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 June 30, 2001
----------------------------------------------
[ ] 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: 0-9831
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LIZ CLAIBORNE, INC.
-------------------------------------------------
(Exact name of registrant as specified in its
charter)
Delaware 13-2842791
- ----------------------------- --------------------------
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation)
1441 Broadway, New York, New York 10018
- ------------------------------------------------- ----------------
(Address of principal executive offices) (Zip Code)
(212) 354-4900
-------------------------------------------------
(Registrant's telephone number, including area
code)
Indicate by check whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ____X____ No _________.
The number of shares of Registrant's Common Stock, par value $1.00 per
share, outstanding at August 10, 2001 was 52,569,996.
2
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
JUNE 30, 2001
PAGE
NUMBER
------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of June 30, 2001,
December 30, 2000 and July 1, 2000.............................. 3
Condensed Consolidated Statements of Income for the Six and
Three Months Periods Ended June 30, 2001 and July 1, 2000....... 4
Condensed Consolidated Statements of Cash Flows for the Six
Months Periods Ended June 30, 2001 and July 1, 2000............. 5
Notes to Condensed Consolidated Financial Statements................. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................14
Item 3. Quantitative and Qualitative Disclosures About Market Risk...........19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings....................................................19
Item 4. Submission of Matters to a Vote of Security Holders..................20
Item 5. Statement Regarding Forward-Looking Disclosure.......................20
Item 6. Exhibits and Reports on Form 8-K.....................................22
SIGNATURES....................................................................23
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(All amounts in thousands except share data)
(Unaudited) (Unaudited)
June 30, December 30, July 1,
2001 2000 2000
-------------- -------------- --------------
Assets
Current Assets:
Cash and cash equivalents $ 64,093 $ 54,630 $ 28,549
Marketable securities -- -- 9,043
Accounts receivable - trade 417,767 267,772 327,943
Inventories, net 529,688 479,845 407,226
Deferred income taxes 52,448 27,698 22,899
Other current assets 76,273 80,631 77,483
-------------- -------------- --------------
Total current assets 1,140,269 910,576 873,143
-------------- -------------- --------------
Property and Equipment - Net 340,100 297,424 290,749
Goodwill and Intangibles - Net 432,866 276,213 235,445
Other Assets 29,524 27,946 37,182
-------------- -------------- --------------
Total Assets $ 1,942,759 $ 1,512,159 $ 1,436,519
============== ============== ==============
Liabilities and Stockholders' Equity
Current Liabilities:
Short-term debt $ 286,113 $ -- $ --
Accounts payable 229,916 199,254 189,711
Accrued expenses 166,718 151,280 133,309
Income taxes payable 9,085 7,370 4,577
-------------- -------------- --------------
Total current liabilities 691,832 357,904 327,597
-------------- -------------- --------------
Long-Term Debt 233,498 269,219 219,561
Other Non-Current Liabilities 20,292 15,000 15,000
Deferred Income Taxes 40,975 31,019 24,307
Commitments and Contingencies
Minority Interest 6,508 4,732 4,096
Stockholders' Equity:
Preferred stock, $.01 par value, authorized shares -
50,000,000, issued shares - none -- -- --
Common stock, $1 par value, authorized shares -
250,000,000, issued shares - 88,218,617 88,219 88,219 88,219
Capital in excess of par value 88,048 83,808 83,371
Retained earnings 2,046,962 1,985,091 1,894,909
Accumulated other comprehensive loss (7,991) (7,656) (2,004)
-------------- -------------- --------------
2,215,238 2,149,462 2,064,495
Common stock in treasury, at cost, 35,659,004,
37,009,400 and 35,143,928 shares (1,265,584) (1,315,177) (1,218,537)
-------------- -------------- --------------
Total stockholders' equity 949,654 834,285 845,958
-------------- -------------- --------------
Total Liabilities and Stockholders' Equity $ 1,942,759 $ 1,512,159 $ 1,436,519
============== ============== ==============
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
4
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(All amounts in thousands, except per common share data)
(Unaudited)
Six Months Ended Three Months Ended
----------------------------- -----------------------------
June 30, July 1, June 30, July 1,
2001 2000 2001 2000
-------------- -------------- ------------- --------------
Net Sales $ 1,553,685 $ 1,471,126 $ 727,035 $ 661,667
Cost of goods sold 922,584 900,498 418,796 393,913
-------------- -------------- ------------- --------------
Gross Profit 631,101 570,628 308,239 267,754
Selling, general & administrative expenses 495,180 443,331 250,019 214,802
-------------- -------------- ------------- --------------
Operating Income 135,921 127,297 58,220 52,952
Other (expense) income - net (2,286) 2,318 (1,335) 19
Interest (expense) - net (11,812) (7,828) (6,156) (3,827)
-------------- -------------- ------------- --------------
Income Before Provision for Income Taxes 121,823 121,787 50,729 49,144
Provision for income taxes 43,856 43,843 18,262 17,692
-------------- -------------- ------------- --------------
Net Income $ 77,967 $ 77,944 $ 32,467 $ 31,452
============== ============== ============= ==============
Net Income per Weighted Average Share, Basic $1.50 $1.43 $0.62 $0.58
Net Income per Weighted Average Share, Diluted $1.49 $1.42 $0.62 $0.58
Weighted Average Shares, Basic 51,868 54,510 52,116 54,049
Weighted Average Shares, Diluted 52,436 54,910 52,626 54,525
Dividends Paid per Common Share $0.23 $0.23 $0.11 $0.11
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
5
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(All dollar amounts in thousands)
(Unaudited)
Six Months Ended
-----------------------------------
June 30, July 1,
2001 2000
--------------- ----------------
Cash Flows from Operating Activities:
Net income $ 77,967 $ 77,944
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 45,252 37,781
Deferred income taxes - net 6,453 4,644
Other - net 10,966 7,663
Change in current assets and liabilities:
(Increase) in accounts receivable - trade (88,264) (29,019)
(Increase) decrease in inventories (1,769) 11,122
Decrease in other current assets 6,274 5,098
Increase in accounts payable 6,258 5,155
(Decrease) in accrued expenses (41,666) (25,938)
(Decrease) in income taxes payable (828) (2,958)
--------------- ----------------
Net cash provided by operating activities 20,643 91,492
--------------- ----------------
Cash Flows from Investing Activities:
Purchases of investment instruments -- (14,572)
Disposals of investment instruments -- 9,930
Purchases of property and equipment (33,023) (32,012)
Payments for acquisitions, net of cash acquired (245,294) (12,840)
Payments for in-store merchandise shops (12,708) (11,396)
Other - net 3,785 682
--------------- ----------------
Net cash (used in) investing activities (287,240) (60,208)
--------------- ----------------
Cash Flows from Financing Activities:
Proceeds from short-term debt 286,113 --
Commercial paper - net (36,674) 103,476
Proceeds from exercise of common stock options 38,151 15,407
Dividends paid (11,548) (12,255)
Purchase of common stock -- (146,456)
--------------- ----------------
Net cash provided by (used in) financing activities 276,042 (39,828)
--------------- ----------------
Effect of Exchange Rate Changes on Cash 18 (847)
--------------- ----------------
Net Change in Cash and Cash Equivalents 9,463 (9,391)
Cash and Cash Equivalents at Beginning of Period 54,630 37,940
--------------- ----------------
Cash and Cash Equivalents at End of Period $ 64,093 $ 28,549
=============== ================
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
6
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements included herein have been
prepared by Liz Claiborne, Inc. and its wholly-owned and majority-owned
subsidiaries (the "Company"), without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC"). Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States have been condensed or omitted from this report, as is permitted
by such rules and regulations; however, the Company believes that the
disclosures are adequate to make the information presented not misleading. It is
suggested that these condensed financial statements be read in conjunction with
the financial statements and notes thereto included in the Company's latest
annual report on Form 10-K and the Company's Current Report on Form 8-K filed
with the SEC on May 23, 2001 as amended on July 20, 2001. Certain items
previously reported in specific captions in the accompanying financial
statements have been reclassified to conform with the current period's
classifications.
In the opinion of management, the information furnished reflects all
adjustments, all of which are of a normal recurring nature, necessary for a fair
presentation of the results for the reported interim periods. Results of
operations for interim periods are not necessarily indicative of results for the
full year.
