UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 27, 1997.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-6666
SALANT CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-3402444
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1114 Avenue of the Americas, New York, New York 10036
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 221-7500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No __
As of November 6, 1997, there were outstanding 14,849,853 shares of the Common
Stock of the registrant.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations
Condensed Consolidated Balance Sheets
Condensed Consolidated Statements of Cash Flows
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
SALANT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands, except per share data)
Three Months Ended Nine Months Ended
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
1997 1996 1997 1996
Net sales $110,871 $117,159 $ 280,472 $ 302,595
Cost of goods sold 83,635 88,100 216,881 234,729
-------- -------- --------- ---------
Gross profit 27,236 29,059 63,591 67,866
Selling, general and
administrative expenses (17,712) (19,661) (59,072) (62,647)
Royalty income 1,297 1,586 3,833 4,114
Goodwill amortization (470) (513) (1,411) (1,733)
Reversal of/(provision for)
restructuring costs (Note 5) -- (152) 1,164 (11,730)
Other income 171 45 359 111
-------- -------- --------- ---------
Income/(loss) from continuing operations
before interest, income taxes and
extraordinary gain 10,522 10,364 8,464 (4,019)
Interest expense, net 4,490 3,966 11,867 11,524
-------- -------- --------- ---------
Income/(loss) from continuing operations
before income taxes and extraordinary gain 6,032 6,398 (3,403) (15,543)
Income taxes 70 60 174 24
-------- -------- --------- ---------
Income/(loss) from continuing operations
before extraordinary gain 5,962 6,338 (3,577) (15,567)
Discontinued operations (Note 3):
Income/(loss) from operations before
extraordinary gain -- (3) (8,136) 128
Estimated loss on disposal (750) -- (1,330) --
Extraordinary gain (Note 4) -- -- 600 --
-------- -------- --------- ---------
Net income/(loss) $ 5,212 $ 6,335 $ (12,443) $ (15,439)
======== ======== ========= =========
Income/(loss) per share:
Income/(loss) per share from
continuing operations $ 0.39 $ 0.42 $ (0.24) $ (1.03)
Income/(loss) per share from
discontinued operations (0.05) -- (0.62) 0.01
Extraordinary gain -- -- 0.04 --
-------- -------- -------- ---------
Net income/(loss) per share $ 0.34 $ 0.42 $ (0.82) $ (1.02)
======== ======== ======== =========
Weighted average common stock and common
stock equivalents outstanding 15,173 15,113 15,128 15,073
======== ======== ======== =========
See Notes to Condensed Consolidated Financial Statements.
4
SALANT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
Sept. 27, December 28, Sept. 28,
1997 1996 1996
(Unaudited) (*) (Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,862 $ 1,498 $ 1,789
Accounts receivable, net 65,207 40,133 56,390
Inventories (Note 2) 120,225 98,497 114,068
Prepaid expenses and other current assets 2,798 3,869 3,256
Net assets of discontinued operations (Note 3) -- 6,988 6,860
---------- ---------- ----------
Total current assets 190,092 150,985 182,363
Property, plant and equipment, net 28,660 25,173 26,123
Other assets 58,290 59,093 59,894
---------- ---------- ----------
Total assets $ 277,042 $ 235,251 $ 268,380
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Loans payable $ 73,021 $ 7,677 $ 40,608
Accounts payable 27,939 27,562 31,880
Accrued liabilities (Note 3) 13,072 17,986 16,543
Current portion of long term debt -- 3,372 --
Reserve for business restructuring (Note 5) 1,642 2,969 4,189
---------- ---------- ----------
Total current liabilities 115,674 59,566 93,220
Long term debt 104,879 106,231 109,574
Deferred liabilities 8,133 8,863 10,158
Shareholders' equity
Common stock 15,405 15,328 15,329
Additional paid-in capital 107,249 107,130 107,130
Deficit (69,590) (57,147) (63,263)
Excess of additional pension liability
over unrecognized prior service cost (3,182) (3,182) (2,185)
Accumulated foreign currency
translation adjustment 88 76 31
Less - treasury stock, at cost (1,614) (1,614) (1,614)
---------- ---------- ----------
Total shareholders' equity 48,356 60,591 55,428
---------- ---------- ----------
Total liabilities and shareholders' equity $ 277,042 $ 235,251 $ 268,380
========== ========== ==========
(*) Derived from the audited financial statements.
