SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 4, 2003
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ......................to.........................
Commission file number: 1-10689
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LIZ CLAIBORNE, INC.
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(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
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(Registrant's telephone number, including area
code)
Indicate by check whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
----- -----
Indicate by check whether the registrant is an accelerated filer (as
defined in Rule 12B-2 of the Exchange Act). Yes X No .
----- -----
The number of shares of Registrant's Common Stock, par value $1.00 per
share, outstanding at November 7, 2003 was 109,125,654.
2
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
OCTOBER 4, 2003
PAGE
NUMBER
------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of October 4, 2003,
December 28, 2002 and September 28, 2002...................... 3
Condensed Consolidated Statements of Income for the Nine and
Three Month Periods Ended October 4, 2003 and September 28,
2002.......................................................... 4
Condensed Consolidated Statements of Cash Flows for the Nine
Month Periods Ended October 4, 2003 and September 28, 2002.... 5
Notes to Condensed Consolidated Financial Statements............ 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................ 22
Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 34
Item 4. Controls and Procedures......................................... 36
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................... 36
Item 5. Other Information............................................... 37
Item 6. Exhibits and Reports on Form 8-K................................ 37
SIGNATURES ............................................................ 39
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(All amounts in thousands except share data)
(Unaudited) (Unaudited)
October 4, December 28, September 28,
2003 2002 2002
------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents $ 120,571 $ 239,524 $ 218,911
Marketable securities 47,603 36,808 37,618
Accounts receivable - trade, net 596,121 370,468 548,900
Inventories, net 529,443 461,154 476,361
Deferred income taxes 44,171 45,877 40,292
Other current assets 72,658 49,340 40,561
------------ ------------ ------------
Total current assets 1,410,567 1,203,171 1,362,643
------------ ------------ ------------
Property and Equipment - Net 400,701 378,303 372,200
Goodwill - Net 492,062 478,869 349,955
Intangibles - Net 244,240 226,577 173,785
Other Assets 6,877 9,398 7,597
------------ ------------ ------------
Total Assets $ 2,554,447 $ 2,296,318 $ 2,266,180
============ ============ ============
Liabilities and Stockholders' Equity
Current Liabilities:
Short-term borrowings $ 18,313 $ 21,989 $ 242
Accounts payable 251,104 252,993 220,113
Accrued expenses 236,225 283,458 263,127
Income taxes payable 35,822 26,241 37,225
------------ ------------ ------------
Total current liabilities 541,464 584,681 520,707
------------ ------------ ------------
Long-Term Debt 434,238 377,725 454,134
Other Non-Current Liabilities 7,734 6,412 5,478
Deferred Income Taxes 46,618 33,709 49,629
Commitments and Contingencies
Minority Interest 9,168 7,430 6,823
Stockholders' Equity:
Preferred stock, $.01 par value, authorized shares -
50,000,000, issued shares - none -- -- --
Common stock, $1 par value, authorized shares -
250,000,000, issued shares - 176,437,234 176,437 176,437 176,437
Capital in excess of par value 108,994 95,708 97,920
Retained earnings 2,466,117 2,283,692 2,232,927
Unearned compensation expense (3,292) (10,185) (14,099)
Accumulated other comprehensive loss (35,763) (28,317) (23,792)
------------ ------------ ------------
2,712,493 2,517,335 2,469,393
Common stock in treasury, at cost, 67,452,696, 69,401,831
and 69,630,073 shares (1,197,268) (1,230,974) (1,239,984)
------------ ------------ ------------
Total stockholders' equity 1,515,225 1,286,361 1,229,409
------------ ------------ ------------
Total Liabilities and Stockholders' Equity $ 2,554,447 $ 2,296,318 $ 2,266,180
============ ============ ============
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
4
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(All amounts in thousands, except per common share data)
(Unaudited)
Nine Months Ended Three Months Ended
---------------------------------------------------------------
(40 Weeks) (39 Weeks) (13 Weeks) (13 Weeks)
October 4, September 28, October 4, September 28,
2003 2002 2003 2002
---------------------------------------------------------------
Net Sales $ 3,209,208 $ 2,723,610 $ 1,174,192 $ 1,041,200
Cost of goods sold 1,807,775 1,547,239 654,303 583,558
------------ ------------ ------------ ------------
Gross Profit 1,401,433 1,176,371 519,889 457,642
Selling, general & administrative expenses 1,052,517 885,592 356,803 319,573
------------ ------------ ------------ ------------
Operating Income 348,916 290,779 163,086 138,069
Other (expense) income - net (2,360) (2,182) (1,804) (1,268)
Interest expense - net (22,689) (17,961) (7,866) (6,348)
------------ ------------ ------------ ------------
Income Before Provision for Income Taxes 323,867 270,636 153,416 130,453
Provision for income taxes 117,240 97,429 55,537 46,963
------------ ------------ ------------ ------------
Net Income $ 206,627 $ 173,207 $ 97,879 $ 83,490
============ ============ ============ ============
Net Income per Weighted Average Share, Basic $1.93 $1.64 $0.91 $0.79
Net Income per Weighted Average Share, Diluted $1.89 $1.62 $0.89 $0.78
Weighted Average Shares, Basic 107,187 105,447 107,959 105,862
Weighted Average Shares, Diluted 109,275 107,035 110,325 107,329
Dividends Paid per Common Share $0.17 $0.17 $0.06 $0.06
===== ===== ===== =====
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
5
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(All dollar amounts in thousands)
(Unaudited)
Nine Months Ended
--------------------------------
(40 Weeks) (39 Weeks)
October 4, September 28,
2003 2002
--------------------------------
Cash Flows from Operating Activities:
Net income $ 206,627 $ 173,207
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 77,413 70,640
Deferred income taxes 10,719 8,373
Other - net 9,317 2,777
Change in current assets and liabilities, exclusive of
acquisitions:
Increase in accounts receivable - trade (212,085) (184,856)
(Increase) decrease in inventories (56,110) 24,151
(Increase) in other current assets (19,546) (159)
(Decrease) in accounts payable (12,672) (18,838)
(Decrease) increase in accrued expenses (5,095) 24,300
Increase in income taxes payable 16,756 32,389
------------ ------------
Net cash provided by operating activities 15,324 131,984
------------ ------------
Cash Flows from Investing Activities:
Purchases of investment instruments (64) (62)
Purchases of property and equipment (72,506) (65,939)
Payments for acquisitions (101,138) (26,517)
Payments for in-store merchandise shops (5,390) (7,602)
Other - net 424 966
------------ ------------
Net cash used in investing activities (178,674) (99,154)
------------ ------------
Cash Flows from Financing Activities:
(Payments for) proceeds from short-term debt (3,676) 242
Commercial paper - net 15,314 34,540
Proceeds from exercise of common stock options 39,100 28,398
Dividends paid (18,114) (17,819)
------------ ------------
Net cash provided by financing activities 32,624 45,361
------------ ------------
Effect of Exchange Rate Changes on Cash 11,773 13,085
------------ ------------
Net Change in Cash and Cash Equivalents (118,953) 91,276
Cash and Cash Equivalents at Beginning of Period 239,524 127,635
------------ ------------
Cash and Cash Equivalents at End of Period $ 120,571 $ 218,911
============ ============
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
6
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements of Liz Claiborne, Inc. and its
wholly-owned and majority-owned subsidiaries (the "Company") included herein
have been prepared, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC"). Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
have been condensed or omitted from this report, as is permitted by such rules
and regulations; however, the Company believes that the disclosures are adequate
to make the information presented not misleading. It is suggested that these
condensed financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's latest annual report on
Form 10-K. Results of acquired companies are included in our operating results
from the date of acquisition, and, therefore, operating results on a
period-to-period basis are not comparable. Information presented as of December
28, 2002 is derived from audited statements. Certain items previously reported
in specific captions in the accompanying financial statements have been
reclassified to conform to the current period's classifications.
In the opinion of management, the information furnished reflects all
adjustments, all of which are of a normal recurring nature, necessary for a fair
presentation of the results for the reported interim periods. Results of
operations for interim periods are not necessarily indicative of results for the
full year.
SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The Company is engaged primarily in the design and marketing of a broad range of
apparel, accessories and fragrances.
PRINCIPLES OF CONSOLIDATION
The condensed consolidated financial statements include the accounts of the
Company. All intercompany balances and transactions have been eliminated in
consolidation.
USE OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent gains and losses at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Estimates by their nature are based on judgments and
available information. Therefore, actual results could differ from those
estimates. It is possible such changes could occur in the near term.
Critical accounting policies are those that are most important to the portrayal
of the Company's financial condition and the results of operations, and require
management's most difficult, subjective and complex judgments, as a result of
the need to make estimates about the effect of matters that are inherently
uncertain. The Company's most critical accounting policies, discussed below,
pertain to revenue recognition, accounts receivable - trade, inventories,
goodwill and other intangibles, accrued expenses and derivative instruments. In
applying such policies, management must use some amounts that are based upon its
informed judgments and best estimates. Because of the uncertainty inherent in
these estimates, actual results could differ from estimates used in applying the
critical accounting policies. Changes in such estimates, based on more accurate
future information, may affect amounts reported in future periods. The Company
is not aware of any reasonably likely events or circumstances which would result
in different amounts being reported that would materially affect its financial
condition or results of operations.
Revenue Recognition
- -------------------
Revenue within the Company's wholesale operations is recognized at the time
title and the risk of loss passes and merchandise has been shipped from the
Company's distribution centers or contractors. Wholesale revenue is recorded net
of returns, discounts and allowances. Returns and allowances require
pre-approval from management. Discounts are based on trade terms. Estimates for
end of season allowances are based on historic trends, seasonal results, an
evaluation of current economic conditions and retailer performance. The
Company's historical estimates
7
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
of these costs have not differed materially from actual results. Retail store
revenues are recognized at the time of sale to consumers. Retail revenues are
recorded net of returns. Licensing revenues are accrued at the contractually
guaranteed minimum levels.
Accounts Receivable - Trade, Net
- --------------------------------
In the normal course of business, the Company extends credit to customers, which
satisfy pre-defined credit criteria. Accounts Receivable - Trade, Net, as shown
on the Condensed Consolidated Balance Sheets, is net of allowances and
anticipated discounts. An allowance for doubtful accounts is determined through
analysis of the aging of accounts receivable at the date of the financial
statements, assessments of collectibility based on historic trends and an
evaluation of the impact of economic conditions. An allowance for discounts is
based on those discounts relating to open invoices where trade discounts have
been extended to customers. Costs associated with potential returns of
unsaleable products as well as allowable customer markdowns and operational
charge backs, net of expected recoveries, are included as a reduction to net
sales and are part of the provision for allowances included in Accounts
Receivable - Trade, Net. These provisions result from divisional seasonal
negotiations as well as historic deduction trends net of expected recoveries and
the evaluation of current market conditions. The Company's historical estimates
of these costs have not differed materially from actual results.
Inventories, Net
- ----------------
Inventories are stated at lower of cost (using the first-in, first-out method)
or market. The Company continually evaluates the composition of its inventories
assessing slow-turning, ongoing product as well as prior seasons' fashion
product. Market value of distressed inventory is valued based on historical
sales trends for this category of inventory of the Company's individual product
lines, the impact of market trends and economic conditions, and the value of
current orders in-house relating to the future sales of this type of inventory.
Estimates may differ from actual results due to quantity, quality and mix of
products in inventory, consumer and retailer preferences and market conditions.
The Company's historical estimates of these costs have not differed materially
from actual results.
Goodwill And Other Intangibles
- ------------------------------
In 2002 the Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142
requires that goodwill and intangible assets with indefinite lives are to no
longer be amortized, but rather be tested at least annually for impairment. This
pronouncement also requires that intangible assets with definite lives continue
to be amortized over their respective lives to their estimated residual values,
and reviewed for impairment in accordance with SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." Trademarks that are owned are no
longer amortized, as they have been deemed to have indefinite lives. Such
trademarks are reviewed at least annually for potential value impairment.
Trademarks that are licensed by the Company from third parties are amortized
over the individual terms of the respective license agreements, which range from
5 to 15 years. Intangible merchandising rights are amortized over a period of
four years.
The recoverability of the carrying values of all long-lived assets with definite
lives is reevaluated when changes in circumstances indicate the assets' value
may be impaired. Impairment testing is based on a review of forecasted operating
cash flows and the profitability of the related business. For the nine-month
periods ended October 4, 2003 and September 28, 2002, there were no material
adjustments to the carrying values of any long-lived assets resulting from these
evaluations.