2. ACQUISITIONS AND LICENSING COMMITMENTS
On May 23, 2001, the Company completed the purchase of 100 percent of the equity
interest of Mexx Group B.V. ("Mexx"), a privately held fashion apparel and
accessories company incorporated and existing under the laws of The Netherlands,
for a purchase price of approximately 300 million Euros (or $259.6 million based
on the exchange rate in effect on such date), in cash at closing (including the
assumption of debt), plus an earnout designed to equal 28% of future implied
equity value, payable at either party's option with respect to the year ended
2003, 2004 or 2005. Mexx designs and markets a wide range of merchandise for
women, men and children under the Mexx brand name. Mexx products are sold via
wholesale and retail formats in more than 40 countries in Europe, the Asia
Pacific region, Canada and the Middle East. The acquisition of Mexx, included in
operating results from the acquisition date, was accounted for using the
purchase method of accounting and, accordingly, the excess purchase price over
fair market value of the underlying net assets acquired of $157.9 million was
allocated to goodwill and property based on preliminary estimates of fair
values, and is subject to adjustment. Goodwill is being amortized on a
straight-line basis over 20 years. The fair value of assets acquired was $185.2
million and liabilities assumed were $91.2 million.
The following unaudited pro forma information assumes the Mexx acquisition had
occurred on January 2, 2000. The pro forma information, as presented below, is
not indicative of the results that would have been obtained had the transactions
occurred on January 2, 2000, nor is it indicative of the Company's future
results.
Six Months Ended Three Months Ended
----------------------------- -----------------------------
June 30, July 1, June 30, July 1,
(Dollars in thousands except per share data) 2001 2000 2001 2000
-------------- -------------- ------------- --------------
Net sales $ 1,696,436 $ 1,613,019 $ 767,610 $ 716,855
Net income 66,207 59,397 23,961 15,544
Basic earnings per share $1.28 $1.09 $0.46 $0.29
Diluted earnings per share $1.26 $1.08 $0.46 $0.29
The above amounts reflect adjustments for interest expense from additional
borrowings necessary to finance the acquisition, amortization of goodwill, and
income tax effect based upon a pro forma effective tax rate of 36%. The
unaudited pro forma information gives effect only to adjustments set forth in
the accompanying notes herein and does not reflect management's estimate of any
anticipated cost savings or other benefits as a result of the acquisition.
7
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Refer to Item 7 in the Current Report on Form 8-K dated May 23, 2001, as filed
with the Securities and Exchange Commission on May 25, 2001 and amended on July
20, 2001 for additional unaudited pro forma information related to this
acquisition and historical financial information of Mexx.
On July 26, 2000, the Company completed the purchase of the majority of the
assets of the Monet Group ("Monet"); on November 2, 1999, the Company completed
the purchase of the entire equity interest of Podell Industries, Inc.; and on
June 8, 1999, the Company completed the purchase of 85.0 percent of the equity
interest of Lucky Brand Dungarees, Inc. On February 12, 1999, the Company
completed the purchase of 84.5 percent of the equity interest of Segrets, Inc.,
in the fourth quarter of 1999, the Company purchased an additional 3.0 percent
equity interest in Segrets, and in November 2000, the Company increased its
equity interest in Segrets to 97.5 percent.
In August 1999, March 2000 and April 2000, the Company consummated exclusive
license agreements (with certain territorial limitations) with Kenneth Cole
Productions, Inc. with respect to women's sportswear, women's socks and women's
belts, respectively; in January 1998 and December 1999, the Company consummated
exclusive license agreements (with certain territorial limitations) with an
affiliate of Donna Karan International, Inc. with respect to women's sportswear
under the DKNY(R) Jeans and DKNY(R) Active and CITY DKNY(R) trademarks,
respectively; and in July 1998, the Company consummated an exclusive license
agreement with Candie's, Inc., with respect to cosmetic products. The Company
acts as licensee under these agreements.
In February 2000, the Company consummated a license agreement with Leslie Fay
Marketing, Inc., a subsidiary of Leslie Fay Company, Inc. to license the
Company's Liz Claiborne Dresses and Elisabeth Dresses labels.
Reference is made to the Company's latest annual report on Form 10-K for further
information regarding the transactions consummated in 1999 and 2000.
3. COMPREHENSIVE INCOME
Comprehensive income is comprised of net income, the effects of foreign currency
translation and changes in unrealized gains and losses on securities. Total
comprehensive income for interim periods was as follows:
Six Months Ended Three Months Ended
----------------------------- -----------------------------
June 30, July 1, June 30, July 1,
(Dollars in thousands) 2001 2000 2001 2000
-------------- -------------- ------------- --------------
Comprehensive income, net of tax:
Net income $ 77,967 $ 77,944 $ 32,467 $ 31,452
Foreign currency translation 18 (847) (482) (794)
Changes in unrealized gains or losses
on securities and cash equivalents (353) 2,537 134 1,181
Reclassification adjustment for gains
or losses included in net income -- (431) -- (431)
-------------- -------------- ------------- --------------
Comprehensive income, net of tax: $ 77,632 $ 79,203 $ 32,119 $ 31,408
============== ============== ============= ==============
4. MARKETABLE SECURITIES
There were no available-for-sale marketable securities at June 30, 2001 or
December 30, 2000.
8
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following are summaries of available-for-sale marketable securities and
maturities at July 1, 2000:
(Dollars in thousands)
July 1, 2000
-----------------------------------------------------
Gross Unrealized Estimated
-------------------------
Cost Gains Losses Fair Value
----------- ------------ ----------- -------------
Equity securities $ 4,643 $ 4,400 $ -- $ 9,043
For the six-month periods ended June 30, 2001 and July 1, 2000, gross realized
gains on sales of available-for-sale securities totaled $0 and $5,403,000,
respectively. The net adjustments to unrealized holding gains and losses on
available-for-sale securities for the six-month periods ended June 30, 2001 and
July 1, 2000 were losses of $353,000 (net of $199,000 in taxes) and $3,954,000
(net of $1,423,000 in taxes), respectively, which were included in retained
earnings.
5. INVENTORIES, NET
Inventories are stated at the lower of cost (using the first-in, first-out
method) or market and consist of the following:
(Dollars in thousands)
June 30, December 30, July 1,
2001 2000 2000
-------------- --------------- ---------------
Raw materials $ 36,622 $ 21,181 $ 31,390
Work in process 5,689 6,233 6,770
Finished goods 487,377 452,431 369,066
-------------- --------------- ---------------
$ 529,688 $ 479,845 $ 407,226
============== =============== ===============
6. PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following:
(Dollars in thousands)
June 30, December 30, July 1,
2001 2000 2000
------------ ------------ ------------
Land and buildings $ 142,140 $ 133,342 $ 131,726
Machinery and equipment 288,847 267,004 261,898
Furniture and fixtures 85,863 74,794 70,552
Leasehold improvements 189,879 165,827 155,684
------------ ------------ ------------
706,729 640,967 619,860
Less: Accumulated depreciation
and amortization 366,629 343,543 329,111
------------ ------------ ------------
$ 340,100 $ 297,424 $ 290,749
============ ============ ============
7. OTHER MATTERS
On May 22, 2001, the Company entered into a synthetic lease agreement to acquire
and construct various land, building, equipment and real property improvements
associated with warehouse/distribution facilities in Ohio and Rhode Island.
Estimated costs to complete these facilities are expected to be approximately
$65 million.
9
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8. DEBT
On May 22, 2001, the Company entered into a 350 million Euro (or $302.9 million
based on the exchange rate in effect on such date) 180-day unsecured credit
facility (the "Bridge Loan") from Citicorp North America, Inc. and Chase
Manhattan Bank. The Bridge Loan has two borrowing options, an "Alternative Base
Rate" option and a Eurodollar rate option, each as defined in the Bridge Loan.
The Bridge Loan contains certain financial covenants relating to the Company's
debt leverage and fixed charge coverage. The Company believes it is in
compliance with such covenants.
The proceeds were primarily used to finance the Company's acquisition of Mexx
Group B.V. on May 23, 2001. As of June 30, 2001, approximately 337.0 million
Euros (or $286.1 million based on the exchange rate in effect on such date) was
outstanding under the Bridge Loan with a weighted average interest rate of
5.29%. The Bridge Loan is classified as short-term debt as of June 30, 2001 as
it expires within 180 days.