See Notes to Condensed Consolidated Financial Statements.
1
SALANT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
Nine Months Ended
Sept. 27, Sept. 28,
1997 1996
---------- ----------
Cash Flows from Operating Activities:
Loss from continuing operations $ (3,577) $ (15,567)
Adjustments to reconcile loss from continuing
operations to net cash used in operating activities:
Depreciation 3,344 3,100
Amortization of intangibles 3,178 2,937
Write-down of fixed assets -- 227
Write-off of other assets -- 6,274
Loss on disposal of fixed assets -- 27
Change in operating assets and liabilities:
Accounts receivable (25,074) (21,513)
Inventories (21,728) 1,297
Prepaid expenses and other current assets 1,071 1,651
Other assets (206) (825)
Accounts payable 377 6,847
Accrued liabilities and reserve for
business restructuring (7,029) (1,338)
Deferred liabilities (1,482) (1,181)
---------- ----------
Net cash used in operating activities (51,126) (18,064)
---------- ----------
Cash Flows from Investing Activities:
Capital expenditures (6,875) (5,027)
Store fixture expenditures (2,169) (2,338)
Acquisition -- (694)
Proceeds from sale of assets -- 54
---------- ----------
Net cash used in investing activities (9,044) (8,005)
---------- ----------
Cash Flows from Financing Activities:
Net short-term borrowings 65,344 26,186
Retirement of long-term debt (3,372) --
Proceeds from exercise of stock options 196 113
Other, net 12 (99)
---------- ----------
Net cash provided by financing activities 62,180 26,200
---------- ----------
Net cash provided by continuing operations 2,010 131
Cash (used in)/provided by discontinued operations (1,646) 263
---------- ----------
Net increase in cash and cash equivalents 364 394
Cash and cash equivalents - beginning of year 1,498 1,395
---------- ----------
Cash and cash equivalents - end of quarter $ 1,862 $ 1,789
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 14,152 $ 15,030
========== ==========
Income taxes $ 174 $ 129
========== ==========
See Notes to Condensed Consolidated Financial Statements.
1
SALANT CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Amounts in Thousands of Dollars, Except Share Data)
(Unaudited)
Note 1. Basis of Presentation and Consolidation
The accompanying unaudited Condensed Consolidated Financial Statements include
the accounts of Salant Corporation ("Salant") and subsidiaries (collectively,
the "Company").
The Company's principal business is the designing, manufacturing, importing and
marketing of apparel. The Company sells its products to retailers, including
department and specialty stores, national chains, major discounters and mass
volume retailers, throughout the United States.
The results of operations for the three and nine months ended September 27, 1997
and September 28, 1996 are not necessarily indicative of a full year's
operations. In the opinion of management, the accompanying financial statements
include only adjustments of a normal recurring nature which are necessary to
present fairly such financial statements. Significant intercompany balances and
transactions are eliminated in consolidation. Certain information and footnote
disclosures normally included in the financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted.
These condensed consolidated financial statements should be read in conjunction
with the audited financial statements and notes thereto included in the
Company's annual report to shareholders for the year ended December 28, 1996.
Income/(loss) per share is based on the weighted average number of common shares
(including, as of September 27, 1997 and September 28, 1996, 320,609 and 331,996
shares, respectively, anticipated to be issued pursuant to the Company's plan of
reorganization) and common stock equivalents outstanding, if applicable. Loss
per share does not include common stock equivalents, inasmuch as their effect
would have been anti-dilutive.
Note 2. Inventories
Sept. 27, December 28, Sept. 28,
1997 1996 1996
Finished goods $78,049 $57,827 $75,737
Work-in-Process 17,146 14,800 15,163
Raw materials and supplies 25,030 25,870 23,168
-------- -------- ----------
$120,225 $98,497 $114,068
======== ======= ========
Note 3. Discontinued Operations
In June 1997, the Company discontinued the operations of the Made in the Shade
division, which produced and marketed women's junior sportswear. The loss from
operations of the division for the three and nine months ended September 27,
1997 was $8,136, which included a second quarter charge of $4,459 for the
write-off of goodwill. Net sales of the division were $623 and $2,822 for the
three and nine months ended September 27, 1997, respectively. Net sales of the
division were $5,439 and $16,208 for the three and nine months ended September
28, 1996, respectively.