Accrued Expenses
- ----------------
Accrued expenses for employee insurance, workers' compensation, profit sharing,
contracted advertising, professional fees, and other outstanding Company
obligations are assessed based on claims experience and statistical trends, open
contractual obligations, or estimates based on projections and current
requirements as appropriate.
Derivative Instruments and Foreign Currency Risk Management Programs
- --------------------------------------------------------------------
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended and interpreted, requires 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
8
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
that changes in the derivative's fair value be recognized currently in earnings
in either income (loss) from continuing operations or Accumulated other
comprehensive income (loss) to the extent the qualifying hedge is effective.
The Company uses foreign currency forward contracts and options for the specific
purpose of hedging the exposure to variability in probable future cash flows
associated with inventory purchases and sales collections from transactions
associated primarily with the Company's European and Canadian entities and other
specific activities and the swapping of variable interest rate debt for fixed
rate debt in connection with the synthetic lease. These instruments are
designated as cash flow hedges and, in accordance with SFAS No. 133, effective
changes in fair value are included in Accumulated other comprehensive income
(loss), net of related tax effects, with the corresponding asset or liability
recorded in the balance sheet. The ineffective portion of the cash flow hedge,
if any, is recognized in current-period earnings. Amounts in Accumulated other
comprehensive income (loss) are reclassified to current-period earnings when the
hedged transaction affects earnings.
The Company hedges its net investment position in Euro. To accomplish this, the
Company borrows directly in foreign currency and designates a portion of foreign
currency debt as a hedge of net investments. Under SFAS No. 133, changes in the
fair value of these instruments are immediately recognized in foreign currency
translation adjustment, a component of Accumulated other comprehensive income
(loss), to offset the change in the value of the net investment being hedged.
Occasionally, the Company purchases short-term foreign currency contracts and
options to mitigate quarter-end balance sheet and other expected exposures.
These derivative instruments do not qualify as cash flow hedges under SFAS No.
133 and are recorded at fair value with all gains or losses, which have not been
significant, recognized in current period earnings immediately.
OTHER SIGNIFICANT ACCOUNTING POLICIES
Fair Value of Financial Instruments
- -----------------------------------
The fair value of cash and cash equivalents, receivables and accounts payable
approximates their carrying value due to their short-term maturities. The fair
value of long-term debt instruments approximates the carrying value and is
estimated based on the current rates offered to the Company for debt of similar
maturities.
Cash And Cash Equivalents
- -------------------------
All highly liquid investments with an original maturity of three months or less
at the date of purchase are classified as cash equivalents.
Marketable Securities
- ---------------------
Investments are stated at market. The estimated fair value of the marketable
securities is based on quoted prices in an active market. Gains and losses on
investment transactions are determined using the specific identification method
and are recognized in income based on settlement dates. Unrealized gains and
losses on securities held for sale are included in Accumulated other
comprehensive income (loss) until realized. Interest is recognized when earned.
All marketable securities are considered available-for-sale.
Property And Equipment
- ----------------------
Property and equipment is stated at cost less accumulated depreciation and
amortization. Buildings and building improvements are depreciated using the
straight-line method over their estimated useful lives of 20 to 39 years.
Machinery and equipment and furniture and fixtures are depreciated using the
straight-line method over their estimated useful lives of three to seven years.
Leasehold improvements are amortized over the shorter of the remaining lease
term or the estimated useful lives of the assets.
Foreign Currency Translation
- ----------------------------
Assets and liabilities of non-U.S. subsidiaries have been translated at
period-end exchange rates. Revenues and expenses have been translated at average
rates of exchange in effect during the quarter. Resulting translation
adjustments have been included in Accumulated other comprehensive income (loss).
Gains and losses on translation of intercompany loans with foreign subsidiaries
of a long-term investment nature are also included in this component of
stockholders' equity.
9
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Cost of Goods Sold
- ------------------
Cost of goods sold includes the expenses incurred to acquire and produce
inventory for sale, including product costs, freight-in, import costs and
provisions for shrinkage.
Advertising, Promotion and Marketing
- ------------------------------------
All costs associated with advertising, promoting and marketing of Company
products are expensed during the periods when the activities take place. Costs
associated with cooperative advertising programs under which the Company, at its
discretion, agrees to share costs, under negotiated contracts, of customers'
advertising and promotional expenditures, are expensed when the related revenues
are recognized.
Shipping and handling costs
- ---------------------------
Shipping and handling costs are included as a component of Selling, General &
Administrative Expenses in the Condensed Consolidated Statements of Income.
Stock-based compensation
- ------------------------
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related Interpretations in accounting for its
stock-based compensation plans. Accordingly, no compensation cost has been
recognized for its fixed stock option grants. Had compensation costs for the
Company's stock option grants been determined based on the fair value at the
grant dates for awards under these plans in accordance with SFAS No. 123
"Accounting for Stock-Based Compensation," the Company's net income and earnings
per share would have been reduced to the pro forma amounts as follows:
Nine Months Ended Three Months Ended
---------------------------------------------------------------
(40 Weeks) (39 Weeks) (13 Weeks) (13 Weeks)
October 4, September 28, October 4, September 28,
(In thousands except for per share data) 2003 2002 2003 2002
- ---------------------------------------- ---------------------------------------------------------------
Net income:
As reported $ 206,627 $ 173,207 $ 97,879 $ 83,490
Total stock-based employee compensation
expense determined under fair value
based method for all awards*, net of tax 13,929 12,633 5,002 4,211
------------ ------------ ------------ ------------
Pro forma $ 192,698 $ 160,574 $ 92,877 $ 79,279
============ ============ ============ ============
Basic earnings per share:
As reported $1.93 $1.64 $0.91 $0.79
Pro forma $1.81 $1.54 $0.87 $0.76
Diluted earnings per share:
As reported $1.89 $1.62 $0.89 $0.78
Pro forma $1.78 $1.51 $0.85 $0.75
<FN>
* "All awards" refers to awards granted, modified, or settled in fiscal
periods beginning after December 15, 1994 - that is, awards for which the
fair value was required to be measured under SFAS No. 123
</FN>
For this purpose, the fair value of each option grant is estimated on the date
of grant using the Black-Scholes option-pricing model with the following
weighted average assumptions used for grants in 2003 and 2002 respectively:
dividend yield of 0.6% and 0.8%, expected volatility of 38% and 39%, risk free
interest rates of 3.1% and 2.7% and expected lives of five years and five years.
Fiscal Year
- -----------
The Company's fiscal year ends on the Saturday closest to December 31. The 2003
fiscal year reflects a 53-week period resulting in a 40-week nine-month period,
as compared to the 2002 fiscal year, which reflected a 52-week period and
39-week nine-month period.
10
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Cash Dividend and Common Stock Repurchase
- -----------------------------------------
On October 1, 2003, the Company's Board of Directors declared a quarterly cash
dividend on the Company's common stock at the rate of $0.05625 per share, to be
paid on December 15, 2003 to stockholders of record at the close of business on
November 25, 2003. As of November 7, 2003, the Company has $218.3 million
remaining in buyback authorization under its share repurchase program.
Prior Years' Reclassification
- -----------------------------
Certain items previously reported in specific captions in the accompanying
financial statements and notes have been reclassified to conform to the current
year's classifications.
2. ACQUISITIONS AND LICENSING COMMITMENTS
On April 7, 2003, the Company acquired 100 percent of the equity interest of
Juicy Couture, Inc. (formerly, Travis Jeans, Inc.) ("Juicy Couture"). Based in
Southern California, Juicy Couture is a premium designer, marketer and
wholesaler of sophisticated basics for women, men and children and is recognized
around the world as a leading contemporary brand of casual lifestyle clothing.
Juicy Couture had sales of approximately $47 million in 2002. The total purchase
price consisted of (i) a payment, including the assumption of debt and fees, of
approximately $47.0 million, and (ii) a contingent payment equal to 30% of the
equity value of Juicy Couture to be determined as a multiple of Juicy Couture's
earnings for one of the years ended 2005, 2006 or 2007. The selection of the
measurement year for the contingent payment is at either party's option. The
Company estimates that, if the 2005 measurement year is selected, the contingent
payment would be in the range of approximately $72 - $76 million. Based upon
preliminary evaluation information, which is subject to revision, $27.3 million
of the purchase price has been allocated to indefinite lived Intangible assets
and $3.4 million has been allocated to Goodwill. Unaudited pro forma information
related to this acquisition is not included, as the impact of this transaction
is not material to the consolidated results of the Company.
On September 30, 2002, the Company acquired 100 percent of the equity interest
of Ellen Tracy, Inc., which was a privately held fashion apparel company, and
its related companies (collectively, "Ellen Tracy") for a purchase price of
approximately $175.6 million, including the assumption of debt. Ellen Tracy
designs, wholesales and markets women's sportswear. Based in New York City,
Ellen Tracy sells its products predominantly to select specialty stores and
upscale department stores at "bridge" price points which are somewhat higher
than the Company's core better-priced businesses. Brands include Ellen Tracy,
Linda Allard Ellen Tracy and Company Ellen Tracy. Ellen Tracy achieved net sales
of approximately $171 million in 2001. The fair market value of assets acquired
was $87.1 million (including (i) $60.3 million of trademarks and (ii) a
reduction of the fair market value of assets of $1.1 million from December 28,
2002 primarily due to a change in a deferred tax asset) and liabilities assumed
were $44.1 million resulting in goodwill of approximately $132.6 million.
Unaudited pro forma information related to this acquisition is not included, as
the impact of this transaction is not material to the consolidated results of
the Company.
On July 9, 2002, the Company acquired 100 percent of the equity interest of Mexx
Canada, Inc., a privately held fashion apparel and accessories company ("Mexx
Canada"). Based in Montreal, Mexx Canada operated as a third party distributor
(both at wholesale and through its own retail operations) in Canada for the
Company's Mexx business and, in 2001, had sales of 83 million Canadian dollars
(or approximately $54 million based on the exchange rate in effect during that
period). The total purchase price consisted of: (a) an initial cash payment made
at the closing date of $15.2 million; (b) a second payment made at the end of
the first quarter 2003 of 26.4 million Canadian dollars (or $17.9 million based
on the exchange rate as of April 5, 2003); and (c) a contingent payment equal to
28% of the equity value of Mexx Canada to be determined as a multiple of Mexx
Canada's earnings and cash flow performance for the year ended either 2004 or
2005. The selection of the measurement year for the contingent payment is at
either party's option. The Company estimates that if the 2004 measurement year
is selected, this payment would be in the range of approximately 35 - 45 million
Canadian dollars (or $26 - 33 million based on the exchange rate as of October
4, 2003). The total Goodwill assigned to this acquisition is $34.2 million.
Unaudited pro forma information related to this acquisition is not included, as
the impact of this transaction is not material to the consolidated results of
the Company.
11
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In June 2002, the Company consummated an exclusive license agreement with
Kellwood Company ("Kellwood") under which Kellwood was granted the license to
design, manufacture, market, sell and distribute men's dress shirts under the
Claiborne label in North America commenced with the Spring 2003 selling season.
The line, which will be produced by Kellwood's subsidiary, Smart Shirts Ltd., a
global manufacturer of men's shirts, was previously produced and sold by the
Company's Claiborne Men's division. Under the agreement, Kellwood is obligated
to pay a royalty equal to a percentage of net sales of the Claiborne products.
The initial term of the license runs through December 31, 2005; the licensee has
an option to renew for two additional 3-year periods if certain sales thresholds
are met.
In connection with the May 23, 2001 acquisition of Mexx Group B.V. ("Mexx"), the
Company agreed to make a contingent payment equal to 28% of the equity value of
Mexx to be determined as a multiple of Mexx's earnings and cash flow performance
for the year ended 2003, 2004 or 2005. The selection of the measurement year is
at either party's option. The Company estimates that if the 2003 measurement
year is selected, the contingent payment will be in the range of approximately
144 - 150 million Euros ($167 - $174 million based on the exchange rate as of
October 4, 2003).