On August 7, 2001, the Company issued 350 million Euros (or $307.2 million based
on the exchange rate in effect on such date), of 6.625% notes due in 2006 (the
"Eurobonds"). The Eurobonds are listed on the Luxembourg Stock Exchange and
received a credit rating of BBB from Standard & Poor's and Baa2 from Moody's
Investor Services. The net proceeds of the sale were primarily used to repay the
outstanding balance of the Bridge Loan. On August 7, 2001, availability under
the Bridge Loan was reduced to 50.0 million Euros (or $43.9 million based on the
exchange rate in effect on such date), which remained undrawn as of August 10,
2001.
9. RESTRUCTURING CHARGE
In September 2000, the Company recorded a net restructuring charge of $5.4
million (pretax), representing a charge of $6.5 million, principally to cover
the closure of eight underperforming Specialty Retail stores, the closure of one
of our divisional offices and severance-related costs, offset by $1.1 million of
the Company's previous restructuring liability originally recorded in December
1998 deemed to be no longer necessary.
In December 2000, the Company recorded a restructuring charge of $15.6 million
(pretax) to further maximize business segment synergies. This charge consisted
of $10.6 million for operating and administrative costs associated with the
elimination of nearly 270 jobs and $5.0 million for real estate consolidations.
Significant items included in the charge are estimated contract termination
costs, severance and related benefits for staff reductions, estimated occupancy
costs and asset writedowns. Asset writedowns of $2.4 million consist principally
of showrooms and administrative offices deemed no longer necessary in our
Wholesale Apparel segment. These asset writedowns are expected to be completed
in early 2002. The fiscal 2000 restructuring charges reduced net income by $13.5
million (after tax), or $.25 per common share.
A summary of the changes in the restructuring reserves is as follows:
Estimated
Operating and Occupancy
Store Closure Administrative Costs and Asset
Costs Costs Write Downs Total
-------------- -------------- ---------------- --------------
Balance at December 30, 2000 $ 5.5 $ 11.4 $ 2.6 $ 19.5
Spending for six months
ended June 30, 2001 (0.1) (6.4) (0.2) (6.7)
-------------- -------------- ---------------- --------------
Balance at June 30, 2001 $ 5.4 $ 5.0 $ 2.4 $ 12.8
============== ============== ================ ==============
10
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
10. CASH DIVIDENDS and COMMON STOCK REPURCHASE
On July 20, 2001, the Company's Board of Directors declared a quarterly cash
dividend on the Company's common stock at the rate of $0.1125 per share, to be
paid on September 7, 2001 to stockholders of record at the close of business on
August 17, 2001. Also, on January 25, 2001, the Company's Board of Directors
authorized the Company to purchase up to an additional $150 million of its
common stock in open market purchases and privately negotiated transactions. As
of August 10, 2001, the Company has $221.2 million remaining in buyback
authorization including previously authorized amounts.
11. EARNINGS PER COMMON SHARE
The following is an analysis of the differences between basic and diluted
earnings per share.
Six Months Ended Three Months Ended
------------------------- ------------------------
June 30, July 1, June 30, July 1,
(Dollars in thousands) 2001 2000 2001 2000
------------ ------------ ----------- -----------
Net income $ 77,967 $ 77,944 $ 32,467 $ 31,452
Weighted average common shares outstanding 51,868 54,510 52,116 54,049
Effect of dilutive securities:
Stock options and restricted stock
grants 568 400 510 476
------------ ------------ ----------- -----------
Weighted average common shares outstanding
and common share equivalents 52,436 54,910 52,626 54,525
============ ============ =========== ===========
12. CONSOLIDATED STATEMENTS OF CASH FLOWS SUPPLEMENTARY DISCLOSURES
During the six months ended June 30, 2001, the Company made income tax payments
of $24,260,000 and interest payments of $12,006,000. During the six months ended
July 1, 2000, the Company made income tax payments of $37,123,000 and interest
payments of $4,206,000.
13. SEGMENT REPORTING
The Company has three segments: Wholesale Apparel, Wholesale Non-Apparel and
Retail. As a result of the acquisition of Mexx, the Company is also segmenting
its results on a geographic basis between Domestic (wholesale customers and
Company retail operations comprised of specialty retail and outlet stores based
in the United States) and International (wholesale customers and Company retail
operations comprised of specialty retail, outlet and concession stores based
outside of the United States). The Wholesale Apparel Segment consists of women's
and men's apparel designed and marketed worldwide under various trademarks owned
or licensed by the Company. The Wholesale Non-Apparel segment consists of
accessories, jewelry and cosmetics designed and marketed worldwide under certain
of those and other owned or licensed trademarks. The Retail segment operates
specialty retail, outlet and concession stores worldwide that sell most of these
apparel and non-apparel products to the public.
11
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Six Months Ended June 30, 2001
--------------------------------------------------------------------------
(Dollars in thousands) Wholesale Wholesale Retail Corporate/ Total
Apparel Non-Apparel Eliminations
------------- ------------- ------------ ------------- -------------
Revenue from external customers $ 1,090,886 $ 200,992 $ 254,667 $ 7,140 $ 1,553,685
Intercompany sales 92,454 9,135 -- (101,589) --
------------- ------------- ------------ ------------- -------------
$ 1,183,340 $ 210,127 $ 254,667 $ (94,449) $ 1,553,685
============= ============= ============ ============= =============
Segment operating profit (loss) from
external customers $ 106,505 $ 3,860 $ 23,148 $ 2,408 $ 135,921
Intercompany segment operating
profit (loss) 19,676 4,036 -- (23,712) --
------------- ------------- ------------ ------------- -------------
$ 126,181 $ 7,896 $ 23,148 $ (21,304) $ 135,921
============= ============= ============ ============= =============
For the Six Months Ended July 1, 2000
--------------------------------------------------------------------------
(Dollars in thousands) Wholesale Wholesale Retail Corporate/ Total
Apparel Non-Apparel Eliminations
------------- ------------- ------------ ------------- -------------
Revenue from external customers $ 1,100,225 $ 146,019 $ 218,504 $ 6,378 $ 1,471,126
Intercompany sales 83,485 7,594 -- (91,079) --
------------- ------------- ------------ ------------- -------------
$ 1,183,710 $ 153,613 $ 218,504 $ (84,701) $ 1,471,126
============= ============= ============ ============= =============
Segment operating profit (loss) from
external customers $ 101,906 $ 400 $ 23,379 $ 1,612 $ 127,297
Intercompany segment operating
profit (loss) 22,001 3,958 -- (25,959) --
------------- ------------- ------------ ------------- -------------
$ 123,907 $ 4,358 $ 23,379 $ (24,347) $ 127,297
============= ============= ============ ============= =============
For the Three Months Ended June 30, 2001
--------------------------------------------------------------------------
(Dollars in thousands) Wholesale Wholesale Retail Corporate/ Total
Apparel Non-Apparel Eliminations
------------- ------------- ------------ ------------- -------------
Revenue from external customers $ 489,048 $ 85,610 $ 149,129 $ 3,248 $ 727,035
Intercompany sales 43,515 4,577 -- (48,092) --
------------- ------------- ------------ ------------- -------------
$ 532,563 $ 90,187 $ 149,129 $ (44,844) $ 727,035
============= ============= ============ ============= =============
Segment operating profit (loss) from
external customers $ 39,307 $ (2,610) $ 20,395 $ 1,128 $ 58,220
Intercompany segment operating
profit (loss) 19,719 2,847 -- (22,566) --
------------- ------------- ------------ ------------- -------------
$ 59,026 $ 237 $ 20,395 $ (21,438) $ 58,220
============= ============= ============ ============= =============
12
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three Months Ended July 1, 2000
--------------------------------------------------------------------------
(Dollars in thousands) Wholesale Wholesale Retail Corporate/ Total
Apparel Non-Apparel Eliminations
------------- ------------- ------------ ------------- -------------
Revenue from external customers $ 473,117 $ 62,624 $ 122,017 $ 3,909 $ 661,667
Intercompany sales 42,387 4,089 -- (46,476) --
------------- ------------- ------------ ------------- -------------
$ 515,504 $ 66,713 $ 122,017 $ (42,567) $ 661,667
============= ============= ============ ============= =============
Segment operating profit (loss) from
external customers $ 32,567 $ (2,166) $ 21,484 $ 1,067 $ 52,952