Additionally, in 1997, the Company recorded a charge of $1,330, including $750
in the third quarter, to accrue for expected losses during the phase-out period.
No income tax benefits have been allocated to the division's 1997 losses.
The net assets of the discontinued operations have been reclassified on the
balance sheets as net assets of discontinued operations, and consist principally
of accounts receivable, inventory, goodwill and accounts payable. Net
liabilities of discontinued operations have been included in accrued
liabilities.
Note 4. Extraordinary Gain
In the second quarter of 1997, the Company recorded an extraordinary gain of
$600 related to the reversal of excess liabilities previously provided for the
anticipated settlement of claims arising from the prior chapter 11 proceeding.
Note 5. Division Restructuring Costs
In the second quarter of 1997, the Company reversed a previously recorded
restructuring provision by $410, as these amounts were no longer needed. This
provision was for estimated liabilities related to the previously disclosed
closure of a manufacturing facility.
In the first quarter of 1997, the Company reversed a previously recorded
restructuring provision of $754. The provision was for net liabilities related
to the JJ. Farmer sportswear product line. These net liabilities were settled
for less than the carrying amount, resulting in the reversal of the excess
portion of the provision.
In 1996, the Company recorded a provision for restructuring of $11,730,
including $152 in the third quarter, consisting of (i) $5,718 in connection with
the decision to sell or license the JJ. Farmer sportswear product line, which
charge is primarily related to the write-off of goodwill and write-down of other
assets, (ii) $2,858 related to the write-off of certain assets related to the
licensing of the Gant dress shirt and accessories product lines, and the accrual
of a portion of the future minimum royalties under the Gant licenses, which are
not expected to be covered by future sales, (iii) $1,837 primarily related to
employee costs in connection with the closing of a manufacturing and
distribution facility in Thomson, Georgia, (iv) $714 primarily related to
employee costs in connection with the closing of a manufacturing facility in
Americus, Georgia and (v) $603 related primarily to other severance costs.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Results of Operations
Third Quarter of 1997 Compared with Third Quarter of 1996
Net Sales
The following table sets forth the net sales of each of the Company's three
principal business segments for the three months ended September 27, 1997 and
September 28, 1996 and the percentage contribution of each of those segments to
total net sales:
Percentage
Three Months Ended Increase/
Sept. 27, 1997 Sept. 28, 1996 (Decrease)
(dollars in millions)
Men's Apparel $82.6 74% $89.5 76% (7.7%)
Children's Sleepwear and Underwear 22.0 20% 19.9 17% 10.8%
Retail Outlet Stores 6.3 6% 7.8 7% (19.1%)
------- ---- ----- ----
Total $110.9 100% $117.2 100% (5.4%)
====== ===== ====== ====
Sales of Men's apparel decreased by $6.9 million, or 7.7%, in the third quarter
of 1997, as compared to the third quarter of 1996. This decrease resulted from
(a) a $3.9 million reduction in sales of men's sportswear, which included a $7.8
million planned reduction based upon the Company's decision to eliminate its JJ.
Farmer and Manhattan sportswear lines, as offset by a $3.9 million increase in
sales of Perry Ellis sportswear product, (b) a $4.1 million decrease in sales of
men's accessories, primarily due to the slow-down of the novelty neckwear
business and (c) a $2.3 million reduction in sales of men's jeans (other than
jeans manufactured for Sears Roebuck & Co. under the Canyon River Blues label).
These sales decreases were partially offset by a $3.3 million increase in sales
of Perry Ellis dress shirts due to the addition of new distribution and the
continued strong acceptance of these products by consumers.
Sales of children's sleepwear and underwear increased by $2.1 million, or 10.8%,
in the third quarter of 1997, as compared to the third quarter of 1996. This
increase was primarily a result of the continuing expansion of the Joe Boxer
children's product lines.
Sales of the retail outlet stores decreased by $1.5 million, or 19.1%, in the
third quarter of 1997, as compared to the third quarter of 1996. This decrease
was primarily due to a decrease in the number of retail outlet stores, from 69
in September 1996 to 62 in September 1997.