3. COMPREHENSIVE INCOME
Comprehensive income is comprised of net income, the effects of foreign currency
translation, changes in the spot value of Eurobonds designated as a net
investment hedge, changes in unrealized gains and losses on securities and
changes in the fair value of cash flow hedges. Total comprehensive income for
interim periods was as follows:
Nine Months Ended Three Months Ended
---------------------------------------------------------------
(40 Weeks) (39 Weeks) (13 Weeks) (13 Weeks)
October 4, September 28, October 4, September 28,
(Dollars in thousands) 2003 2002 2003 2002
- ---------------------- ---------------------------------------------------------------
Net income $ 206,627 $ 173,207 $ 97,879 $ 83,490
Other comprehensive income (loss), net of tax:
Foreign currency translation gain (loss) 28,475 13,085 5,690 (2,895)
Foreign currency translation of Eurobond (41,200) (32,250) (4,415) 4,531
Changes in unrealized gains (losses) on
securities 6,848 2,920 7,988 (6,876)
Changes in fair value of cash flow hedges (1,569) (2,201) 1,119 (1,193)
------------ ------------ ------------ ------------
Total comprehensive income, net of tax $ 199,181 $ 154,761 $ 108,261 $ 77,057
============ ============ ============ ============
Accumulated other comprehensive income (loss) consists of the following:
October 4, December 28, September 28,
(Dollars in thousands) 2003 2002 2002
- ---------------------- -----------------------------------------------
Foreign currency translation (loss) $ (34,369) $ (21,644) $ (21,313)
(Losses) on cash flow hedging derivatives (7,678) (6,109) (2,451)
Unrealized gains (losses) on securities 6,284 (564) (28)
------------ ------------- ------------
Accumulated other comprehensive (loss), net
of tax $ (35,763) $ (28,317) $ (23,792)
============ ============ ============
12
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. MARKETABLE SECURITIES
The following is a summary of available-for-sale marketable securities at
October 4, 2003, December 28, 2002 and September 28, 2002:
October 4, 2003
--------------------------------------------
Unrealized Estimated
-------------------
(Dollars in thousands) Cost Gains Losses Fair Value
- ---------------------- --------------------------------------------
Equity securities $ 29,000 $ 12,415 $ -- $ 41,415
Other holdings 8,753 -- (2,565) 6,188
--------- --------- -------- ---------
Total $ 37,753 $ 12,415 $ (2,565) $ 47,603
========= ========= ======== =========
December 28, 2002
--------------------------------------------
Unrealized Estimated
-------------------
(Dollars in thousands) Cost Gains Losses Fair Value
- ---------------------- --------------------------------------------
Equity securities $ 29,000 $ 2,590 $ -- $ 31,590
Other holdings 8,689 -- (3,471) 5,218
--------- --------- -------- ---------
Total $ 37,689 $ 2,590 $ (3,471) $ 36,808
========= ========= ======== =========
September 28, 2002
--------------------------------------------
Unrealized Estimated
-------------------
(Dollars in thousands) Cost Gains Losses Fair Value
- ---------------------- --------------------------------------------
Equity securities $ 29,000 $ 3,805 $ -- $ 32,805
Other holdings 8,661 -- (3,848) 4,813
--------- --------- -------- ---------
Total $ 37,661 $ 3,805 $ (3,848) $ 37,618
========= ========= ======== =========
For the three and nine months ended October 4, 2003 and September 28, 2002,
there were no realized gains or losses on sales of available-for-sale
securities. The net adjustments to unrealized holding gains and losses on
available-for-sale securities for the three months ended October 4, 2003 and
September 28, 2002 were a gain of $7,988,000 (net of $4,532,000 in taxes) and a
loss of $6,876,000 (net of $3,867,000 in taxes), respectively, and the net
adjustments to unrealized holding gains and losses on available-for-sale
securities for the nine months ended October 4, 2003 and September 28, 2002 were
gain of $6,848,000 (net of $3,882,000 in taxes) and a gain of $2,920,000 (net of
$1,643,000 in taxes), respectively, which were included in Accumulated other
comprehensive loss.
5. INVENTORIES, NET
Inventories are stated at the lower of cost (using the first-in, first-out
method) or market and consist of the following:
October 4, December 28, September 28,
(Dollars in thousands) 2003 2002 2002
- ---------------------- -----------------------------------------------
Raw materials $ 25,431 $ 26,069 $ 25,860
Work in process 9,748 5,824 7,140
Finished goods 494,264 429,261 443,361
------------ ------------ ------------
Total $ 529,443 $ 461,154 $ 476,361
============ ============ ============
13
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following:
October 4, December 28, September 28,
(Dollars in thousands) 2003 2002 2002
- ---------------------- -----------------------------------------------
Land and buildings $ 140,311 $ 140,311 $ 144,299
Machinery and equipment 332,066 313,161 317,628
Furniture and fixtures 136,314 122,815 118,590
Leasehold improvements 271,309 235,859 223,380
------------ ------------ ------------
880,000 812,146 803,897
Less: Accumulated depreciation
and amortization 479,299 433,843 431,697
------------ ------------ ------------
Total property and equipment, net $ 400,701 $ 378,303 $ 372,200
============ ============ ============
7. GOODWILL AND INTANGIBLES, NET
In 2002 the Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142
requires that goodwill and intangible assets with indefinite useful lives are no
longer to be amortized, but will rather be tested at least annually for
impairment. SFAS No. 142 also requires that intangible assets with finite useful
lives will continue to be amortized over their respective useful lives to their
estimated residual values, and reviewed for impairment in accordance with SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."
Trademarks that are owned are no longer amortized, as they have been deemed to
have indefinite lives. Such trademarks are reviewed at least annually for
potential value impairment. The Company adopted the provisions of SFAS No. 142
effective December 30, 2001. The Company is currently performing its annual
impairment analysis as of the first day of the third quarter of 2003. No
impairment is expected to be recorded as a result of this evaluation.
The following table discloses the carrying value of all the intangible assets:
October 4, December 28, September 28,
(Dollars in thousands) 2003 2002 2002
- ---------------------- -----------------------------------------------
Amortized intangible assets:
- ----------------------------
Gross Carrying Amount:
Licensed trademarks $ 42,849 $ 42,849 $ 42,849
Merchandising rights 79,310 73,920 92,089
------------ ------------ ------------
Subtotal $ 122,159 $ 116,769 $ 134,938
------------ ------------ ------------
Accumulated Amortization:
Licensed trademarks $ (13,033) $ (10,184) $ (8,322)
Merchandising rights (54,242) (42,064) (54,587)
------------ ------------ ------------
Subtotal $ (67,275) $ (52,248) $ (62,909)
------------ ------------ ------------
Net:
Licensed trademarks $ 29,816 $ 32,665 $ 34,527
Merchandising rights 25,068 31,856 37,502
------------ ------------ ------------
Total amortized intangible
assets, net $ 54,884 $ 64,521 $ 72,029
============ ============ ============
Unamortized intangible assets:
- ------------------------------
Owned trademarks $ 189,356 $ 162,056 $ 101,756
------------ ------------ ------------
Total intangible assets $ 244,240 $ 226,577 $ 173,785
============ ============ ============
Intangible amortization expense was $15.0 million for the nine months ended
October 4, 2003 and $16.6 million for the nine months ended September 28, 2002.
14
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The estimated intangible amortization expense for the next five years is as
follows:
(In thousands)
Fiscal Year Amortization Expense
- ----------------------------------------------------------------
2003 $ 19.6
2004 16.0
2005 9.5
2006 5.0
2007 3.3
The changes in carrying amount of goodwill for the nine months ended October 4,
2003 are as follows:
Wholesale Wholesale
(Dollars in thousands) Apparel Non-Apparel Total
- ---------------------- -----------------------------------------------
Balance December 28, 2002 $ 469,050 $ 9,819 $ 478,869
Acquisition of Juicy Couture 3,440 -- 3,440
Reversal of unused purchase accounting reserves (3,894) (224) (4,118)
Translation difference 5,240 -- 5,240
Revision to preliminary purchase price
allocation of Ellen Tracy 5,131 -- 5,131
Additional purchase price of Lucky Brands 3,500 -- 3,500
------------ ------------ ------------
Balance October 4, 2003 $ 482,467 $ 9,595 $ 492,062
============ ============ ============
There is no goodwill recorded in our retail segment.
8. DEBT
On August 7, 2001, the Company issued 350 million Euro (or $307.2 million based
on the exchange rate in effect on such date), of 6.625% notes due in 2006 (the
"Eurobonds"). The Eurobonds are listed on the Luxembourg Stock Exchange and
received a credit rating of BBB from Standard & Poor's and Baa2 from Moody's
Investor Services. The net proceeds of the issuance were primarily used to
finance the Company's acquisition of Mexx on May 23, 2001. Interest on the
Eurobonds is being paid on an annual basis until maturity. As of October 4,
2003, December 28, 2002 and September 28, 2002, the balance outstanding of these
bonds was 350 million Euro ($406.6 million at the exchange rate in effect on
October 4, 2003). These bonds are designated as a hedge of our net investment in
Mexx. As of October 4, 2003, Accumulated other comprehensive income (loss)
reflects approximately $97 million in unrealized exchange rate losses related to
these bonds.
On October 17, 2003, the Company received a $375 million, 364-day unsecured
financing commitment under a bank revolving credit facility, replacing the
existing $375 million, 364-day unsecured credit facility scheduled to mature in
October 2003, and on October 21, 2002, the Company received a $375 million,
three-year bank revolving credit facility (collectively, the "Agreement"). The
aforementioned bank facility replaced an existing $750 million bank facility
which was scheduled to mature in November 2003. The three-year facility includes
a $75 million multi-currency revolving credit line which permits the Company to
borrow in U.S. dollars, Canadian dollars and Euro. Repayment of outstanding
balances of the 364-day facility can be extended for one year after the maturity
date. The Agreement has two borrowing options, an "Alternative Base Rate"
option, as defined in the Agreement, and a Eurocurrency rate option with a
spread based on the Company's long-term credit rating. The Agreement contains
certain customary covenants, including financial covenants requiring the Company
to maintain specified debt leverage and fixed charge coverage ratios, and
covenants restricting the Company's ability to, among other things, incur
indebtedness, grant liens, make investments and acquisitions, and sell assets.
The Company believes it is in compliance with such covenants. The Agreement may
be directly drawn upon, or used, to support the Company's $750 million
commercial paper program, which is used from time to time to fund working
capital and other general corporate requirements. The Company's ability to
obtain funding through its commercial paper program is subject to, among other
things, the Company maintaining an investment-grade credit rating. At October 4,
2003, the Company had no commercial paper outstanding and a total of $44.7
million of borrowings
15
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
from the Agreement and other sources denominated in foreign currencies at an
average interest rate of 2.8%. The borrowings under the Agreement are classified
as long-term debt as of October 4, 2003 as the Company intends to refinance such
obligations on a long-term basis and believes it is able to do so.
As of October 4, 2003, the Company had lines of credit aggregating $411 million,
which were primarily available to cover trade letters of credit. At October 4,
2003, December 28, 2002 and September 28, 2002, the Company had outstanding
trade letters of credit of $264 million, $291 million and $267 million,
respectively. These letters of credit, which have terms ranging from one to ten
months, primarily collateralize the Company's obligations to third parties for
the purchase of inventory. With the exception of the Eurobonds, which mature in
2006, substantially all of the Company's debt will mature in 2003 and will be
refinanced under existing credit lines.
The Company's Canadian and European subsidiaries also have unsecured lines of
credit totaling approximately $85 million (based on the exchange rates as of
October 4, 2003). These lines of credit bear interest at rates based on indices
specified in the contracts plus a margin. The lines of credit are in effect for
less than one year and mature at various dates in 2004. These lines are
guaranteed by the Company.
9. CONTINGENCIES AND COMMITMENTS
On May 22, 2001, the Company entered into an off-balance sheet financing
arrangement (commonly referred to as a "synthetic lease") to acquire various
land and equipment and construct buildings and real property improvements
associated with warehouse and distribution facilities in Ohio and Rhode Island.
The leases expire on November 22, 2006, with renewal subject to the consent of
the lessor. The lessor under the operating lease arrangements is an independent
third-party limited liability company, which has contributed equity of 5.75% of
the $63.7 million project costs. The leases include guarantees by the Company
for a substantial portion of the financing and options to purchase the
facilities at original cost; the maximum guarantee is approximately $54 million.