Intercompany segment operating
profit (loss) 20,270 2,628 -- (22,898) --
------------- ------------- ------------ ------------- -------------
$ 52,837 $ 462 $ 21,484 $ (21,831) $ 52,952
============= ============= ============ ============= =============
June 30, July 1,
(Dollars in thousands) 2001 2000
-------------- --------------
Segment assets:
Wholesale Apparel $ 1,524,177 $ 1,305,903
Wholesale Non-Apparel 189,508 104,983
Retail 348,011 142,418
Corporate/Eliminations 181,295 192,784
-------------- --------------
$ 2,242,991 $ 1,746,088
============== ==============
Six Months Ended Three Months Ended
----------------------------- ----------------------------
June 30, July 1, June 30, July 1,
(Dollars in thousands) 2001 2000 2001 2000
-------------- -------------- ------------- --------------
Revenue from external customers:
Domestic $ 1,422,489 $ 1,398,193 $ 640,198 $ 623,109
International 131,196 72,933 86,837 38,558
-------------- -------------- ------------- --------------
$ 1,553,685 $ 1,471,126 $ 727,035 $ 661,667
============== ============== ============= ==============
June 30, July 1,
(Dollars in thousands) 2001 2000
-------------- --------------
Segment assets:
Domestic $ 1,816,906 $ 1,688,424
International 426,085 57,664
-------------- --------------
$ 2,242,991 $ 1,746,088
============== ==============
A reconciliation to adjust segment assets to consolidated assets follows:
June 30, July 1,
(Dollars in thousands) 2001 2000
-------------- --------------
Total segment assets $ 2,242,991 $ 1,746,088
Intercompany receivables (14,764) (21,933)
Investments in wholly-owned
subsidiaries (292,963) (290,244)
Other 7,495 2,608
-------------- --------------
Total consolidated assets $ 1,942,759 $ 1,436,519
============== ==============
13
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
14. ACCOUNTING FOR DERIVATIVES
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
statement also requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities, an Amendment of FASB
Statement No.133," which amended certain provisions of SFAS No. 133. The Company
adopted SFAS No. 133 and the corresponding amendments under SFAS No. 138 in the
first quarter of 2001. The cumulative effect of adoption did not result in a
material impact on the Company's financial position, results of operations or
cash flows.
The Company enters into foreign exchange forward contracts to hedge transactions
denominated in foreign currencies for periods of less than one year. Gains and
losses on contracts which hedge specific foreign currency denominated
commitments are recognized in the period in which the transactions are completed
and are accounted for as part of the underlying transaction. As of June 30,
2001, the Company had forward contracts maturing through December 2001 to sell
3,300,000 European Euros, contracts maturing through December 2001 to sell
17,000,000 Canadian dollars and contracts maturing through September 2001 to
sell 1,000,000 British pounds sterling. The aggregate U.S. dollar value of the
foreign exchange contracts was approximately $15,475,000. Unrealized gains and
losses for outstanding foreign exchange forward contracts were not material at
June 30, 2001.
15. NEW ACCOUNTING PRONOUNCEMENTS
In April 2001, the FASB's Emerging Issues Task Force reached a consensus on
Issue No. 00-25, "Vendor Income Statement Characterization of Consideration Paid
to a Reseller of the Vendor's Products." This issue addresses the recognition,
measurement and income statement classification of consideration from a vendor
to a customer in connection with the customer's purchase or promotion of the
vendor's products. This consensus is expected to only impact revenue and expense
classifications and not change reported net income. In accordance with the
consensus reached, the Company will adopt the required accounting beginning in
2002.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations". This
statement requires that all business combinations initiated after June 30, 2001
are to be accounted for using the purchase method and specifies the criteria for
the recognition and measurement of goodwill and other intangible assets acquired
in a business combination.
In June 2001, the FASB also issued SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 142 requires that goodwill and intangible assets with
indefinite useful lives are to no longer be amortized but rather be tested at
least annually for impairment; intangible assets with definite useful lives will
continue to be amortized over their respective useful lives. The Company will
adopt SFAS No. 142 beginning in 2002 and is currently evaluating the impact of
the adoption of SFAS No. 142 on its results of operations and financial
position.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
General
- -------
Liz Claiborne, Inc. and its wholly-owned and majority-owned subsidiaries (the
"Company") has three segments: Wholesale Apparel, Wholesale Non-Apparel and
Retail. As a result of the acquisition of Mexx Group B.V. ("MEXX"), the Company
is also segmenting its results on a geographic basis between Domestic (wholesale
customers and Company retail operations comprised of specialty retail and outlet
stores based in the United States) and International (wholesale customers and
Company retail operations comprised of specialty retail, outlet and concession
stores based outside of the United States). The Wholesale Apparel Segment
consists of women's and men's apparel designed and marketed worldwide under
various trademarks owned or licensed by the Company. The Wholesale Non-Apparel
segment consists of accessories, jewelry and cosmetics designed and marketed
worldwide under certain of those and other owned or licensed trademarks. The
Retail segment operates specialty retail, outlet and concession stores worldwide
that sell most of these apparel and non-apparel products to the public. All data
and discussion with respect to our specific segments included within this
"Management's Discussion and Analysis" is presented before applicable
intercompany eliminations. Please refer to Note 12 of Notes to Condensed
Consolidated Financial Statements.
On May 23, 2001, the Company completed its acquisition of all the outstanding
capital stock of MEXX, a privately held fashion apparel and accessories company
with limited liability, incorporated and existing under the laws of The
Netherlands. MEXX designs and markets a wide range of merchandise for women, men
and children under the MEXX brand name. MEXX's products are sold via wholesale
and retail formats in more than 40 countries in Europe, the Asia Pacific region,
Canada and the Middle East, with MEXX's core markets being the Benelux and
Germanic regions. MEXX products, which are in the mid-price range, are targeted
at the 20-40 year old modern, urban consumer. In fiscal 2000 and 1999, MEXX's
net sales were approximately 382 million Euros (or $352.9 million based on the
average exchange rate for such period) and 283.5 million Euros (or $261.9
million based on the average exchange rate for such period), respectively.
MEXX's wholesale business, which represented approximately 66% and 67% of MEXX's
total net sales for fiscal 2000 and 1999, respectively, consists of sales to
approximately 6,000 independent retail stores, 1,100 department store doors and
75 free standing MEXX franchise stores. MEXX's retail business which accounted
for approximately 29% and 29% of MEXX's total net sales in fiscal 2000 and 1999,
respectively, consists of approximately 59 company owned and operated retail
stores, 102 concession shop-in-shop stores (where the space is owned and
operated by the department store while MEXX owns the inventory) and 34 high
street concession stores (whereby the store is leased and operated by the
partner while MEXX owns the inventory). In addition, MEXX operates approximately
12 factory outlets. MEXX also manages a variety of product licenses for
non-apparel items such as fragrances, shoes, handbags, costume jewelry and
watches.
Second quarter ended June 30, 2001 compared to second quarter ended July 1, 2000
- --------------------------------------------------------------------------------
Net sales for the second quarter of 2001 were $727.0 million, an increase of
$65.4 million (of which $44.4 million of the net sales increase was due to the
inclusion of sales of our MEXX business, acquired in May 2001), or 9.9%, over
net sales for the second quarter of 2000. This result reflected net sales
increases of 3.3% in our Wholesale Apparel segment (to $532.6 million), 35.2% in
Wholesale Non-Apparel (to $90.2 million) and 22.2% in Retail (to $149.1
million). The increase was 125.2% in our International segment (to $86.8
million), due primarily to the inclusion of sales of our recently acquired MEXX
and MONET businesses, and 2.7% in our Domestic segment (to $640.2 million).