Gross Profit
The following table sets forth the gross profit and gross profit margin (gross
profit as a percentage of net sales) for each of the Company's business segments
for the three months ended September 27, 1997 and September 28, 1996:
Three Months Ended
d
Sept. 27, 1997 Sept. 28, 1996
(dollars in millions)
Men's Apparel $19.0 23.0% $20.4 22.8%
Children's Sleepwear and Underwear 5.6 25.3% 5.9 29.4%
Retail Outlet Stores 2.6 42.3% 2.8 36.4%
--- ---
Total $27.2 24.6% $29.1 24.8%
===== =====
The decline in gross profit in the men's apparel segment and for the Company as
a whole was primarily attributable to the reduction in net sales discussed
above. The gross profit margin increase is primarily related to the elimination
of unprofitable programs in 1997, as previously discussed.
The gross profit margin decline in the children's segment resulted from the
introduction of sportswear product lines in 1997, which carry a slightly lower
margin than existing product lines.
The gross profit margin of the retail outlet stores increased primarily as a
result of a decrease in the transfer prices (from a negotiated rate to standard
cost) charged to the retail outlet stores for products made by other divisions
of the Company.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses for the third quarter of
1997 were $17.7 million (16.0% of net sales) as compared with $19.7 million
(16.8% of net sales) for the third quarter of 1996. The SG&A expense decrease is
primarily related to the elimination of the Company's JJ. Farmer and Manhattan
sportswear lines, as previously discussed.
Income from Continuing Operations Before Interest, Income Taxes and
Extraordinary Gain
The following table sets forth the income from continuing operations before
interest, income taxes and extraordinary gain for each of the Company's three
business segments, expressed both in dollars and as a percentage of net sales,
for the three months ended September 27, 1997 and September 28, 1996:
Three Months Ended
Sept. 27, 1997 Sept. 28, 1996
(dollars in millions)
Men's Apparel $7.9 9.6% $6.9 7.7%
Children's Sleepwear and Underwear 3.7 16.6% 4.3 21.8%
Retail Outlet Stores (0.6) (8.9%) (0.6) (7.8%)
------ --------
11.0 9.9% 10.6 9.1%
Corporate expenses (1.5) (1.6)
Licensing division income 1.0 1.4
--- ---
Income from continuing operations before
interest, income taxes and extraordinary
gain $10.5 9.5% $10.4 8.8%
===== =====
Interest Expense, Net
Net interest expense was $4.5 million for the third quarter of 1997 compared
with $4.0 million for the third quarter of 1996. The increase in interest
expense resulted from higher average borrowings in the third quarter of 1997 as
compared to the third quarter of 1996.
Discontinued Operations
In the third quarter of 1997, the Company recorded an additional charge of $0.8
million, or $(0.05) per share, to accrue for expected losses during the
phase-out period of the Made in the Shade division. Net sales of the division
for the three months ended September 27, 1997 and September 28, 1996 were $0.6
million and $5.4 million, respectively.
Net Income
In the third quarter of 1997, the Company reported net income of $5.2 million,
or $0.34 per share, as compared with net income of $6.3 million, or $0.42 per
share, in the third quarter of 1996.
Earnings Before Interest, Taxes, Depreciation, Amortization and
Restructuring Charges
Earnings before interest, taxes, depreciation, amortization and restructuring
charges was $12.6 million (11.4% of net sales) in the third quarter of 1997,
compared to $12.2 million (10.5% of net sales) in the third quarter of 1996, an
increase of $0.4 million, or 3%. The Company believes this information is
helpful in understanding cash flow from operations that is available for debt
service and capital expenditures. This measure is not contained in Generally
Accepted Accounting Principles and is not a substitute for operating income, net
income or net cash flows from operating activities.