The guarantee becomes effective if the Company declines to purchase the
facilities at the end of the lease and the lessor is unable to sell the property
at a price equal to or greater than the original cost. The Company selected this
financing arrangement to take advantage of the favorable financing rates such an
arrangement afforded as opposed to the rates available under alternative real
estate financing options. The lessor financed the acquisition of the facilities
through funding provided by third-party financial institutions. The lessor has
no affiliation or relationship with the Company or any of its employees,
directors or affiliates, and the Company's transactions with the lessor are
limited to the operating lease agreements and the associated rent expense that
will be included in Selling, general & administrative expense in the Condensed
Consolidated Statements of Income. In January 2003, the FASB issued
Interpretation No. 46, "Consolidation of Variable Interest Entities (an
interpretation of ARB No. 51)" ("FIN 46") (see Note 15 of Notes to Condensed
Consolidated Financial Statements). The third party lessor does not meet the
definition of a variable interest entity under FIN 46, and therefore
consolidation by the Company is not required.
The Company has not entered into any other off-balance sheet arrangements.
Various legal actions are pending against the Company. Although the outcome of
any such actions cannot be determined with certainty, management is of the
opinion that the final outcome of any of these actions should not have a
material adverse effect on the Company's results of operations or financial
position.
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
relationship with the factories, have violated various federal and state laws.
One action, filed in California 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 the United States District Court
for the Central District of California, and later transferred to the District of
Hawaii and, in Spring 2001, to the United States District Court for the District
of the Northern Mariana Islands, is brought on behalf of a purported class
consisting of the Saipan factory workers (the "Federal Action"). The Federal
Action alleges
16
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 "FLSA Action").
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 Actions. Eighteen other apparel companies also settled these claims at
that time. As part of the settlement, the Company was 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"), currently
pending in the United States District Court for the District of the Northern
Mariana Islands. The Brylane Action mirrors portions of the larger Federal
Action but does not include RICO and certain of the other claims alleged in that
case.
After the transfer of the Federal Action and the Brylane Action to Saipan, the
Court ruled on and denied in most material respects the non-settling defendants'
motion to dismiss the Federal Action. The court in Saipan held a hearing on
February 14, 2002 on Plaintiffs' motions to certify the proposed class and to
preliminarily approve the settlement. On May 10, 2002, the court issued an
opinion and order granting preliminary approval of the settlement and of similar
settlements with certain other retailers and also certifying the proposed class.
The Ninth Circuit Court of Appeals subsequently denied the non-settling
defendants' petition for interlocutory review of the grant of class
certification. At the end of September 2002, plaintiffs and all of the factory
and retailer non-settling defendants other than Levi Strauss & Co. reached
agreement to settle the Federal Action, the State Court Action and the FLSA
action. At a hearing held on October 31, 2002, the Court granted conditional
preliminary approval of the September 2002 settlement and scheduled a Fairness
Hearing to determine whether to grant final approval to the prior settlement
agreements and the September 2002 settlement. The Fairness Hearing was held on
March 22, 2003. At the conclusion, the Court reserved final decision on whether
to approve the settlement agreements and the September 2002 settlement. On April
23, 2003, the Court entered an Order and Final Judgment Approving Settlement and
Dismissing with Prejudice the Brylane Action. Management is of the opinion that
implementation of the terms of the approved settlement will not have a material
adverse effect on the Company's financial position or results of operations.
10. RESTRUCTURING CHARGE
In December 2002, the Company recorded a net restructuring charge of $7.1
million (pretax), representing a charge of $9.9 million in connection with the
closure of the 22 remaining domestic Liz Claiborne brand specialty stores,
offset by a $2.8 million reversal of liabilities recorded in connection with the
December 2001 restructuring that are no longer required. This determination to
close the stores is intended to eliminate redundancy between this retail format
and the wide department store base in which Liz Claiborne products are
available. The $9.9 million charge includes costs associated with lease
obligations ($5.4 million), asset write-offs ($3.3 million) and other store
closing costs ($1.2 million); of these amounts, approximately $6.6 million is
expected to be paid out in cash. The remaining balance of the 2002 restructuring
liability as of October 4, 2003 was $4.1 million. The Company expects that these
activities will be substantially complete by December 2003.
17
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A summary of the changes in the restructuring reserves is as follows:
Estimated
Operating & Occupancy
Store Closure Administrative Costs & Asset
(Dollars in millions) Costs Exit Costs Write Downs Total
- --------------------- ----------------------------------------------------------------
Balance at December 28, 2002 $ 7.8 $ 1.1 $ 2.5 $ 11.4
Spending for nine months ended October 4, 2003 (4.1) (0.9) (2.3) (7.3)
------ ------ ------ ------
Balance at October 4, 2003 $ 3.7 $ 0.2 $ 0.2 $ 4.1
====== ====== ====== ======
11. EARNINGS PER COMMON SHARE
The following is a reconciliation of the shares outstanding used in the
calculation of basic and diluted earnings per share:
Nine Months Ended Three Months Ended
---------------------------------------------------------------
October 4 September 28, October 4, September 28,
(Amounts in thousands) 2003 2002 2003 2002
- ---------------------- ---------------------------------------------------------------
Weighted average common shares outstanding 107,187 105,447 107,959 105,862
Effect of dilutive securities:
Stock options and restricted stock grants 2,088 1,588 2,366 1,467
------------ ------------ ------------ ------------
Weighted average common shares outstanding and
common share equivalents 109,275 107,035 110,325 107,329
============ ============ ============ ============
12. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS SUPPLEMENTARY DISCLOSURES
During the nine months ended October 4, 2003, the Company made income tax
payments of $89,895,000 and interest payments of $26,980,000. During the nine
months ended September 28, 2002, the Company made income tax payments of
$56,851,000 and interest payments of $23,753,000.
13. SEGMENT REPORTING
The Company operates the following business segments: Wholesale Apparel,
Wholesale Non-Apparel and Retail. The Wholesale Apparel segment consists of
women's and men's apparel designed and marketed worldwide under various
trademarks owned by the Company or licensed by the Company from third-party
owners, including wholesale sales of women's, men's and children's apparel
designed and marketed in Europe, Canada, the Asia-Pacific Region and the Middle
East under the Mexx brand names. The Wholesale Non-Apparel segment consists of
accessories, jewelry and cosmetics designed and marketed worldwide under certain
owned or licensed trademarks. The Retail segment consists of our worldwide
retail operations that sell most of these apparel and non-apparel products to
the public through our specialty retail stores, outlet stores, and concession
stores. As a result of the Company's 2001 acquisition of Mexx, the Company also
presents its results on a geographic basis between Domestic (wholesale customers
and Company specialty retail and outlet stores located in the United States) and
International (wholesale customers and Company specialty retail, outlet and
concession stores located outside of the United States). The Company, as
licensor, also licenses to third parties the right to produce and market
products bearing certain Company-owned trademarks; the resultant royalty income
is not allocated to any of the specified operating segments, but is rather
included in the line "Sales from external customers" under the caption
"Corporate/ Eliminations."
The Company evaluates performance and allocates resources based on operating
profits or losses. The accounting policies of the reportable segments are the
same as those described in the summary of significant accounting policies in our
2002 Annual Report on Form 10-K. Intersegment sales are recorded at cost. There
is no intercompany profit
18
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
or loss on intersegment sales, however, the wholesale segments are credited with
their proportionate share of the operating profit generated by the Retail
segment. The profit credited to the wholesale segments from the Retail segment
is eliminated in consolidation.
The Company's segments are business units that offer either different products
or distribute similar products through different distribution channels. The
segments are each managed separately because they either manufacture and
distribute distinct products with different production processes or distribute
similar products through different distribution channels.
For the Nine Months Ended October 4, 2003
--------------------------------------------------------------------------
Wholesale Wholesale Corporate/
(Dollars in thousands) Apparel Non-Apparel Retail Eliminations Total
- ---------------------- -------------- -------------- -------------- -------------- --------------
NET SALES:
Total net sales $ 2,340,361 $ 399,911 $ 588,630 $ (119,694) $ 3,209,208
Intercompany sales (128,416) (13,642) -- 142,058 --
----------- ----------- ----------- ----------- -----------
Sales from external customers $ 2,211,945 $ 386,269 $ 588,630 $ 22,364 $ 3,209,208
=========== =========== =========== =========== ===========
OPERATING INCOME:
Total operating income (loss) $ 280,634 $ 41,932 $ 48,537 $ (22,187) $ 348,916
Intercompany segment operating
income (loss) (31,149) (6,529) -- 37,678 --
----------- ----------- ----------- ----------- -----------
Segment operating income (loss)
from external customers $ 249,485 $ 35,403 $ 48,537 $ 15,491 $ 348,916
=========== =========== =========== =========== ===========
For the Nine Months Ended September 28, 2002
--------------------------------------------------------------------------
Wholesale Wholesale Corporate/
(Dollars in thousands) Apparel Non-Apparel Retail Eliminations Total
- ---------------------- -------------- -------------- -------------- -------------- --------------
NET SALES:
Total net sales $ 1,995,452 $ 365,162 $ 501,782 $ (138,786) $ 2,723,610
Intercompany sales (137,319) (16,988) -- 154,307 --
----------- ----------- ----------- ----------- -----------
Sales from external customers $ 1,858,133 $ 348,174 $ 501,782 $ 15,521 $ 2,723,610
=========== =========== =========== =========== ===========
OPERATING INCOME:
Total operating income (loss) $ 243,386 $ 32,161 $ 40,347 $ (25,115) $ 290,779
Intercompany segment operating
income (loss) (25,561) (7,780) -- 33,341 --
----------- ----------- ----------- ----------- -----------
Segment operating income (loss)
from external customers $ 217,825 $ 24,381 $ 40,347 $ 8,226 $ 290,779
=========== =========== =========== =========== ===========
For the Three Months Ended October 4, 2003
--------------------------------------------------------------------------
Wholesale Wholesale Corporate/
(Dollars in thousands) Apparel Non-Apparel Retail Eliminations Total
- ---------------------- -------------- -------------- -------------- -------------- --------------
NET SALES:
Total net sales $ 858,726 $ 153,194 $ 204,909 $ (42,637) $ 1,174,192
Intercompany sales (44,320) (5,491) -- 49,811 --
----------- ----------- ----------- ----------- -----------
Sales from external customers $ 814,406 $ 147,703 $ 204,909 $ 7,174 $ 1,174,192
=========== =========== =========== =========== ===========
OPERATING INCOME:
Total operating income (loss) $ 128,865 $ 22,163 $ 20,610 $ (8,552) $ 163,086
Intercompany segment operating
income (loss) (11,338) (2,836) -- 14,174 --
----------- ----------- ----------- ----------- -----------
Segment operating income (loss)
from external customers $ 117,527 $ 19,327 $ 20,610 $ 5,622 $ 163,086
=========== =========== =========== =========== ===========
19
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For the Three Months Ended September 28, 2002
--------------------------------------------------------------------------
Wholesale Wholesale Corporate/
(Dollars in thousands) Apparel Non-Apparel Retail Eliminations Total
- ---------------------- -------------- -------------- -------------- -------------- --------------
NET SALES:
Total net sales $ 760,718 $ 153,701 $ 178,382 $ (51,601) $ 1,041,200
Intercompany sales (49,494) (7,853) -- 57,347 --
----------- ----------- ----------- ----------- -----------
Sales from external customers $ 711,224 $ 145,848 $ 178,382 $ 5,746 $ 1,041,200
=========== =========== =========== =========== ===========
OPERATING INCOME:
Total operating income (loss) $ 108,304 $ 20,593 $ 17,644 $ (8,472) $ 138,069
Intercompany segment operating
income (loss) (8,838) (3,202) -- 12,040 --
----------- ----------- ----------- ----------- -----------
Segment operating income (loss)
from external customers $ 99,466 $ 17,391 $ 17,644 $ 3,568 $ 138,069
=========== =========== =========== =========== ===========
October 4, December 28, September 28,
(Dollars in thousands) 2003 2002 2002
- ---------------------- ---------------------------------------------
SEGMENT ASSETS:
Wholesale Apparel $ 1,941,857 $ 1,505,014 $1,512,235
Wholesale Non-Apparel 220,987 176,728 231,590
Retail 510,967 430,201 402,900
Corporate 169,837 460,605 243,201
Eliminations (289,201) (276,230) (123,746)
----------- ----------- -----------
Total assets $ 2,554,447 $ 2,296,318 $2,266,180
=========== =========== ==========
GEOGRAPHIC DATA:
Nine Months Ended Three Months Ended
------------------------------------------------------------
October 4, September 28, October 4, September 28,
(Dollars in thousands) 2003 2002 2003 2002
- ---------------------- ------------------------------------------------------------
NET SALES:
Domestic sales $ 2,523,280 $ 2,235,584 $ 906,272 $ 836,255
International sales 685,928 488,026 267,920 204,945
----------- ----------- ----------- -----------
Total net sales $ 3,209,208 $ 2,723,610 $ 1,174,192 $ 1,041,200
=========== =========== =========== ===========
OPERATING INCOME:
Domestic operating income $ 287,186 $ 254,010 $ 125,898 $ 118,984
International operating income 61,730 36,769 37,188 19,085
----------- ----------- ----------- -----------
Total operating income $ 348,916 $ 290,779 $ 163,086 $ 138,069
=========== =========== =========== ===========
October 4, December 28, September 28,
(Dollars in thousands) 2003 2002 2002
- ---------------------- ---------------------------------------------
TOTAL ASSETS:
Domestic assets $ 1,819,419 $ 1,648,986 $ 1,688,943
International assets 735,028 647,332 577,237
----------- ----------- -----------
Total assets $ 2,554,447 $ 2,296,318 $ 2,266,180
=========== =========== ===========
14. ACCOUNTING FOR DERIVATIVES AND HEDGING ACTIVITIES
At October 4, 2003, the Company had various Euro currency collars outstanding
with a net notional amount of $42 million, maturing through July 2004 with
values ranging between 1.05 and 1.14 U.S. dollar per Euro and average rate
options with a notional amount of $12 million, maturing through December 2003 at
a rate of 0.98 US dollars per Euro as compared to $116 million in similar
contracts at December 28, 2002 and $131 million at September 28,
20
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2002. The Company also had forward contracts maturing through December 2004 to
sell 80 million Euro for $88 million and 14 million Canadian dollars for $10
million. The notional value of the foreign exchange forward contracts was
approximately $98 million at October 4, 2003, as compared with approximately $25
million at December 28, 2002 and approximately $45 million at September 28,
2002. Unrealized losses for outstanding foreign exchange forward contracts and
currency options were approximately $8.5 million at October 4, 2003,
approximately $5.2 million at December 28, 2002 and approximately $744,000 at
September 28, 2002. The ineffective portion of these contracts was not material
and was expensed in the current quarter.