The increase in net sales of our Wholesale Apparel segment primarily reflected
the inclusion of sales of MEXX, our licensed CITY DKNY(R) business (launched in
February 2001) and our licensed KENNETH COLE NEW YORK women's apparel line
(launched in August 2000). The sales increase also reflected sales increases in
our LUCKY BRAND DUNGAREES business, due to higher unit volume, and in our DANA
BUCHMAN business, due to higher average unit selling prices. These increases
were partially offset by sales declines in our LAUNDRY and ELISABETH businesses,
due in each case to lower unit volume and lower average unit selling prices, in
our Casual, Men's Sportswear and Special Markets businesses, due in each case to
lower average unit selling prices, and in our Career business due to lower unit
volume.
15
The increase in our Wholesale Non-Apparel segment was primarily due to
significant net sales increases in our Jewelry business, due primarily to the
inclusion of sales from our MONET business (acquired in July 2000), and our
Cosmetics business, which launched our LUCKY YOU fragrance in August 2000, and,
to a lesser extent, our Fashion Accessories business, principally reflecting
higher unit selling prices. These gains were partially mitigated by a slight
decline in our Handbags business due to lower average unit volume.
The increase in net sales of our Retail segment reflected the inclusion of
retail sales of our recently acquired MEXX business. Our Outlet store sales
increased primarily due to 22 additional stores on a period-to-period basis,
while comparable store sales remained relatively flat. Our Specialty Retail
Store sales increased, with a significant increase due to 21 new LUCKY BRAND
DUNGAREES stores on a period-to-period basis as well as comparable store sales
increases in our LUCKY BRAND DUNGAREES stores and the balance of our Specialty
Retail stores.
Gross profit dollars increased $40.5 million, or 15.1%, in 2001 over 2000. Gross
profit as a percent of sales increased to 42.4% in 2001 from 40.5% in 2000 due
to increased penetration of our relatively higher-margin Wholesale Non-Apparel
segment, reflecting our recently acquired MONET business and the launch of our
LUCKY YOU fragrance, the increased penetration of our relatively higher-margin
Retail segment, driven by the additional store base, and the inclusion of our
recently acquired MEXX business, which runs at a higher gross margin rate than
the company average. The increase in gross profit rate also reflected
significantly lower unit sourcing costs as a result of the continued
consolidation and optimization of our worldwide supplier base, combined with the
continued improvement in the matching of our production orders with our customer
orders through the use of new systems and revamped business processes
implemented in late 1999. The Company also benefited from higher margins
realized in our DANA BUCHMAN, ELISABETH and Career businesses due to reduced
retailer support. These increases were partially offset by lower gross margins
in our Casual, LAUNDRY, Special Markets and CRAZY HORSE Men's businesses.
Selling, general and administrative expenses ("SG&A") increased $35.2 million,
or 16.4%, in 2001 over 2000. These expenses as a percent of sales increased to
34.4% in 2001 from 32.5% in 2000. These results principally reflected the
increased penetration of our relatively higher-cost Wholesale Non-Apparel
segment, primarily due to higher marketing costs in our Cosmetics business
associated with the launch of our LUCKY YOU brand and relatively higher SG&A
rates in our recently acquired MONET business, increased penetration of our
relatively higher-cost Retail segment, the inclusion of MEXX which has a
relatively higher SG&A rate than the Company average, and the lower Wholesale
Apparel sales in our Casual, ELISABETH and Special Markets businesses, which are
supported by relatively lower SG&A levels. Additionally, the Company incurred
higher goodwill amortization generated by our recent acquisitions. The increase
in the dollar level of our SG&A was mitigated by ongoing Company-wide expense
management and cost reduction initiatives.
As a result of the factors described above, operating income increased $5.3
million, or 9.9%, to $58.2 million in the second quarter of 2001, and operating
income as a percent of sales remained unchanged at 8.0% in 2001 compared to
2000. Segment operating profit in our Wholesale Apparel segment increased $6.2
million to $59.0 million (11.1% of sales) in 2001 compared to $52.8 million
(10.2% of sales) in 2000, principally reflecting increased profit dollars in our
ELISABETH, DANA BUCHMAN, DKNY(R) JEANS Women's, Career and Segrets businesses
and the inclusion of the profits from our recently acquired MEXX business,
partially offset by reduced profits in our Special Markets, Casual, LAUNDRY and
CRAZY HORSE Men's businesses. Operating profit in our Wholesale Non-Apparel
segment decreased $0.3 million to $0.2 million (0.3% of sales) in 2001 compared
to $0.5 million (0.7% of sales) in 2000, primarily due to reduced profit dollars
in our Fashion Accessories business, partially offset by increases in our
Cosmetics business, reflecting the launch of our LUCKY YOU fragrance, and our
Jewelry business, primarily due to the inclusion of the profits from our
recently acquired MONET business. Segment operating profit in our Retail segment
decreased $1.1 million to $20.4 million (13.7% of sales) in 2001 compared to
$21.5 million (17.6% of sales) in 2000, principally reflecting higher operating
expenses in our Outlet store business, partially offset by an increase in our
Specialty Retail store profits due to higher gross margins overall, 21 new LUCKY
BRAND DUNGAREES stores on a period-to-period basis, and the inclusion of the
profits from the Retail stores of our recently acquired MEXX business.
Net other expense in the second quarter of 2001 was $1.3 million, comprised of
minority interest and other non-operating expenses, compared to net other income
of $19,000 in 2000. Last year's other income included a special investment gain
of $0.3 million related to our sale of marketable equity securities, partially
offset by minority interest and other non-operating expenses.
Net interest expense in the second quarter of 2001 was $6.2 million compared to
interest expense of $3.8 million in 2000. This increase of $2.4 million
represents the incremental interest cost on the cash and debt used to finance
our
16
strategic initiatives including costs associated with our recently acquired
businesses, the repurchase of common stock in the prior year and capital
expenditures primarily related to the technological upgrading of our
distribution facilities and information systems and in-store merchandise shops.
For the second quarter our effective income tax rate remained unchanged at
36.0%. The 36.0% reflected our current estimate of our full year effective
income tax rate.
Net income increased $1.0 million in 2001 to $32.5 million and declined as a
percent of net sales to 4.5% in 2001 from 4.8% in 2000, due to the factors
described above. Diluted earnings per common share increased 6.9% to $0.62 in
2001 from $0.58 in 2000, reflecting higher net income and a lower number of
average outstanding common shares and share equivalents in 2001. Our average
diluted shares outstanding declined by 1.9 million in the second quarter of 2001
on a period-to-period basis, to 52.6 million, as a result of our stock
repurchase program. No shares were purchased during the second quarter of 2001.
Since the end of the second quarter, we have not purchased any additional
shares. As of August 10, 2001, we have $221.2 million remaining in our buyback
authorization.
Six months ended June 30, 2001 compared to six months ended July 1, 2000
- ------------------------------------------------------------------------
Net sales for the six months of 2001 were $1,553.7 million, an increase of $82.6
million (of which $44.4 million of the net sales increase was due to the
inclusion of sales of our MEXX business), or 5.6%, over net sales for the six
months of 2000. This result reflected net sales increases of 36.8% in Wholesale
Non-Apparel (to $210.1 million) and 16.6% in Retail (to $254.7 million),
partially offset by a $0.4 million net sales decrease in our Wholesale Apparel
segment (to $1,183.3 million). Our International net sales increased by 79.9%
(to $131.2 million), due primarily to the inclusion of sales of our recently
acquired MEXX and MONET businesses, and our Domestic net sales increased by 1.7%
(to $1,422.5 million).
The decrease in net sales of our Wholesale Apparel segment primarily reflected
sales declines in our Casual, LAUNDRY and ELISABETH businesses due in each case
to lower unit volume and lower average unit selling prices, in our Special
Markets business due to lower average unit selling prices, and in our Career
business due to lower unit volume. The sales decrease also reflected the
licensing of our dress business in February 2000. These decreases were partially
offset by the inclusion of sales of our MEXX business, our licensed KENNETH COLE
NEW YORK women's apparel line, our licensed CITY DKNY(R) business and our CRAZY
HORSE Men's apparel line, as well as sales increases in our LUCKY BRAND
DUNGAREES and Men's sportswear businesses, due in each case to higher unit
volume, and in our DANA BUCHMAN business, due to higher average unit selling
prices.
