit
responsibility for the brand it manages, should bring very positive results.
It will allow for the streamlining of the organization, the elimination of
redundancy and a consistent market focus.
RESTRUCTURING CHARGES
The Company recorded a $27 million pre-tax restructuring charge in 1995 to
provide for the three key steps discussed above - the closing of 300 outlet
stores, the closing of three domestic shirt manufacturing facilities and the
reorganization of PVH's management structure. Approximately one-half of the
charge relates to non-cash items.
In 1994 the Company recorded a $7 million pre-tax restructuring charge to
realign its wholesale apparel business from four operating units into a dress
shirt division and a sportswear division. The dress shirt division has proved
to be a particularly effective vehicle for leveraging costs and improving
gross margins and it will not be affected by the 1995 changes. While the
sportswear group provided an effective mechanism for achieving an immediate
integration of Gant and Izod into PVH, the 1995 reorganization permits its
split-up into separate brand marketing units.
CORPORATE EXPENSES
Corporate expenses were $12.9 million in 1995 compared with $10.5 million
in 1994 and $13.0 million in 1993. The lower expense level in 1994 compared
with both 1995 and 1993 resulted primarily from a reduction in the Company's
liability for its supplemental savings plan which is linked to the market
value of PVH stock. Contributing to the higher expense level in 1995 were
expenses related to certain brand research and marketing projects.
INTEREST EXPENSE
Interest expense was $23.2 million in 1995 compared with $12.8 million in
1994 and $16.7 million in 1993. The increase in 1995 reflects the higher
borrowing levels associated with the acquisition of the Gant and Izod
businesses. The decrease in 1994 relates principally to the November 1993
refinancing which reduced the interest rate on 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.
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INCOME TAXES
In 1995, PVH incurred a pre-tax loss of $2.6 million after taking into
account the charge for restructuring. Such loss represented a combination of
pre-tax income earned in Puerto Rico and a U.S. tax loss. Since the U.S. tax
loss was available for carryback without limitation and the Puerto Rico income
was tax exempt, the net result was a tax benefit which eliminated the full
amount of the pre-tax loss. 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 in 1994 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.
SEASONALITY
The Company's business is seasonal, with higher sales and operating 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 the weekend following Thanksgiving and
continuing through the week after Christmas.
Also contributing to the relative 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.
LIQUIDITY AND CAPITAL RESOURCES
The following table shows key cash flow elements over the last three years:
(In Thousands) 1995 1994 1993
Income from operations
adjusted for non-cash items $ 31,785 $42,773 $57,607
Change in working capital (74,278) 6,621 (4,147)
Capital spending, net (31,973) (37,830) (37,883)
Acquisition of Gant & Izod (114,503) 0 0
Investment in Pyramid
Sportswear (6,950) 0 0
Early retirement of debt 0 0 (11,394)
Cash dividends (4,007) (3,984) (3,920)
Exercise of stock options 1,745 2,630 7,425
Other changes 3,905 2,438 (678)
Increase (decrease) in cash,
before net change in debt $(194,276) $12,648 $ 7,010
29
The year 1995 was characterized by major investment.
The acquisition of the Gant and Izod businesses involved both the cost of
the acquisition itself as well as the costs of their immediate restructuring
and integration into PVH. The investment in Pyramid Sportswear represents the
purchase of a 25% interest in that company plus an option to acquire the
balance in four years.
Changes in working capital components, after excluding working capital
acquired in the acquisition of the Gant and Izod businesses, were as follows:
Source/(Use) of Cash (000's)
Accounts receivable $(13,927)
Inventory 16,315
Other assets (3,183)
Payables and accruals (17,201)
$(17,996)
The increase in accounts receivable was due principally to a temporary
change in the timing of year end shipments. Inventory, which ended the year
with a 10% reduction, was well balanced and continues to reflect the Company's
focus on tight management of working capital.
Capital spending of $39.8 million marked the completion of several major
capital projects, including the new Jonesville Distribution Center and the
upgrading of key information systems.
Looking ahead, the major restructuring initiatives under way, including the
downsizing of the Company's retail business, should provide a significant
reduction in working capital requirements. In addition, a $10.0 million
reduction in capital spending is planned for the coming year.
Total debt as a percentage of total capital increased at year end 1995 to
52.3% from 38.2% at year end 1994 and 40.8% at year end 1993. The Company
believes that the 1995 increase, principally due to the acquisition of the
Gant and Izod businesses, represents a temporary interruption of the past
seven years of improving financial position.
With all of its major investments now in place, PVH is well-positioned to
achieve a very positive cash flow in 1996 and beyond.
30