In connection with the variable rate financing under the synthetic lease
agreement, the Company has entered into two interest rate swap agreements with
an aggregate notional amount of $40.0 million that began in January 2003 and
will terminate in May 2006, in order to fix the interest component of rent
expense at a rate of 5.56%. The Company has entered into this arrangement to
provide protection against potential future interest rate increases. The change
in fair value of the effective portion of the interest rate swap is recorded as
a component of Accumulated other comprehensive income (loss) since these swaps
are designated as cash flow hedges. The ineffective portion of these swaps is
recognized currently in earnings and was not material for the nine months ended
October 4, 2003.
15. NEW ACCOUNTING PRONOUNCEMENTS
In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 is effective for financial instruments entered into or modified after
May 31, 2003 and for interim periods beginning after June 15, 2003. The adoption
of SFAS No. 150 did not have a material impact on the Company's results of
operations and financial position.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," to require
more consistent reporting of contracts as either derivatives or hybrid
instruments. SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003. The Company adopted SFAS No. 149 on June 30, 2003. The
adoption of SFAS No. 149 did not have a material impact on the Company's results
of operations and financial position.
In January 2003, the FASB issued FIN 46, which addresses consolidation by
business enterprises of certain variable interest entities, commonly referred to
as special purpose entities. The third party lessor does not meet the definition
of a variable interest entity under FIN 46, and therefore consolidation by the
Company is not required.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on the existing disclosure
requirements for most guarantees, including loan guarantees such as standby
letters of credit. It also clarifies that at the time a company issues a
guarantee, the company must recognize an initial liability for the fair market
value of the obligations it assumes under that guarantee and must disclose that
information in its interim and annual financial statements. The initial
recognition and measurement provisions of FIN 45 apply on a prospective basis to
guarantees issued or modified after December 31, 2002. The adoption of FIN 45
did not have a material impact on the Company's financial statements.
16. SUBSEQUENT EVENT
On November 12, 2003, the Company announced that it has agreed to purchase all
of the equity interest in ENYCE HOLDING LLC ("ENYCE") for a purchase price of
approximately $114 million, including the retirement of debt at closing.
Founded in 1996 by FILA USA and based in New York City, ENYCE is a designer,
marketer and wholesaler of fashion forward streetwear for men and women through
its ENYCE(R) and Lady ENYCE(R) brands. ENYCE is projected to generate net sales
of approximately $95 million in fiscal 2003. Consummation of the transaction is
21
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
subject to review under the provisions of the Hart-Scott-Rodino Act and other
customary closing conditions. The transaction is expected to close in the fourth
quarter of 2003.
ENYCE sells its products primarily through specialty store chains, better
specialty stores and select department stores. The Company also has agreements
with international distributors in Germany, Canada and Japan. Currently, men's
products account for approximately 84% of net sales while women's products
account for the remaining 16% of net sales. Men's and women's products include a
variety of denim-based lifestyle products, outerwear, athletic-inspired apparel,
casual tops and knitwear.
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
General
- -------
We operate the following business segments: Wholesale Apparel, Wholesale
Non-Apparel and Retail.
o Wholesale Apparel consists of women's and men's apparel designed and
------------------
marketed worldwide under various trademarks owned by the Company or
licensed by the Company from third-party owners; this segment includes our
core LIZ CLAIBORNE (career and casual, which includes COLLECTION, LIZSPORT,
LIZWEAR and LIZ & CO.), bridge (DANA BUCHMAN and ELLEN TRACY), men's
(CLAIBORNE), moderate-priced special markets (AXCESS, CRAZY HORSE, EMMA
JAMES, FIRST ISSUE, VILLAGER and J.H. COLLECTIBLES), specialty apparel
(SIGRID OLSEN), premium denim (LUCKY BRAND DUNGAREES) and contemporary
sportswear and dress (LAUNDRY, JUICY COUTURE) businesses, as well as our
licensed DKNY(R)JEANS, DKNY(R)ACTIVE, and CITY DKNY(R)businesses and our
licensed KENNETH COLE NEW YORK and REACTION KENNETH COLE businesses. The
Wholesale Apparel segment also includes wholesale sales of women's, men's
and children's apparel designed and marketed in Europe, Canada, the
Asia-Pacific Region and the Middle East under the MEXX brand names.
o Wholesale Non-Apparel consists of accessories, jewelry and cosmetics
----------------------
designed and marketed worldwide under certain of the above listed and other
owned or licensed trademarks, including our MONET, TRIFARI and MARVELLA
labels.
o Retail consists of our worldwide retail operations that sell most of these
------
apparel and non-apparel products to the public through our 263 outlet
stores, 227 specialty retail stores and 513 international concession stores
(where the retail selling space is either owned and operated by the
department store in which the retail selling space is located or leased and
operated by a third party, while, in each case, the Company owns the
inventory). This segment includes stores operating under the following
formats: MEXX, LUCKY BRAND DUNGAREES, LIZ CLAIBORNE, ELISABETH,
DKNY(R)JEANS, DANA BUCHMAN, ELLEN TRACY, SIGRID OLSEN and MONET, as well as
our Special Brands Outlets which include products from our Special Markets
divisions. On February 20, 2003, we announced our decision to close our 22
LIZ CLAIBORNE specialty retail stores (see Note 10 of Notes to Condensed
Consolidated Financial Statements).
The Company, as licensor, also licenses to third parties the right to produce
and market products bearing certain Company-owned trademarks. The resultant
royalty income is not allocated to any of the specified operating segments, but
is rather included in the line "Sales from external customers" under the caption
"Corporate/Eliminations" in Note 13 of Notes to Condensed Consolidated Financial
Statements.
We also present our results on the following geographic basis:
o Domestic: wholesale customers and Company specialty retail and outlet
--------
stores located in the United States; and
o International: wholesale customers and Company specialty retail and outlet
-------------
stores and concession stores located outside of the United States,
primarily Mexx Group B.V. ("MEXX") and MEXX Canada.
All data and discussion with respect to our specific segments included within
this "Management's Discussion and Analysis" is presented after applicable
intercompany eliminations. Please refer to Note 13 of Notes to Condensed
Consolidated Financial Statements.
In connection with the May 23, 2001 acquisition of MEXX, the Company agreed to
make a contingent payment equal to 28% of the equity value of MEXX to be
determined as a multiple of MEXX's earnings and cash flow performance for the
year ended 2003, 2004 or 2005. The selection of the measurement year is at
either party's option. The Company estimates that if the 2003 measurement year
is selected, the contingent payment would be in the range of approximately 144 -
150 million Euros ($167 - $174 million based on the exchange rate as of October
4, 2003).
On July 9, 2002, we acquired 100 percent of the equity interest of Mexx Canada,
Inc., a privately held fashion apparel and accessories company ("MEXX Canada").
Based in Montreal, MEXX Canada operated as a third party distributor (both at
wholesale and through its own retail operations) in Canada for our MEXX business
and, in 2001, had sales of 83 million Canadian dollars (or approximately $54
million based on the average exchange rate in effect during that period). The
total purchase price consisted of: (a) an initial cash payment made at the
closing date of
23
$15.2 million; (b) a second payment made at the end of the first quarter 2003 of
26.4 million Canadian dollars (or $17.9 million based on the exchange rate in
effect as of April 5, 2003); and (c) a contingent payment equal to 28% of the
equity value of MEXX Canada to be determined as a multiple of MEXX Canada's
earnings and cash flow performance for the year ended either 2004 or 2005. The
selection of the measurement year for the contingent payment is at either
party's option. The Company estimates that if the 2004 measurement year is
selected the payment would be in the range of 35 - 45 million Canadian dollars
(or $26 - 33 million based on the exchange rate in effect at October 4, 2003).
Unaudited pro forma information related to this acquisition is not included, as
the impact of this transaction is not material to our consolidated results.
On September 30, 2002, we acquired 100 percent of the equity interest of Ellen
Tracy, Inc., which was a privately held fashion apparel company, and its related
companies (collectively "Ellen Tracy") for a purchase price of approximately
$175.6 million, including the assumption of debt. Ellen Tracy designs,
wholesales and markets women's sportswear. Based in New York City, Ellen Tracy
sells its products predominantly to select specialty stores and upscale
department stores at bridge price points which are somewhat higher than the
Company's core better-priced businesses. Brands include ELLEN TRACY, LINDA
ALLARD ELLEN TRACY and COMPANY ELLEN TRACY. Ellen Tracy achieved net sales of
approximately $171 million in 2001. Unaudited pro forma information related to
this acquisition is not included, as the impact of this transaction is not
material to our consolidated results.
On April 7, 2003, we acquired 100 percent of the equity interest of Juicy
Couture, Inc. (formerly, Travis Jeans Inc.) ("JUICY COUTURE"). Based in southern
California, JUICY COUTURE is a premium designer, marketer and wholesaler of
sophisticated basics for women, men and children and is recognized around the
world as a leading contemporary brand of casual lifestyle clothing. JUICY
COUTURE sells its products predominantly through select specialty stores and
upscale department stores. JUICY COUTURE had sales of approximately $47 million
in 2002. The total purchase price consisted of (i) a payment, including the
assumption of debt, of approximately $47.0 million, and (ii) a contingent
payment equal to 30% of the equity value of JUICY COUTURE to be determined as a
multiple of JUICY COUTURE's earnings for one of the years ended 2005, 2006 or
2007. The selection of the measurement year for the contingent payment is at
either party's option. We estimate that if the 2005 measurement year is
selected, the contingent payment would be in the range of $72 - $76 million.
Unaudited pro forma information related to this acquisition is not included as
the impact of this transaction is not material to our consolidated results.
On November 12, 2003, we announced that we have agreed to purchase all of the
equity interest in ENYCE HOLDING LLC ("ENYCE") for a purchase price of
approximately $114 million, including the retirement of debt at closing. Founded
in 1996 by FILA USA and based in New York City, ENYCE is a designer, marketer
and wholesaler of fashion forward streetwear for men and women through its
ENYCE(R) and Lady ENYCE(R) brands. ENYCE is projected to generate net sales of
approximately $95 million in fiscal 2003. Consummation of the transaction is
subject to review under the provisions of the Hart-Scott-Rodino Act and other
customary closing conditions. The transaction is expected to close in the fourth
quarter of 2003. ENYCE sells its products primarily through specialty store
chains, better specialty stores and select department stores. The Company also
has agreements with international distributors in Germany, Canada and Japan.