The increase in our Wholesale Non-Apparel segment was primarily due to the
significant net sales increases in our Jewelry business, due to the inclusion of
sales from our MONET business, and our Cosmetics business, which launched our
LUCKY YOU fragrance in August 2000. To a lesser extent, there was also a sales
increase in our Fashion Accessories business, principally reflecting higher unit
selling prices. These gains were partially mitigated by a decline in our
Handbags business due to lower average unit selling prices and lower average
unit volume.
The increase in net sales of our Retail segment reflected increased Outlet store
sales, primarily due to 22 additional stores on a period-to-period basis,
partially offset by a low single-digit comparable store sales decrease. The
increase in the Retail Segment also reflected the inclusion of retail sales of
our recently acquired MEXX business, and increased Specialty Retail Store sales,
with a significant increase due to 21 new LUCKY BRAND DUNGAREES stores on a
period-to-period basis, as well as a LUCKY BRAND DUNGAREES comparable store
sales increase, offset by a low single-digit comparable store sales decrease in
the balance of our Specialty Retail stores.
Gross profit dollars increased $60.5 million, or 10.6%, in 2001 over 2000. Gross
profit as a percent of sales increased to 40.6% in 2001 from 38.8% in 2000 due
to the increased penetration of our relatively higher-margin Wholesale
Non-Apparel segment, primarily due to our recently acquired MONET business and
the launch of our LUCKY YOU fragrance, as well as the increased penetration of
our relatively higher-margin Retail segment, driven by the additional store
base. The increase in gross profit rate also reflected significantly lower unit
sourcing costs as a result of the continued consolidation and optimization of
our worldwide supplier base, combined with the continued improvement in the
matching of our production orders with our customer orders through the use of
new systems and revamped business processes implemented in late 1999. The
Company also benefited from higher margins realized in our Specialty Retail
business and improved margins in our DANA BUCHMAN, Career and Handbags
businesses due to reduced retailer support. These increases were partially
offset by lower gross margins in our Casual, LAUNDRY and Special Markets
businesses.
17
SG&A increased $51.8 million, or 11.7%, in 2001 over 2000. These expenses as a
percent of sales increased to 31.9% in 2001 from 30.1% in 2000. These results
principally reflected the increased penetration of our relatively higher-cost
Wholesale Non-Apparel segment primarily due to higher marketing costs in our
Cosmetics business associated with the launch of our LUCKY YOU brand and
relatively higher SG&A rates in our recently acquired MONET business, increased
penetration of our relatively higher-cost Retail segment, the inclusion of MEXX
which has a relatively higher SG&A rate than the Company average, and the lower
Wholesale Apparel sales in our Casual, ELISABETH and Special Markets businesses,
which are supported by relatively lower SG&A levels. Additionally, the Company
incurred higher compensation expenses as a result of the vesting of certain
incentive equity instruments previously granted under the Company's stock
incentive plan, as well as goodwill amortization generated by our recent
acquisitions. The increase in the dollar level of our SG&A was mitigated by
ongoing Company-wide expense management and cost reduction initiatives.
As a result of the factors described above, operating income increased $8.6
million, or 6.8%, to $135.9 million in the six months of 2001, and operating
income as a percent of sales remained unchanged at 8.7% in 2001 compared to
2000. Segment operating profit in our Wholesale Apparel segment increased $2.3
million to $126.2 million (10.7% of sales) in 2001 compared to $123.9 million
(10.5% of sales) in 2000, principally reflecting increased profit dollars in our
Career, DANA BUCHMAN, DKNY(R) JEANS Women's, ELISABETH, Men's sportswear, LUCKY
BRAND DUNGAREES and SEGRETS businesses and the inclusion of the profits from our
recently acquired MEXX business, partially offset by reduced sales in our
Casual, Special Markets and LAUNDRY businesses. Operating profit in our
Wholesale Non-Apparel segment increased $3.5 million to $7.9 million (3.8% of
sales) in 2001 compared to $4.4 million (2.8% of sales) in 2000, primarily due
to the inclusion of the profits from our recently acquired MONET business and
the launch of our LUCKY YOU fragrance and increased profit dollars in our
Handbags business, partially offset by reduced profit dollars in our Fashion
Accessories business. Segment operating profit in our Retail segment decreased
$0.3 million to $23.1 million (9.1% of sales) in 2001 compared to $23.4 million
(10.7% of sales) in 2000, principally reflecting higher operating expenses in
our Outlet store business, partially offset by an increase in our Specialty
Retail store profits due to higher gross margins overall, 21 new LUCKY BRAND
DUNGAREES stores on a period-to-period basis, and the inclusion of the profits
from the Retail stores of our recently acquired MEXX business.
Net other expense in the six months of 2001 was $2.3 million, comprised of
minority interest and other non-operating expenses, compared to net other income
of $2.3 million in 2000. Last year's other income included a special investment
gain of $3.0 million related to our sale of marketable equity securities, net of
associated expenses, partially offset by minority interest and other
non-operating expenses.
Net interest expense in the six months of 2001 was $11.8 million compared to
interest expense of $7.8 million in 2000. This increase of $4.0 million
represents the incremental interest cost on the cash and debt used to finance
our strategic initiatives including costs associated with our recently acquired
businesses, the repurchase of common stock and capital expenditures primarily
related to the technological upgrading of our distribution facilities and
information systems and in-store merchandise shops.
For the six months our effective income tax rate remained unchanged at 36.0%.
The 36.0% reflected our current estimate of our full year effective income tax
rate.
Net income increased $0.1 million in 2001 to $78.0 million and declined as a
percent of net sales to 5.0% in 2001 from 5.3% in 2000, due to the factors
described above. Diluted earnings per common share increased 8.0% to $1.49 in
2001 from $1.38 in 2000 (excluding last year's $3.0 million special investment
gain), reflecting higher net income and a lower number of average outstanding
common shares and share equivalents in 2001. Diluted earnings per common share,
including the $3.0 million special investment gain was $1.49 in 2001 compared to
$1.42 in 2000. Our average diluted shares outstanding declined by 2.5 million in
the six months of 2001 on a period-to-period basis, to 52.4 million, as a result
of our ongoing stock repurchase program. No shares were purchased during the six
months of 2001.
FORWARD OUTLOOK
- ---------------
While the macroeconomic and retail environments continue to be challenging, the
Company remains optimistic that for the full year 2001 we can generate a sales
increase of 12.5% to 14.5% and an earnings per share increase of 12.5% to 14.5%,
excluding last year's restructuring charges and special investment gain or any
future stock repurchases. For the third quarter of 2001, we are optimistic that
we can achieve sales and EPS increases in the mid-teens, excluding the impact of
last year's restructuring charges and special investment gain or any future
stock
18
repurchases. For the fourth quarter of 2001, we are optimistic that we can
achieve a low twenty percent sales increase and an EPS increase in the
mid-teens, excluding last year's restructuring charges and special investment
gain or any future stock repurchases. Refer to "PART II - ITEM 5. STATEMENT
REGARDING FORWARD-LOOKING DISCLOSURE" for a discussion of the risks and
uncertainties relating to the foregoing forward-looking statements.
FINANCIAL POSITION, CAPITAL RESOURCES AND LIQUIDITY
- ---------------------------------------------------
We ended the second quarter of 2001 with $64.1 million in cash and marketable
securities, compared to $37.6 million at the end of the 2000 second quarter, and
$519.6 million of debt compared to $219.6 million of debt outstanding at the end
of the second quarter of 2000. This $300.0 million change in our cash and debt
position over the last twelve months is primarily attributable to our
expenditure of $294.7 million for purchase price payments in connection with the
acquisitions of Mexx Group B.V., the Monet Group and Segrets, Inc., net of cash
acquired, $94.5 million for the repurchase of common stock and $79.8 million for
capital expenditures primarily related to the technological upgrading of our
distribution facilities and information systems and in-store merchandise shops,
offset by cash provided from operating activities. Our borrowings under the
commercial paper program peaked at $449.7 million during the quarter.
Net cash provided by operating activities for the six months of 2001 was $20.6
million, compared to $91.5 million in 2000. This $70.9 million change in cash
flow was primarily due to a $120.0 million use of cash for working capital in
2001 compared to $36.5 million in 2000, driven specifically by year over year
changes in the accounts receivable and accrued expense balances.