Year to Date 1997 Compared to Year to Date 1996
Net Sales
The following table sets forth the net sales of each of the Company's three
principal business segments for the nine months ended September 27, 1997 and
September 28, 1996 and the percentage contribution of each of those segments to
total net sales:
Percentage
Nine months Ended Increase/
Sept. 27, 1997 Sept. 28, 1996 (Decrease)
-------------- -------------- ----------
(dollars in millions)
Men's Apparel $232.4 83% $254.9 84% (8.8%)
Children's Sleepwear and Underwear 31.9 11% 28.5 10% 11.9%
Retail Outlet Stores 16.2 6% 19.2 6% (16.0%)
------- -- ---- --
Total $280.5 100% $302.6 100% (7.3%)
====== ==== ====== ====
Sales of Men's apparel decreased by $22.5 million, or 8.8%, in the first nine
months of 1997, as compared to the first nine months of 1996. This decrease
resulted from (a) an $12.8 million reduction in sales of men's slacks, of which
$8.9 million was a planned reduction based upon the Company's decision to
eliminate unprofitable programs and the balance was primarily due to operational
difficulties experienced in the first quarter of 1997 related to the move of
manufacturing and distribution out of the Company's facilities in Thomson,
Georgia, (b) a $9.7 million reduction in sales of men's sportswear, which
included a $15.2 million planned reduction based upon the Company's decision to
eliminate its JJ. Farmer and Manhattan sportswear lines, as offset by a $5.5
million increase in sales of Perry Ellis sportswear product, (c) a planned $6.8
million reduction in sales of certain dress shirt lines, which was based upon
the Company's decision to eliminate unprofitable businesses and (d) a $6.0
million decrease in sales of men's accessories, primarily due to the slow-down
of the novelty neckwear business in the first nine months of 1997. These sales
decreases were partially offset by a $10.0 million increase in sales of Perry
Ellis dress shirts due to the addition of new distribution and the continued
strong acceptance of these products by consumers.
Sales of children's sleepwear and underwear increased by $3.4 million, or 11.9%,
in the first nine months of 1997, as compared to the first nine months of 1996.
This increase was primarily a result of the continuing expansion of the Joe
Boxer children's product lines.
Sales of the retail outlet stores decreased by $3.0 million, or 16.0%, in the
first nine months of 1997, as compared to the first nine months of 1996. This
decrease was primarily due to a decrease in the number of retail outlet stores,
from 69 in September 1996 to 62 in September 1997.
Gross Profit
The following table sets forth the gross profit and gross profit margin (gross
profit as a percentage of net sales) for each of the Company's business segments
for the nine months ended September 27, 1997 and September 28, 1996:
Nine months Ended
Sept. 27, 1997 Sept. 28, 1996
(dollars in millions)
Men's Apparel $50.0 21.5% $53.7 21.1%
Children's Sleepwear and Underwear 7.0 21.8% 7.4 25.8%
Retail Outlet Stores 6.6 41.0% 6.8 35.2%
------ ------
Total $63.6 22.7% $67.9 22.4%
===== =====
The decline in gross profit in the men's apparel segment and for the Company as
a whole was primarily attributable to the reduction in net sales discussed
above. The gross profit margin increase is primarily related to the elimination
of unprofitable programs in 1997, as previously discussed.
The gross profit margin decline in the children's segment resulted from the
introduction of sportswear product lines in 1997, which carry a slightly lower
margin than existing product lines.
The gross profit margin of the retail outlet stores increased primarily as a
result of a decrease in the transfer prices charged to the retail outlet stores
for products made by other divisions of the Company.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses for the first nine months
of 1997 were $59.1 million (21.1% of net sales) as compared with $62.6 million
(20.7% of net sales) for the first nine months of 1996. S,G&A expenses in the
first nine months of 1996 included $1.1 million of charges related to the
restructuring of the men's apparel businesses.
Reversal of/(Provision for) Restructuring Costs
In the first nine months of 1997, the Company reversed previously recorded
restructuring provisions of $1.2 million. These provisions were for net
liabilities which were settled for less than their carrying amounts.
The cash portion of the remaining reserve for restructuring is expected to be
expended in the following manner: $0.5 million in the last quarter of 1997, $0.5
million in 1998 and $0.3 million in 1999.
In the first nine months of 1996, the Company recorded a provision for
restructuring of $11.7 million, consisting of (i) $5.7 million in connection
with the decision to sell or license the JJ. Farmer sportswear product line,
which charge is primarily related to the write-off of goodwill and write-down of
other assets, (ii) $2.9 million related to the write-off of certain assets
related to the licensing of the Gant dress shirt and accessories product lines,
and the accrual of a portion of the future minimum royalties under the Gant
licenses, which are not expected to be covered by future sales, (iii) $1.8
million primarily related to employee costs in connection with the closing of a
manufacturing and distribution facility in Thomson, Georgia, (iv) $0.7 million
primarily related to employee costs in connection with the closing of a
manufacturing facility in Americus, Georgia and (v) $0.6 million related
primarily to other severance costs.