Currently, men's products account for approximately 84% of net sales while
women's products account for the remaining 16% of net sales. Men's and women's
products include a variety of denim-based lifestyle products, outerwear,
athletic-inspired apparel, casual tops and knitwear.
24
THREE MONTHS ENDED OCTOBER 4, 2003 COMPARED TO THREE MONTHS ENDED SEPTEMBER 28,
- -------------------------------------------------------------------------------
2002
- ----
The following table sets forth our operating results for the three months ended
October 4, 2003 compared to the three months ended September 28, 2002 (both
periods are comprised of 13 weeks):
Three months ended Variance
---------------------------------------------------------
October 4, September 28,
Dollars in millions 2003 2002 $ %
- ------------------- ---------------------------------------------------------
Net Sales $ 1,174.2 $ 1,041.2 $ 133.0 12.8%
Gross Profit 519.9 457.6 62.3 13.6%
Selling, general and administrative expenses 356.8 319.5 37.3 11.7%
Operating Income 163.1 138.1 25.0 18.1%
Other (expense) income-net (1.8) (1.3) 0.5 38.5%
Interest (expense) income-net (7.9) (6.3) 1.6 25.4%
Provision for income taxes 55.5 47.0 8.5 18.1%
Net Income 97.9 83.5 14.4 17.3%
Net Sales
- ---------
Net sales for the third quarter of 2003 were a record $1.174 billion, an
increase of $133.0 million, or 12.8% over net sales for the third quarter of
2002. The acquisitions of Ellen Tracy and JUICY COUTURE added approximately
$92.4 million in net sales during the quarter. Approximately $33.4 million of
the increase in the quarter was due to the impact of foreign currency exchange
rate fluctuations, primarily as a result of the strengthening of the Euro. Net
sales results for our business segments are provided below:
o Wholesale Apparel net sales increased $103.2 million, or 14.5%, to $814.4
------------------
million. This result was primarily due to the following:
- The inclusion of $88.3 million of sales of our recently acquired Ellen
Tracy and JUICY COUTURE businesses;
- A $21.7 million increase resulting from foreign currency exchange rate
fluctuations in our international businesses; and
- A $6.8 million overall sales decrease primarily reflecting an
approximate 11.8% decrease in our core Liz Claiborne businesses
partially offset by increases reflecting continued growth in MEXX
Europe (exclusive of foreign currency exchange rate fluctuations) and
the introduction of new products in our Special Markets businesses.
o Wholesale Non-Apparel net sales were up $1.9 million, or 1.3%, to $147.7
----------------------
million.
- The increase resulted primarily from higher unit volume representing
higher demand in our Fashion Accessories and Jewelry businesses.
- These increases were partially offset by a sales decrease in our
Cosmetics business, resulting from lower unit sales reflecting the
difficult retail environment.
- Increases resulting from foreign currency exchange rate fluctuations
were not material in this segment.
o Retail net sales increased $26.5 million, or 14.9%, to $204.9 million. The
------
increase reflected the following:
- The inclusion of $3.7 million reflecting sales from our recently
acquired Ellen Tracy business;
- A $10.7 million increase resulting from foreign currency exchange rate
fluctuations in our international businesses; and
- A $12.1 million increase primarily driven by higher comparable store
sales and the addition of eight new stores over the last twelve months
in our LUCKY BRAND DUNGAREES specialty retail business as well
25
as comparable store sales increases and the addition of nine net new
Specialty Retail and Outlet stores in our MEXX Europe business. These
gains were partially offset by the decreases related to the strategic
decision to close our domestic LIZ CLAIBORNE Specialty Retail stores.
These closures were completed by the end of the second quarter of
2003. Comparable store sales were up 0.6% in our Outlet business and
down 2.1% in our Specialty Retail business.
We ended the quarter with a total of 263 Outlet stores, 227 Specialty
Retail stores and 513 international concession stores.
o Corporate net sales, consisting of licensing revenue, increased $1.4
---------
million, or 24.9%, to $7.2 million as a result of the inclusion of revenues
from new licenses as well as growth in revenues from existing licenses.
Domestic net sales increased by $70.0 million, or 8.4%, to $906.3 million for
- --------
the reasons previously discussed. International net sales increased $63.0
-------------
million, or 30.7% (to $267.9 million), due principally to an increase in sales
of our MEXX Europe business. As previously stated, approximately $33.4 million
of the increase was due to the impact of currency exchange rate fluctuations.
Gross Profit
- ------------
Gross profit increased $62.3 million, or 13.6%, to $519.9 million in the third
quarter of 2003 over the third quarter of 2002. Gross profit as a percent of net
sales increased to 44.3% in 2003 from 44.0% in 2002. The increasing gross profit
rate reflected a continued focus on inventory management and lower sourcing
costs partially offset by slightly higher than planned promotional activity at
retail resulting in additional markdown assistance. The acquisitions of Ellen
Tracy and JUICY COUTURE as well as continued growth in our MEXX Europe business
contributed to the rate increase, as these businesses run at higher gross profit
rates than the Company average.
Selling, General & Administrative Expenses
- ------------------------------------------
Selling, general & administrative expenses ("SG&A") increased $37.3 million, or
11.6%, to $356.8 million, in the third quarter of 2003 over the third quarter of
2002. These expenses as a percent of net sales decreased slightly to 30.4% in
2003 from 30.7% in 2002. The lower SG&A rate primarily reflected the favorable
impact of Company-wide expense control initiatives partially offset by the
increased proportion of expenses related to our MEXX Europe business, which runs
at a higher SG&A rate than the Company average.
Operating Income
- ----------------
Operating income for the third quarter of 2003 was $163.1 million, an increase
of $25.0 million, or 18.1%, over last year. Operating income as a percent of net
sales increased to 13.9% in 2003 compared to 13.3% in 2002. The increase was a
result of lower sourcing costs, Company-wide inventory management and expense
reductions partially offset by additional retailer markdown assistance.
Operating income by business segment is provided below:
o Wholesale Apparel operating income increased $18.1 million to $117.5
------------------
million (14.4% of net sales) in 2003 compared to $99.5 million (14.0% of
net sales) in 2002, principally reflecting the inclusion of our recently
acquired Ellen Tracy and JUICY COUTURE businesses and increased profits in
our MEXX business, partially offset by reduced profits in our core LIZ
CLAIBORNE business as a result of lower sales volume and additional
markdown assistance as well as reduced profits in our Special Markets
businesses as a result of additional markdown assistance.
o Wholesale Non-Apparel operating income was $19.3 million (13.1% of net
----------------------
sales) in 2003 compared to $17.4 million (11.9% of net sales) in 2002,
principally due to increases in our Fashion Accessories and Jewelry
businesses.
o Retail operating income increased $3.0 million to $20.6 million (10.1% of
------
net sales) in 2003 compared to $17.6 million (9.9% of net sales) in 2002,
principally reflecting an increase in profits from our LUCKY BRAND
DUNGAREES and MEXX Europe retail stores, partially offset by start up costs
associated with the opening of our new MEXX USA and Sigrid Olsen stores.
o Corporate operating income, primarily consisting of licensing operating
---------
income, increased $2.1 million, or 57.6%, to $5.6 million.
Domestic operating profit increased by $6.9 million, or 5.8%, to $125.9 million,
- --------
due to the improvements in sales and gross profit discussed above. International
-------------
operating profit increased $18.1 million, or 94.9% to $37.2 million primarily
due to increased profits from our MEXX business.
26
Net Other Expense
- -----------------
Net other expense in the third quarter of 2003 was $1.8 million, principally
comprised of minority interest expense (which relates to the 15% minority
interest in Lucky Brand Dungarees, Inc. and the 2.5% minority interest in
Segrets, Inc.) and, to a lesser extent, other non-operating expenses, compared
to net other expense of $1.3 million in 2002, principally comprised of minority
interest expense.
Net Interest Expense
- --------------------
Net interest expense in the third quarter of 2003 was $7.9 million, compared to
$6.3 million in 2002, both of which were principally related to borrowings
incurred to finance our strategic initiatives, including acquisitions. Foreign
currency exchange rate fluctuations accounted for the majority of the increase.
Provision for Income Taxes
- --------------------------
The provision for income taxes in the third quarter of 2003 reflected a slightly
increased income tax rate at 36.2% versus 36.0% in the prior year due to an
increase in taxes from foreign operations.
Net Income
- ----------
Net income increased in the third quarter of 2003 to $97.9 million, or 8.3% of
net sales, from $83.5 million in the third quarter of 2002, or 8.0% of net
sales. Diluted earnings per common share increased 14.1% to $0.89 in 2003, up
from $0.78 in 2002. Our average diluted shares outstanding increased by 3.0
million shares in the third quarter of 2003 on a period-to-period basis, to
110.3 million, as a result of the exercise of stock options and the effect of
dilutive securities.
NINE MONTHS ENDED OCTOBER 4, 2003 COMPARED TO NINE MONTHS ENDED SEPTEMBER 28,
- -----------------------------------------------------------------------------
2002
- ----
The following table sets forth our operating results for the nine months ended
October 4, 2003 (comprised of 40 weeks) compared to the nine months ended
September 28, 2002 (comprised of 39 weeks):
Nine months ended Variance
---------------------------------------------------------
October 4, September 28,
Dollars in millions 2003 2002 $ %
- ------------------- ---------------------------------------------------------
Net Sales $ 3,209.2 $ 2,723.6 $ 485.6 17.8%
Gross Profit 1,401.4 1,176.4 225.0 19.1%
Selling, general and administrative expenses 1,052.5 885.6 166.9 18.8%
Operating Income 348.9 290.8 58.1 20.0%
Other (expense) income-net (2.4) (2.2) 0.2 9.1%
Interest (expense) income-net (22.7) (18.0) 4.7 26.1%
Provision for income taxes 117.2 97.4 19.8 20.3%
Net Income 206.6 173.2 33.4 19.3%
Net Sales
- ---------
Net sales for the nine months of 2003 were a record $3.209 billion, an increase
of $485.6 million, or 17.8% over net sales for the nine months of 2002. The
acquisitions of Ellen Tracy, JUICY COUTURE and the inclusion of a full nine
month's sales for our recently acquired MEXX Canada business (acquired July
2002) added approximately $224.3 million in net sales for the nine months.
Approximately $104.8 million of the nine-month increase was due to the impact of
foreign currency exchange rate fluctuations, primarily as a result of the
strengthening of the Euro. While the nine months of 2003 was comprised of 40
weeks, as compared to 39 weeks in 2002, we do not believe
27
this extra week had a material impact on our overall sales results for the first
nine months. Net sales results for our business segments are provided below:
o Wholesale Apparel net sales increased $353.8 million, or 19.0%, to $2.212
------------------
billion. The increase was primarily due to the following:
- The inclusion of $180.9 million of sales of our recently acquired
Ellen Tracy and JUICY COUTURE businesses;
- A $63.3 million increase resulting from foreign currency exchange rate
fluctuations in our international businesses; and
- A $109.6 million overall sales increase driven by continued growth in
our MEXX Europe business (excluding the impact of foreign currency
exchange rate fluctuations) and increases in our Special Markets
business primarily reflecting the introduction of new products,
partially offset by an approximate 6.4% decrease in our core LIZ
CLAIBORNE businesses.
o Wholesale Non-Apparel net sales were up $38.1 million, or 10.9%, to $386.3
----------------------
million.
- The increase was primarily the result of increases in our Jewelry and
Handbags businesses, due to higher unit volume resulting from higher
demand.
- These increases were partially offset by a sales decrease in our
Cosmetics business, resulting from reduced prices reflecting the
highly promotional environment partially offset by higher unit sales.
- Increases resulting from foreign currency exchange rate fluctuations
were not material in this segment.
o Retail net sales increased $86.8 million, or 17.3%, to $588.6 million. The
------
increase reflected the following:
- The inclusion of $36.0 million of sales from our recently acquired
Ellen Tracy business and a full nine month's sales from our recently
acquired MEXX Canada business;
- A $38.2 million increase resulting from foreign currency exchange rate
fluctuations in our international businesses; and
- A $12.6 million increase primarily due to the addition of new stores,
partially offset by the decreases related to the strategic decision to
close the domestic LIZ CLAIBORNE specialty stores (which were closed
by the end of the second quarter of 2003). Comparable store sales
overall were down 0.8% in our Specialty Retail business and were down
2.0% in our Outlet stores due in each case to reduced traffic
(excluding the extra week in the 2003 period Specialty Retail
comparable store sales were down 2.5% and Outlet comparable store
sales were down 3.6%).
o Corporate net sales, consisting of licensing revenue, increased $6.8
---------
million to $22.4 million as a result of the inclusion of revenues from new
licenses as well as growth in revenues from existing licenses.