Our accounts receivable ended the quarter at $417.8 million, up 27.4% over last
year. This increase in accounts receivable primarily reflected the assumption of
the accounts receivable of our recently acquired MEXX and MONET businesses,
which together accounted for approximately 83% of the increase.
Inventory increased $122.5 million, or 30.1%, at the second quarter end 2001
compared to the second quarter end 2000. Without the acquisition of MEXX, our
inventories were up 15.1%. The majority of this increase was driven by store
openings in both our Outlet and Specialty Retail businesses, along with our
acquisitions of the MONET business and the launches of our CITY DKNY(R) and
Kenneth Cole licensed businesses and our LUCKY YOU fragrance. Excluding the
inventories of our newly opened retail stores and our recently acquired and
launched businesses, inventories were up 6.9% year-over-year, primarily due to
an increase in our replenishment inventory category due to our failure to adjust
the flow of new replenishment product as replenishment sales slowed. We believe
that replenishment inventory is lower risk than fashion inventory, and we have
adjusted the flow of new receipts of replenishment product to reflect sales; we
expect that supply should be normalized by the end of the third quarter. Our
average inventory turnover rate decreased to 4.0 times (4.1 times excluding
MEXX) in 2001 from 4.4 times in 2000.
Net cash used in investing activities was $287.2 million in 2001, compared to
$60.2 million in 2000. The 2001 net cash used primarily reflected $245.3 million
for the purchase of MEXX, along with capital and in-store merchandise shop
expenditures of $45.7 million, compared to the 2000 capital and in-store
merchandise shop expenditures of $43.4 million, additional payments related to
the purchase of our LUCKY BRAND DUNGAREES business of $12.8 million and net
purchases of investments of $5.5 million.
Net cash provided by financing activities was $276.0 million in 2001, compared
to net cash used of $39.8 million in 2000. The $315.8 million year over year
increase primarily reflected the assumption of $286.1 million of additional
short-term debt to finance the May 2001 purchase of MEXX, $146.5 million
expended for stock purchases in 2000 (there were none in 2001), and an increase
in net proceeds from the exercise of stock options of $22.7 million, partially
offset by a net repayment of the commercial paper program of $36.7 million
during the six months of 2001 compared to net borrowings of $103.5 million in
2000.
Our anticipated capital expenditures for the full year 2001 approximate $90
million, of which $33.0 million has been expended through June 30, 2001. These
expenditures consist primarily of the continued technological upgrading and
expansion of our management information systems and distribution facilities
(including certain building and equipment expenditures) and the opening of an
additional eight Outlet and seven Specialty Retail stores. In addition, we
anticipate spending approximately $19 million on in-store merchandise shops for
the full year of 2001. Capital expenditures, in-store shops and working capital
cash needs will be financed with net cash provided by operating activities and
our revolving credit and trade letter of credit facilities.
19
On May 22, 2001, the Company entered into a synthetic lease agreement to acquire
and construct various land, building, equipment and real property improvements
associated with warehouse/distribution facilities in Ohio and Rhode Island.
Estimated costs to complete these facilities are expected to be approximately
$65 million.
On May 22, 2001, the Company received a 350 million Euro (or $302.9 million
based on the exchange rate in effect on such date) 180-day credit facility (the
"Bridge Loan") from Citicorp North America, Inc. and Chase Manhattan Bank. The
proceeds were primarily used to finance the acquisition of MEXX on May 23, 2001.
As of June 30, 2001, we had approximately 337.0 million Euros (or $286.1 million
based on the exchange rate in effect on such date) outstanding under the Bridge
Loan.
On August 7, 2001, the Company issued 350 million Euros (or $307.2 million based
on the exchange rate in effect on such date) of 6.625% notes due in 2006 (the
"Eurobonds"). The Eurobonds are listed on the Luxembourg Stock Exchange and
received a credit rating of BBB from Standard & Poor's and Baa2 from Moody's
Investor Services. The net proceeds of the sale were primarily used to repay the
outstanding balance of the credit facility. On August 7, 2001, availability
under the credit facility was reduced to 50.0 million Euros (or $43.9 million
based on the exchange rate in effect on such date), which remained undrawn as of
August 10, 2001.
In November 2000, the Company received a $750 million financing commitment under
a bank revolving credit facility to finance our liquidity needs, replacing our
previously existing $600 million facility. This bank facility, which has
received a credit rating of BBB from Standard & Poor's and Baa2 from Moody's
Investor Services, may be either drawn upon or used as a liquidity facility to
support the issuance of A2/P2 rated commercial paper. At June 30, 2001, the
Company had approximately $233 million outstanding under our commercial paper
program. Also, MEXX has short-term credit facilities available of approximately
$34.2 million Euros (or $29.0 million) as of June 30, 2001. In addition, we have
in place $385 million of letter of credit facilities primarily to support our
merchandise purchasing requirements. At June 30, 2001, we had approximately $278
million outstanding under these letter of credit facilities. We anticipate that
our cash flows from operations, commercial paper program and bank and letter of
credit facilities will be sufficient to fund our future liquidity requirements
and that we will be able to adjust the amounts available under these facilities
if necessary.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We finance our capital needs through available cash and marketable securities,
operating cash flow, letter of credit, synthetic lease and bank revolving credit
facilities and commercial paper issuances. Our floating rate bank revolving
credit facility, Bridge Loan and commercial paper program expose us to market
risk for changes in interest rates. We have not employed interest rate hedging
to mitigate the risks with respect to our floating rate facilities. We believe
that our recent Eurobond offering, which is a fixed rate obligation, mitigates
the risks with respect to our variable rate financing.
Prior to the acquisition of MEXX, we mitigated the risks associated with changes
in foreign currency rates through foreign exchange forward contracts to hedge
transactions denominated in foreign currencies for periods of less than one year
and to hedge expected payment of intercompany transactions with our non-U.S.
subsidiaries. Gains and losses on contracts, which hedge specific foreign
currency denominated commitments are recognized in the period in which the
transaction is completed. See Note 14 of "NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS" for information regarding our forward contracts as of June
30, 2001. The acquisition of MEXX, which transacts business in foreign
currencies, will increase the Company's exposure to exchange rate fluctuations.
The Company is currently reviewing various alternatives to hedge its increased
exposure to foreign currency exchange rate fluctuations and expects to implement
a program in the third quarter.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In January 1999, two actions were filed in California naming as defendants more
than a dozen United States-based apparel companies that source garments from
Saipan (Commonwealth of the Northern Mariana Islands) and a large number of
Saipan-based garment factories. The actions assert that the Saipan factories
engage in unlawful practices relating to the recruitment and employment of
foreign workers and that the apparel companies, by virtue of their alleged
relationships with the factories, have violated various federal and state laws.
One action, filed in California
20
Superior Court in San Francisco by a union and three public interest groups,
alleges unfair competition and false advertising (the "State Court Action"). The
State Court Action seeks equitable relief, unspecified amounts for restitution
and disgorgement of profits, interest and an award of attorney's fees. The
second, filed in Federal Court for the Central District of California and later
transferred to the District of Hawaii, is brought on behalf of a purported class
consisting of the Saipan factory workers (the "Federal Action"). The Federal
Action alleges claims under the civil RICO statute and the Alien Tort Claims
Act, premised on supposed violations of the federal anti-peonage and indentured
servitude statutes, as well as other violations of Saipan and international law,
and seeks equitable relief and unspecified damages, including treble and
punitive damages, interest and an award of attorney's fees. A third action,
brought in Federal Court in Saipan solely against the garment factory defendants
on behalf of a putative class of their workers, alleges violations of federal
and Saipanese wage and employment laws. The Company sources products in Saipan
but was not named as a defendant in the actions. The Company and certain other
apparel companies not named as defendants were advised in writing, however, that
they would be added as parties if a consensual resolution of the complaint
claims could not be reached. In the wake of that notice, which was accompanied
by a draft complaint, the Company entered into settlement negotiations and
subsequently entered into an agreement to settle all claims that were or could
have been asserted in the Federal or State Court Action. To date, more than a
dozen other apparel companies have also settled these claims. As part of the
settlement, the Company has since been named as a defendant, along with certain
other settling apparel companies, in a Federal Court action styled Doe I, et al.