Income/(Loss) from Continuing Operations Before Interest, Income Taxes
and Extraordinary Gain
The following table sets forth the loss from continuing operations before
interest, income taxes and extraordinary gain for each of the Company's three
business segments, expressed both in dollars and as a percentage of net sales,
for the nine months ended September 27, 1997 and September 28, 1996:
Nine months Ended
Sept. 27, 1997 Sept. 28, 1996
(dollars in millions)
Men's Apparel (a) $13.3 5.7% $ (1.2) (0.5%)
Children's Sleepwear and Underwear 1.4 4.4% 3.3 11.5%
Retail Outlet Stores (3.2) (19.7%) (3.2) (16.5%)
----- --------
11.5 4.1% (1.1) (0.4%)
Corporate expenses (6.0) (6.2)
Licensing division income 3.0 3.3
------ --------
Income/(loss) from continuing operations
before interest, income taxes and
extraordinary gain $8.5 3.0% $(4.0) (1.3%)
==== =====-
(a) Includes the reversal of restructuring charges of $1.2 million in 1997
and a restructuring provision of $11.7
million in 1996.
The $12.5 million increase in income from continuing operations before interest,
income taxes and extraordinary gain in the first nine months of 1997 was
primarily a result of the absence of the $11.7 million restructuring charge in
the prior year.
Interest Expense, Net
Net interest expense was $11.9 million for the first nine months of 1997
compared with $11.5 million for the
first nine months of 1996.
Discontinued Operations
In the first nine months of 1997, the Company recognized a charge of $9.5
million, or $(0.62) per share, related to the discontinuance of the Made in the
Shade division. This charge included a write-off of goodwill of $4.5 million and
an accrual of $1.3 million for estimated losses during the phase-out period. Net
sales of the division for the nine months ended September 27, 1997 and September
28, 1996 were $2.8 million and $16.2 million, respectively.
Extraordinary Gain
In the second quarter or 1997, the Company recorded an extraordinary gain of
$0.6 million related to the reversal of excess liabilities previously provided
for the anticipated settlement of claims arising from the prior chapter 11
proceeding.
Net Loss
In the first nine months of 1997, the Company reported a net loss of $12.4
million, or $(0.82) per share, as compared with a net loss of $15.4 million, or
$(1.02) per share, in the first nine months of 1996.
Earnings Before Interest, Taxes, Depreciation, Amortization,
Restructuring Charges, Discontinued Operations and
Extraordinary Gain
Earnings before interest, taxes, depreciation, amortization, restructuring
charges, discontinued operations and extraordinary gain were $13.8 million (4.9%
of net sales) in the first nine months of 1997, compared to $13.7 million (4.5%
of net sales) in the first nine months of 1996. The Company believes this
information is helpful in understanding cash flow from operations that is
available for debt service and capital expenditures. This measure is not
contained in Generally Accepted Accounting Principles and is not a substitute
for operating income, net income or net cash flows from operating activities.
Liquidity and Capital Resources
The Company is a party to a revolving credit, factoring and security agreement,
as amended (the "Credit Agreement"), with The CIT Group/Commercial Services,
Inc. ("CIT"). The Credit Agreement provides the Company with working capital
financing through September 30, 1998, in the form of direct borrowings and
letters of credit, up to an aggregate of $135 million (the "Maximum Credit"),
subject to an asset-based borrowing formula. As collateral for borrowings under
the Credit Agreement, Salant has granted to CIT a security interest in
substantially all of the assets of the Company.
Pursuant to the Credit Agreement, the interest rate charged on direct borrowings
is 0.75% in excess of the base rate of The Chase Manhattan Bank, N.A. (the
"Prime Rate", which was 8.5% at September 27, 1997) or 3.00% above the London
Late Eurodollar rate (the "Eurodollar Rate", which was 5.7% at September 27,
1997). Pursuant to the Credit Agreement, the Company sells to CIT, without
recourse, certain eligible accounts receivable. The credit risk for such
accounts is thereby transferred to CIT. The amounts due from CIT have been
offset against the Company's direct borrowings from CIT in the accompanying
balance sheets. The amounts which have been offset were $14.4 million at
September 27, 1997 and $23.8 million at September 28, 1996. This decrease
resulted from lower sales in the third quarter of 1997 of product lines for
which the receivables are sold to CIT.