Domestic net sales increased by $287.7 million, or 12.9%, to $2.523 billion for
- --------
the reasons previously discussed. International net sales increased $197.9
-------------
million, or 40.6%, to $685.9 million, due principally to an increase in sales of
our MEXX Europe business as previously discussed and the inclusion of a full
nine month's sales of our MEXX Canada business. As previously stated,
approximately $104.8 million of the increase was due to the impact of currency
exchange rate fluctuations.
Gross Profit
- ------------
Gross profit increased $225.0 million, or 19.1%, to $1.401 billion in the first
nine months of 2003 over the first nine months of 2002. Gross profit as a
percent of net sales increased to 43.7% in 2003 from 43.2% in 2002. The
increasing gross profit rate reflected a continued focus on inventory management
and lower sourcing costs partially offset by higher than planned promotional
activity at retail resulting in additional markdown assistance. The acquisitions
of Ellen Tracy and JUICY COUTURE also contributed to the rate increase, as these
businesses run at higher gross profit rates than the Company average.
Selling, General & Administrative Expenses
- ------------------------------------------
SG&A increased $166.9 million, or 18.8%, to $1.053 billion in the first nine
months of 2003. These expenses as a percent of net sales increased to 32.8% in
2003 from 32.5% in 2002. The higher SG&A rate primarily reflected the increased
proportion of expenses related to our MEXX Europe business, which runs at a
higher SG&A rate than the Company average, partially offset by the favorable
impact of Company-wide expense control initiatives.
28
Operating Income
- ----------------
Operating income for the first nine months of 2003 was $348.9 million, an
increase of $58.1 million, or 20.0%, over last year. Operating income as a
percent of net sales increased to 10.9% in 2003 compared to 10.7% in 2002
primarily as a result of the improved gross margin rate discussed earlier.
Operating income by business segment is provided below:
o Wholesale Apparel operating income increased $31.7 million to $249.5
------------------
million (11.3% of net sales) in 2003 compared to $217.8 million (11.7% of
net sales) in 2002, principally reflecting the inclusion of our recently
acquired businesses and increased profits in our SIGRID OLSEN and MEXX
Europe businesses as well as in our Men's complex, partially offset by
reduced profits in our core LIZ CLAIBORNE businesses.
o Wholesale Non-Apparel operating income increased $11.0 million to $35.4
----------------------
million (9.2% of net sales) in 2003 compared to $24.4 million (7.0% of net
sales) in 2002, principally due to increases in our Cosmetics and Jewelry
businesses.
o Retail operating income increased $8.2 million to $48.5 million (8.2% of
------
net sales) in 2003 compared to $40.3 million (8.0% of net sales) in 2002,
principally reflecting increased gross profit rates in our Outlet stores
and an increase in profits from our MEXX Europe Retail stores, partially
offset by losses in our domestic LIZ CLAIBORNE specialty stores, which are
all now closed.
o Corporate operating income, primarily consisting of licensing operating
---------
income, increased $7.3 million to $15.5 million.
Domestic operating profit increased by $33.2 million, or 13.1%, to $287.2
- --------
million, due to the improvements discussed above. International operating profit
-------------
increased $25.0 million, or 67.9% to $61.7 million primarily due to increased
profits from our MEXX business.
Net Other Expense
- -----------------
Net other expense in the first nine months of 2003 was $2.4 million, principally
comprised of minority interest expense (which relates to the 15% minority
interest in Lucky Brand Dungarees, Inc. and the 2.5% minority interest in
Segrets, Inc.) and, to a lesser extent, other non-operating expenses, compared
to net other expense of $2.2 million in 2002, principally comprised of minority
interest expense partially offset by other non-operating income.
Net Interest Expense
- --------------------
Net interest expense in the first nine months of 2003 was $22.7 million,
compared to $18.0 million in 2002, both of which were principally related to
borrowings incurred to finance our strategic initiatives, including
acquisitions. Foreign currency exchange rate fluctuations accounted for the
majority of the increase.
Provision for Income Taxes
- --------------------------
The provision for income taxes in the first nine months reflected a slightly
increased income tax rate at 36.2% versus 36.0% in the prior year due to an
increase in taxes from foreign operations.
Net Income
- ----------
Net income increased in the first nine months of 2003 to $206.6 million, or 6.4%
of net sales, from $173.2 million in the first nine months of 2002, or 6.4% of
net sales. Diluted earnings per common share increased 16.7% to $1.89 in 2003,
up from $1.62 in 2002. Our average diluted shares outstanding increased by 2.2
million shares in the first nine months of 2003 on a period-to-period basis, to
109.3 million, as a result of the exercise of stock options and the effect of
dilutive securities.
FORWARD OUTLOOK
- ---------------
For the fourth quarter of 2003, we are optimistic that we can achieve a sales
increase of 4 - 6% and earnings per share ("EPS") in the range of $0.63 - $0.66.
For fiscal 2003, we have adjusted our sales guidance for the full year from an
increase of 11 - 13% to an increase of 14 - 15% and our EPS guidance from a
range of $2.49 - $2.55 to a range of $2.52 - $2.55. For fiscal 2004, we will
plan our business in accordance with the challenging and unsettled retail
environment. On October 30, 2003, in connection with our third quarter earnings
release, we announced a forecast of a sales increase of 3 - 6% and EPS in the
range of $2.65 - $2.72 for fiscal 2004.
On November 12, 2003 we announced that we have agreed to purchase all of the
equity interest of ENYCE HOLDING LLC. Consummation of the transaction is subject
to review under the provisions of the Hart-Scott-Rodino Act and other customary
closing conditions. The transaction is expected to close in the fourth quarter
of
29
2003. We expect this transaction to have no impact on Fiscal 2003 EPS and to be
accretive to 2004 EPS by approximately $0.05. Accordingly, we are adjusting our
fiscal 2004 sales guidance from an increase of 3 - 6% to an increase of 5 - 8%
and our EPS guidance from a range of $2.65 - $2.72 to a range of $2.70 - $2.77.
All of these forward-looking statements exclude the impact of any future
acquisitions or stock repurchases. The foregoing forward-looking statements are
qualified in their entirety by the reference to the risks and uncertainties set
forth under the heading "STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE" below.
FINANCIAL POSITION, CAPITAL RESOURCES AND LIQUIDITY
- ---------------------------------------------------
Our primary ongoing cash requirements are to fund growth in working capital
(primarily accounts receivable and inventory) to support projected increased
sales, investment in the technological upgrading of our distribution centers and
information systems and other expenditures related to retail store expansion,
in-store merchandise shops and normal maintenance activities. In 2003 and 2002,
we also required cash to fund our acquisition program. Sources of liquidity to
fund ongoing cash requirements include cash flows from operations, cash and cash
equivalents, securities on hand, our commercial paper program and bank lines of
credit; in 2001, we issued Euro-denominated bonds (the "Eurobonds") to fund our
acquisition of MEXX.
We anticipate that cash flows from operations, our 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. Such sufficiency and availability may be
adversely affected by a variety of factors, including, without limitation,
retailer and consumer acceptance of the Company's products, which may impact the
Company's financial performance, maintenance of the Company's investment grade
credit rating, as well as interest rate and exchange rate fluctuations.
We ended the third quarter of 2003 with $168.2 million in cash and marketable
securities, compared to $276.3 million and $256.5 million at December 28, 2002
and September 28, 2002 respectively, and with $452.6 million of debt outstanding
compared to $399.7 million and $454.4 million at December 28, 2002 and September
28, 2002, respectively. This $161.0 million and $86.5 million increase in our
debt net of cash position over the last nine and twelve months, respectively, is
attributable to the 2002 acquisition of Ellen Tracy and the current year
acquisition of JUICY COUTURE, as well as additional payments made in connection
with the acquisitions of Lucky Brand Dungarees and MEXX Canada as discussed
below and the differences in working capital due to the factors discussed below.
The foreign currency exchange translation on our Eurobond accounted for $41.2
million and $64.4 million of the increase in our debt balance compared to
December 28, 2002 and September 28, 2002. This debt increase was offset by cash
flow from operations on a trailing twelve-month basis of $305.2 million. We
ended the quarter with a record $1.515 billion in stockholders' equity, giving
us a total debt to total capital ratio of 23.0%.
Accounts receivable increased $47.2 million, or 8.6%, at October 4, 2003
compared to September 28, 2002, primarily due to the acquisitions of Ellen Tracy
and JUICY COUTURE. Accounts receivable increased $225.7 million, or 60.9%, at
October 4, 2003 compared to December 28, 2002 due to seasonal timing and
increases in sales. Currency exchange rate fluctuations, primarily the
strengthening of the Euro, were responsible for $20.2 million and $13.5 million
of the increases in accounts receivable, respectively.
Inventories increased $53.1 million, or 11.1%, at October 4, 2003 compared to
September 28, 2002, and increased $68.3 million, or 14.8% at October 4, 2003
compared to December 28, 2002. The increase from December 28, 2002 is a result
of seasonal timing, the acquisition of JUICY COUTURE and increases due to
foreign exchange rate fluctuations. The acquisitions of Ellen Tracy and JUICY
COUTURE as well as new lines of business were responsible for $35.6 million of
the increase from September 28, 2002. Currency exchange rate fluctuations,
primarily the strengthening of the Euro, were responsible for $22.3 million of
the increase from September 28, 2002. Our average inventory turnover rate
increased to 4.8 times for the 12-month period ended October 4, 2003 from 4.7
times for the 12-month period ended December 28, 2002 and 4.5 times for the
12-month period ended September 28, 2002. The Company continues to take a
conservative approach to inventory management in 2003.
Borrowings under our commercial paper and revolving credit facilities peaked at
$136 million during the nine months of 2003; at October 4, 2003, our borrowings
under these facilities were $27.9 million.
Net cash provided by operating activities was $15.3 million in the first nine
months of 2003, compared to $132.0 million provided in 2002. This $116.7 million
change in cash flow was primarily due to a $288.8 million use of
30
cash for working capital in 2003 compared to a $123.0 million in 2002, driven
primarily by year-over-year changes in the accounts receivable and inventory
balances (discussed above), partially offset by the increase in net income of
$33.4 million in the first nine months of 2003 from the first nine months of
2002.
Net cash used in investing activities was $178.7 million in the first nine
months of 2003, compared to $99.2 million in 2002. Net cash used in the first
nine months of 2003 primarily reflected $101.1 million in acquisition related
payments and $77.9 million in capital and in store expenditures. Net cash used
in the first nine months of 2002 primarily reflected $73.5 million in capital
and in-store expenditures and $26.5 million for the purchase of MEXX Canada.
Net cash provided by financing activities was $32.6 million in the first nine
months of 2003, compared to $45.4 million in 2002. The $12.8 million year over
year decrease primarily reflected a $19.2 million reduction in commercial paper
issued in 2003.
Our anticipated capital expenditures for 2003 approximate $95 million, of which
$77.9 million had been expended through October 4, 2003. These expenditures
consisted 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 stores. Capital
expenditures and working capital cash needs will be financed with net cash
provided by operating activities and our revolving credit, trade letter of
credit and other credit facilities.
On October 17, 2003, the Company received a $375 million, 364-day unsecured
financing commitment under a bank revolving credit facility, replacing the
existing $375 million, 364-day unsecured credit facility scheduled to mature in
October 2003, and on October 21, 2002, the Company received a $375 million,
three-year bank revolving credit facility (collectively, the "Agreement"). The
aforementioned bank facility replaced an existing $750 million bank facility
which was scheduled to mature in November 2003. The three-year facility includes
a $75 million multi-currency revolving credit line, which permits the Company to
borrow in U.S. dollars, Canadian dollars and Euro. Repayment of outstanding
balances of the 364-day facility can be extended for one year after the maturity
date. The Agreement has two borrowing options, an "Alternative Base Rate"
option, as defined in the Agreement, and a Eurocurrency rate option with a
spread based on the Company's long-term credit rating. The Agreement contains
certain customary covenants, including financial covenants requiring the Company
to maintain specified debt leverage and fixed charge coverage ratios, and
covenants restricting the Company's ability to, among other things, incur
indebtedness, grant liens, make investments and acquisitions, and sell assets.