v. Brylane, L.P. et al., (the "Brylane Action"), initially brought in the United
States District Court for the District of Hawaii, that mirror portions of the
larger State and Federal Actions but does not include RICO and certain of the
other claims alleged in those Actions. The newly filed action against the
Company will remain inactive unless the settlement is not finally approved by
the Federal Court. The settlement agreements concluded by the Company and other
retailers are subject to federal court approval, which has been delayed by
virtue of the Hawaii District Court's June 23, 2000 decision to transfer the
Federal Action to Saipan. Plaintiffs petitioned the Ninth Circuit Court of
Appeals for a Writ of Mandamus reversing that ruling. On March 22, 2001, the
Court of Appeals denied Plaintiff's petition, and the Federal Action and the
Brylane Action have been transferred to Saipan. Under the terms of the
settlement agreement, if the settlement does not receive final federal court
approval, the Company will be entitled to a refund of the entire settlement
amount except for funds of up to $10,000 spent on costs of notice. Because the
litigation is at a preliminary stage, with virtually no merits discovery having
taken place, if the settlement is not executed or is not finally approved by the
federal court, we cannot at this juncture determine the likelihood of a
favorable or unfavorable outcome or the magnitude of the latter if it were to
occur. Although the outcome of any such litigation cannot be determined with
certainty, management is of the opinion that the final outcome should not have a
material adverse effect on the Company's financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's 2001 Annual Meeting of Stockholders held on May 17, 2001, the
stockholders of the Company (i) ratified the appointment of Arthur Andersen LLP
as independent public accountants of the Company for the fiscal year ending
December 29, 2001 (the number of affirmative votes cast was 47,240,311, the
number of negative votes cast was 379,239, and the number of abstentions was
165,708), and (ii) elected the following nominees to the Company's Board of
Directors, to serve until the 2004 annual meeting of stockholders and until
their respective successors are duly elected and qualified.
Votes
Nominee For Withheld
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Raul J. Fernandez 46,959,287 825,971
Kenneth P. Kopelman 46,977,870 807,388
Arthur C. Martinez 46,973,262 811,996
ITEM 5. STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE
Statements contained herein and in future filings by the Company with the
Securities and Exchange Commission (the "SEC"), in the Company's press releases,
and in oral statements made by, or with the approval of, authorized personnel
that relate to the Company's future performance, including, without limitation,
statements with respect to the Company's anticipated results of operations or
level of business for 2001, or any other future period, are forward-looking
statements within the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Such statements, which are indicated by words or
phrases such as "plan", "anticipate", "estimate", "project", "management
expects", "the Company believes", "remains optimistic" or "currently envisions"
and similar phrases
21
are based on current expectations only, and are subject to
certain risks, uncertainties and assumptions. Should one or more of these risks
or uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those anticipated, estimated or
projected.
Among the factors that could cause actual results to materially differ include
changes in regional, national, and global microeconomic and macroeconomic
conditions, including the levels of consumer confidence and spending, consumer
income growth, higher personal debt levels, rising energy costs, fluctuations in
foreign currency exchange rates, increasing interest rates and increased stock
market volatility; risks related to retailer and consumer acceptance of the
Company's products; risks associated with competition and the marketplace,
including the financial condition of, and consolidations, restructurings and
other ownership changes in, the apparel (and related products) industry and the
retail industry, the introduction of new products or pricing changes by the
Company's competitors, and the Company's ability to effectively remain
competitive with respect to product, value and service; risks associated with
the Company's dependence on sales to a limited number of large department store
customers, including risks related to customer requirements for vendor margin
support, and those related to extending credit to customers; risks relating to
retailers' buying patterns and purchase commitments for apparel products in
general and the Company's products specifically; the Company's ability to
correctly balance the level of its commitments with actual orders; the Company's
ability to effectively distribute its product within its targeted markets; risks
related to the Company's ability to establish, defend and protect its trademarks
and other proprietary rights and other risks relating to managing intellectual
property issues; uncertainties relating to the Company's ability to successfully
implement its growth strategies, integrate recent or future acquisitions,
maintain product licenses, or successfully launch new products and lines; risks
associated with the entry into new markets, either through internal development
activities or acquisitions; risks associated with the possible inability of the
Company's unaffiliated manufacturers to manufacture and deliver products in a
timely manner, to meet quality standards or to comply with the Company's
policies regarding labor practices; and risks associated with changes in social,
political, economic and other conditions affecting foreign operations and
sourcing.
With respect to foreign sourcing, the Company notes that legislation which would
further restrict the importation and/or increase the cost of textiles and
apparel produced abroad has been periodically introduced in Congress. Although
it is unclear whether any new legislation will be enacted into law, it appears
likely that various new legislative or executive initiatives will be proposed.
These initiatives may include a reevaluation of the trading status of certain
countries, and/or retaliatory duties, quotas or other trade sanctions, which, if
enacted, would increase the cost of products purchased from suppliers in such
countries. In light of the very substantial portion of the Company's products,
which are manufactured by foreign suppliers, the enactment of new legislation or
the administration of current international trade regulations, or executive
action affecting international textile agreements could adversely affect the
Company's operations.
The Company from time to time reviews its possible entry into new markets,
either through internal development activities, acquisitions or licensing. The
entry into new markets (including the development and launch of new product
categories and product lines), such as the Company's entry into the moderate
market, the acquisition of businesses, such as the Company's acquisitions of
MEXX, SEGRETS, LUCKY BRAND DUNGAREES, LAUNDRY and MONET, and the licensing of
brands such as DKNY(R) JEANS and DKNY(R) ACTIVE, CITY DKNY(R), KENNETH COLE NEW
YORK, REACTION KENNETH COLE and UNLISTED.COM, are accompanied by risks inherent
in any such new business venture and may require methods of operations and
marketing and financial strategies different from those employed in the
Company's other businesses. Moreover, certain new businesses may be lower margin
businesses and may require the Company to achieve significant cost efficiencies.
In addition, new markets, product categories, product lines and businesses may
involve buyers, store customers and/or competitors different from the Company's
historical buyers, customers and competitors. Furthermore, the Company's
acquisition of other businesses entails the normal risks inherent in such
transactions, including, without limitation, possible difficulties, delays
and/or unanticipated costs in integrating the business, operations, personnel,
and/or systems of the acquired entity; risks that projected or satisfactory
level of sales, profits and/or return on investment will not be generated; risks
that expenditures required for capital items or working capital will be higher
than anticipated; risks involving the Company's ability to retain and
appropriately motivate key personnel of the acquired business; and risks
associated with unanticipated events and unknown or uncertain liabilities. In
addition, businesses licensed by the Company are subject to risks inherent in
such transactions, including compliance with terms set forth in the applicable
license agreements, including among other things the maintenance of certain
levels of sales, and the public perception and/or acceptance of the licensor's
brands or other product lines, which are not within the Company's control.
22
Reference is also made to the other economic, competitive, governmental and
technological factors affecting the Company's operations, markets, products,
services and prices as are set forth in our 2000 Annual Report on Form 10-K,
including, without limitation, those set forth under the heading
"Business-Competition; Certain Risks".
The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10* Agency Agreement between Liz Claiborne, Inc., Citibank, N.A. and Dexia
Banque Internationale A Luxembourg.
(b) Current Reports on Form 8-K.
A Current Report on Form 8-K dated May 16, 2001 was filed with the SEC by
the Company announcing that it had entered into a Share Purchase Agreement
to acquire all of the outstanding ordinary and preference shares of Mexx
Group B.V.
A Current Report on Form 8-K dated May 23, 2001 and amended on July 20,
2000 was filed with the SEC by the Company describing the Company's
acquisition of Mexx Group B.V.
A Current Report on Form 8-K dated July 20, 2001 was filed with the SEC by
the Company relating to its 2001 second quarter earnings.
* Filed herewith.
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SIGNATURES
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PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.
DATE: August 14, 2001
LIZ CLAIBORNE, INC.
By: /s/ Michael Scarpa By: /s/ Elaine H. Goodell
----------------------------- -------------------------------------
MICHAEL SCARPA ELAINE H. GOODELL
Vice President - Vice President - Corporate Controller
Chief Financial Officer and Chief Accounting Officer
(Principal financial officer) (Principal accounting officer)