On September 27, 1997, direct borrowings (including borrowings under the
Eurodollar option) and letters of credit outstanding under the Credit Agreement
were $73.0 million and $24.0 million, respectively, and the Company had unused
availability of $12.6 million. On September 28, 1996, direct borrowings and
letters of credit outstanding under the Credit Agreement were $40.6 million and
$28.8 million, respectively, and the Company had unused availability of $25.5
million. The increase in direct borrowings is primarily related to the increase
in inventory of $21.7 million, capital and store fixture expenditures of $9.0
million and the repayment of long term debt of $3.4 million. The decrease in
unused availability is related to the higher direct borrowings, as partially
offset by an increase in the percentage of inventory available under the
asset-based borrowing formula and the lower outstanding letters of credit.
During the first nine months of 1997, the maximum aggregate amount of direct
borrowings and letters of credit outstanding under the Credit Agreement was
$112.9 million at which time the Company had unused availability of $10.5
million. During the first nine months of 1996, the maximum aggregate amount of
direct borrowings and letters of credit outstanding under the Credit Agreement
was $101.9 million at which time the Company had unused availability of $18.4
million.
The instruments governing the Company's outstanding debt contain certain
financial and operating covenants, including restrictions on incurring
indebtedness and liens, making investments in or purchasing the stock, or all or
a substantial part of the assets of another person, selling property and paying
cash dividends. In addition, under the Credit Agreement, the Company is required
during the year to maintain a minimum level of stockholders' equity and to
satisfy a maximum cumulative net loss test. The following table indicates the
Company's compliance with these two financial covenants contained in the Credit
Agreement:
Sept. 27, 1997
Credit Agreement Covenants Covenant Level Actual Level
Stockholders' Equity no less than $42.5 million $48.4 million
Maximum Loss (a) no more than $(15.0) million $(14.7) million
(a) Maximum loss excludes write-offs for goodwill, restructuring expenses or
other unusual or non-recurring expenses during the first two quarters of 1996,
up to a maximum of $13.0 million.
The indenture governing the Company's outstanding Senior Secured Notes requires
the Company to reduce its outstanding indebtedness (excluding outstanding
letters of credit) to $20 million or less for fifteen consecutive days during
each twelve month period commencing on the first day of February. This covenant
has been satisfied for the balance of the term of the Senior Secured Notes.
The Company's cash used in operating activities for the first nine months of
1997 was $51.1 million, which reflects a $25.1 million increase in inventories
and a $21.7 million increase in receivables, a significant portion of which was
planned to occur in the first nine months of 1997.
Cash used for investing activities in the first nine months of 1997 was $9.0
million, which represented capital expenditures of $6.9 million and the
installation of store fixtures in department stores of $2.2 million. During the
fourth quarter of 1997, the Company plans to make additional capital
expenditures of approximately $0.6 million and to spend an additional $0.5
million for the installation of store fixtures in department stores.
Cash provided by financing activities in the first nine months of 1997 was $62.2
million, which represented short-term borrowings under the Credit Agreement of
$65.3 million, partially offset by cash used to retire $3.4 million of Senior
Secured Notes.
The Company's principal sources of liquidity, both on a short-term and a
long-term basis, are cash flow from operations and borrowings under the Credit
Agreement. Based upon its analysis of its consolidated financial position, its
cash flow during the past twelve months, and the cash flow anticipated from its
future operations, the Company believes that its future cash flows together with
funds available under the Credit Agreement will be adequate to meet the
financing requirements it anticipates during the next twelve months. There can
be no assurance, however, that future developments and general economic trends
will not adversely affect the Company's operations and, hence, its anticipated
cash flow.
The Company's Senior Secured Notes, of which $104.9 million principal amount was
outstanding at September 27, 1997, mature December 31, 1998. The Company does
not expect to generate sufficient cash flow from operations to repay those notes
at maturity and will seek to refinance the notes prior to maturity. There can be
no assurance that the Company will obtain such refinancing or that the terms of
such refinancing, if obtained, will not be less favorable to the Company than
those of the Senior Secured Notes.
Factors that May Affect Future Results and Financial Condition.
This report contains or incorporates by reference forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
Where any such forward-looking statement includes a statement of the assumptions
or bases underlying such forward-looking statement, the Company cautions that
assumed facts or bases almost always vary from the actual results, and the
differences between assumed facts or bases and actual results can be material,
depending on the circumstances. Where, in any forward-looking statement, the
Company or its management expresses an expectation or belief as to future
results, there can be no assurance that the statement of the expectation or
belief will result or be achieved or accomplished. The words "believe",
"expect", "estimate", "project", "seek", "anticipate" and similar expressions
may identify forward-looking statements. The Company's future operating results
and financial condition are dependent upon the Company's ability to successfully
design, manufacture, import and market apparel. Taking into account the
foregoing, the following are identified as important factors that could cause
results to differ materially from those expressed in any forward-looking
statement made by, or on behalf of, the Company:
Competition. The apparel industry in the United States is highly competitive and
characterized by a relatively small number of multi-line manufacturers (such as
the Company) and a large number of specialty manufacturers. The Company faces
substantial competition in its markets from manufacturers in both categories.
Many of the Company's competitors have greater financial resources than the
Company. The Company also competes for private label programs with the internal
sourcing organizations of many of its own customers.
Apparel Industry Cycles and other Economic Factors. The apparel industry
historically has been subject to substantial cyclical variation, with consumer
spending on apparel tending to decline during recessionary periods. A decline in
the general economy or uncertainties regarding future economic prospects may
affect consumer spending habits, which, in turn, could have a material adverse
effect on the Company's results of operations and its financial condition.
Retail Environment. Various retailers, including some of the Company's
customers, have experienced declines in revenue and profits in recent periods
and some have been forced to file for bankruptcy protection. To the extent that
these financial difficulties continue, there can be no assurance that the
Company's financial condition and results of operations would not be materially
adversely affected.
Seasonality of Business and Fashion Risk. The Company's principal products are
organized into seasonal lines for resale at the retail level during the Spring,
Fall and Christmas Seasons. Typically, the Company's products are designed as
much as one year in advance and manufactured approximately one season in advance
of the related retail selling season. Accordingly, the success of the Company's
products is often dependent on the ability of the Company to successfully
anticipate the needs of the Company's retail customers and the tastes of the
ultimate consumer up to a year prior to the relevant selling season.
Substantial Level of Indebtedness. The Company had indebtedness of $177.9
million as of September 27, 1997. This level of indebtedness could materially
adversely affect the Company's operations because a substantial portion of the
Company's cash flow from operations must be dedicated to the payment of interest
and would, therefore, not be available for other purposes. Further, this level
of indebtedness might inhibit the Company's ability to obtain financing in the
future for working capital needs, capital expenditures, acquisitions,
investments, general corporate purposes or other purposes.
Foreign Operations. The Company's foreign sourcing operations are subject to
various risks of doing business abroad, including currency fluctuations
(although the predominant currency used is the U.S. dollar), quotas and, in
certain parts of the world, political instability. Any substantial disruption of
its relationship with its foreign suppliers could adversely affect the Company's
operations. Some of the Company's imported merchandise is subject to United
States Customs duties. In addition, bilateral agreements between the major
exporting countries and the United States impose quotas which limit the amount
of certain categories of merchandise that may be imported into the United
States. Any material increase in duty levels, material decrease in quota levels
or material decrease in available quota allocation could adversely affect the
Company's operations.
Dependence on Contract Manufacturing. In 1996, the Company produced 61% of all
of its products (in units) through arrangements with independent contract
manufacturers. The use of such contractors and the resulting lack of direct
control could subject the Company to difficulty in obtaining timely delivery of
products of acceptable quality. In addition, as is customary in the industry,
the Company does not have any long-term contracts with its fabric suppliers or
product manufacturers. While the Company is not dependent on one particular
product manufacturer or raw material supplier, the loss of several such product
manufacturers and/or raw material suppliers in a given season could have a
material adverse effect on the Company's performance.
Because of the foregoing factors, as well as other factors affecting the
Company's operating results and financial condition, past financial performance
should not be considered to be a reliable indicator of future performance, and
investors are cautioned not to use historical trends to anticipate results or
trends in the future. In addition, the Company's participation in the highly
competitive apparel industry often results in significant volatility in the
Company's common stock price.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Reports on Form 8-K
During the third quarter of 1997, the Company did not file any reports on Form
8-K.
Exhibits
Number Description
27 Financial Data Schedule.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SALANT CORPORATION
Date: November 11, 1997 /s/ Philip A. Franzel
------------------- ---------------------
Philip A. Franzel
Executive Vice President
and Chief Financial Officer
(Principal Accounting Officer)