The Company believes it is in compliance with such covenants. The Agreement may
be directly drawn upon, or used, to support the Company's $750 million
commercial paper program, which is used from time to time to fund working
capital and other general corporate requirements. The Company's ability to
obtain funding through its commercial paper program is subject to, among other
things, the Company maintaining an investment-grade credit rating. At October 4,
2003, the Company had no commercial paper outstanding and a total of $44.7
million of borrowings from the Agreement and other sources denominated in
foreign currencies at an average interest rate of 2.8%. The borrowings under the
Agreement are classified as long-term debt as of October 4, 2003 as the Company
intends to refinance such obligations on a long-term basis and is able to do so.
On May 22, 2001, the Company entered into an off-balance sheet financing
arrangement (commonly referred to as a "synthetic lease") to acquire various
land and equipment and construct buildings and real property improvements
associated with warehouse and distribution facilities in Ohio and Rhode Island.
The leases expire on November 22, 2006 with renewal subject to the consent of
the lessor. The lessor under the operating lease arrangements is an independent
third-party limited liability company, which has contributed equity of 5.75% of
the $63.7 million project costs. The leases include guarantees by the Company
for a substantial portion of the financing and options to purchase the
facilities at original cost; the maximum guarantee is approximately $54 million.
The guarantee becomes effective if the Company declines to purchase the
facilities at the end of the lease and the lessor is unable to sell the property
at a price equal to or greater than the original cost. The Company selected this
financing arrangement to take advantage of the favorable financing rates such an
arrangement afforded as opposed to the rates available under alternative real
estate financing options. The lessor financed the acquisition of the facilities
through funding provided by third-party financial institutions. The lessor has
no affiliation or relationship with the Company or any of its employees,
directors or affiliates, and the Company's transactions with the lessor are
limited to the operating lease agreements and the associated rent expense that
will be included in Selling, general & administrative expense in the Condensed
Consolidated Statements of Income. In January 2003, the FASB issued
Interpretation No. 46, "Consolidation of Variable Interest Entities (an
interpretation of ARB No. 51)" ("FIN 46") (see Note 15 of
31
Notes to Condensed Consolidated Financial Statements). The third party lessor
does not meet the definition of a variable interest entity under FIN 46, and
therefore consolidation by the Company is not required.
As of October 4, 2003, the Company had lines of credit aggregating $411 million,
which were primarily available to cover trade letters of credit. At October 4,
2003, December 28, 2002 and September 28, 2002, the Company had outstanding
trade letters of credit of $264 million, $291 million and $267 million,
respectively. These letters of credit, which have terms ranging from one to ten
months, primarily collateralize the Company's obligations to third parties for
the purchase of inventory. The fair value of these letters of credit
approximates contract values. With the exception of the Eurobonds, which mature
in 2006, substantially all of the Company's debt will mature in 2003 and will be
refinanced under existing credit lines.
The Company's Canadian and European subsidiaries also have unsecured lines of
credit totaling approximately $85 million (based on the exchange rates as of
October 4, 2003). These lines of credit bear interest at rates based on indices
specified in the contracts plus a margin. The lines of credit are in effect for
less than one year and mature at various dates in 2004. These lines are
guaranteed by the Company.
At October 4, 2003, the Company had various Euro currency collars outstanding
with a net notional amount of $42 million, maturing through July 2004 with
values ranging between 1.05 and 1.14 U.S. dollar per Euro and average rate
options with a notional amount of $12 million, maturing through December 2003 at
a rate of 0.98 US dollars per Euro as compared to $116 million in similar
contracts at December 28, 2002 and $131 million at September 28, 2002. The
Company also had forward contracts maturing through December 2004 to sell 80
million Euro for $88 million and 14 million Canadian dollars for $10 million.
The notional value of the foreign exchange forward contracts was approximately
$98 million at October 4, 2003, as compared with approximately $25 million at
December 28, 2002 and approximately $45 million at September 28, 2002.
Unrealized losses for outstanding foreign exchange forward contracts and
currency options were approximately $8.5 million at October 4, 2003,
approximately $5.2 million at December 28, 2002 and approximately $744,000 at
September 28, 2002. The ineffective portion of these contracts was not material
and was expensed in the current quarter.
In connection with the variable rate financing under the synthetic lease
agreement, the Company has entered into two interest rate swap agreements with
an aggregate notional amount of $40.0 million that began in January 2003 and
will terminate in May 2006, in order to fix the interest component of rent
expense at a rate of 5.56%. The Company has entered into this arrangement to
provide protection against potential future interest rate increases. The change
in fair value of the effective portion of the interest rate swap is recorded as
a component of Accumulated other comprehensive income (loss) since these swaps
are designated as cash flow hedges. The ineffective portion of these swaps is
recognized currently in earnings and was not material for the nine months ended
October 4, 2003.
The Company may be required to make additional payments in connection with its
acquisitions (see Note 2 of Notes to Condensed Consolidated Financial
Statements).
USE OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES
- -------------------------------------------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and revenues and expenses during the
period. Significant accounting policies employed by the Company, including the
use of estimates, are presented in the Notes to Consolidated Financial
Statements in our 2002 Annual Report on Form 10-K.
Critical accounting policies are those that are most important to the portrayal
of the Company's financial condition and the results of operations, and require
management's most difficult, subjective and complex judgments, as a result of
the need to make estimates about the effect of matters that are inherently
uncertain. The Company's most critical accounting policies, discussed below,
pertain to revenue recognition, accounts receivable - trade, net, inventories,
accrued expenses and derivative instruments. In applying such policies
management must use some amounts that are based upon its informed judgments and
best estimates. Because of the uncertainty inherent in these estimates, actual
results could differ from estimates used in applying the critical accounting
policies. The Company is not aware of any reasonably likely events or
circumstances, which would result in different amounts being reported that would
materially affect its financial condition or results of operations.
32
Revenue Recognition
- -------------------
Revenue within our wholesale operations is recognized at the time when
merchandise is shipped from the Company's distribution centers, or if shipped
direct from contractor to customer, when title and the risk of loss passes.
Wholesale revenue is net of returns, discounts and allowances. Discounts and
allowances are recognized when the related revenues are recognized. Retail store
revenues are recognized at the time of sale. Retail revenues are net of returns.
Accounts Receivable - Trade, Net
- --------------------------------
In the normal course of business, the Company extends credit to customers, which
satisfy pre-defined credit criteria. Accounts Receivable - Trade, Net, as shown
on the Condensed Consolidated Balance Sheets, is net of allowances and
anticipated discounts. An allowance for doubtful accounts is determined through
analysis of the aging of accounts receivable at the date of the financial
statements, assessments of collectibility based on historic trends and an
evaluation of the impact of economic conditions. An allowance for discounts is
based on those discounts relating to open invoices where trade discounts have
been extended to customers. Costs associated with potential returns of
unsaleable products as well as allowable customer markdowns and operational
charge backs, net of historical recoveries, are included as a reduction to net
sales and are part of the provision for allowances included in Accounts
Receivable - Trade, Net. These provisions result from divisional seasonal
negotiations as well as historic deduction trends net of historic recoveries and
the evaluation of current market conditions.
Inventories
- -----------
Inventories are stated at lower of cost (using the first-in, first-out method)
or market. The Company continually evaluates the composition of its inventories
assessing slow-turning, ongoing product as well as prior seasons' fashion
product. Market value of distressed inventory is valued based on historical
sales trends for this category of inventory of our individual product lines, the
impact of market trends and economic conditions, and the value of current orders
in house relating to the future sales of this type of inventory.
Accrued Expenses
- ----------------
Accrued expenses for employee insurance, workers' compensation, profit sharing,
contracted advertising, professional fees, and other outstanding Company
obligations are assessed based on claims experience and statistical trends, open
contractual obligations, or estimates based on projections and current
requirements as appropriate.
Derivative Instruments and Foreign Currency Risk Management Programs
- --------------------------------------------------------------------
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended and interpreted, requires 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 in either income (loss) from continuing
operations or Accumulated other comprehensive income (loss) to the extent the
qualifying hedge is effective.
The Company uses foreign currency forward contracts and options for the specific
purpose of hedging the exposure to variability in probable future cash flows
associated with inventory purchases and sales collections from transactions
associated primarily with our European and Canadian entities and other specific
activities and the swapping of variable interest rate debt for fixed rate debt
in connection with the synthetic lease. These instruments are designated as cash
flow hedges and, in accordance with SFAS No. 133, effective changes in fair
value are included in Accumulated other comprehensive income (loss), net of
related tax effects, with the corresponding asset or liability recorded in the
balance sheet. The ineffective portion of the cash flow hedge, if any, is
recognized in current-period earnings. Amounts in Accumulated other
comprehensive income (loss) are reclassified to current-period earnings when the
hedged transaction affects earnings.
The Company hedges its net investment position in Euro. To accomplish this, the
Company borrows directly in foreign currency and designates a portion of foreign
currency debt as a hedge of net investments. Under SFAS No. 133, changes in the
fair value of these instruments are immediately recognized in foreign currency
translation adjustment, a component of Accumulated other comprehensive income
(loss), to offset the change in the value of the net investment being hedged.
33
Occasionally, the Company purchases short-term foreign currency contracts and
options to mitigate quarter-end balance sheet and other expected exposures.
These derivative instruments do not qualify as cash flow hedges under SFAS No.
133 and are recorded at fair value with all gains or losses, which have not been
significant, recognized in current period earnings immediately.
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 fiscal 2003, any fiscal quarter of 2003 or any other
future period, including those herein under the heading "Future Outlook" or
otherwise, are forward-looking statements within the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Such statements, which are
indicated by words or phrases such as "intend," "anticipate," "plan,"
"estimate," "project," "management expects," "the Company believes," "we are
optimistic that we can," "current visibility indicates that we forecast" or
"currently envisions" and similar phrases are based on current expectations
only, and are subject to certain risks, uncertainties and assumptions. Should
one or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
anticipated, estimated or projected. Included among the factors that could cause
actual results to materially differ are risks with respect to the following:
Risks Associated with Competition and the Marketplace
- -----------------------------------------------------
The apparel and related product markets are highly competitive, both within the
United States and abroad. The Company's ability to compete successfully within
the marketplace depends on a variety of factors, including:
o The current challenging retail and macroeconomic environment, including the
levels of consumer confidence and discretionary spending, and levels of
customer traffic within department stores, malls and other shopping and
selling environments;
o The Company's ability to effectively anticipate, gauge and respond to
changing consumer demands and tastes, across multiple product lines,
shopping channels and geographies;
o The Company's ability to translate market trends into appropriate, saleable
product offerings relatively far in advance, while minimizing excess
inventory positions, including the Company's ability to correctly balance
the level of its fabric and/or merchandise commitments with actual customer
orders;
o Consumer and customer demand for, and acceptance and support of, Company
products (especially by the Company's largest customers) which are in turn
dependent, among other things, on product design, quality, value and
service;
o The ability of the Company, especially through its sourcing, logistics and
technology functions, to operate within substantial production and delivery
constraints, including risks associated with the possible failure of the
Company's unaffiliated manufacturers to manufacture and deliver products in
a timely manner, to meet quality standards or to comply with the Company's
policies regarding labor practices or applicable laws or regulations;
o The financial condition of, and consolidations, restructurings and other
ownership changes in, the apparel (and related products) industry and the
retail industry;
o Risks associated with the Company's dependence on sales to a limited number
of large department store customers, including risks related to customer
requirements for vendor margin support, and those related to extending
credit to customers, risks relating to retailers' buying patterns and
purchase commitments for apparel products in general and the Company's
products specifically;
o The Company's ability to respond to the strategic and operational
initiatives of its largest customers, as well as to the introduction of new
products or pricing changes by its competitors; and
o The Company's ability to obtain sufficient retail floor space and to
effectively present products at retail.
Economic, Social and Political Factors
- --------------------------------------
Also impacting the Company and its operations are a variety of economic, social
and political factors, including the following:
o Risks associated with war, the threat of war, and terrorist activities,
including reduced shopping activity as a result of public safety concerns
and disruption in the receipt and delivery of merchandise;
o Changes in national and global microeconomic and macroeconomic conditions
in the markets where the Company sells or sources its products, including
the levels of consumer confidence and discretionary spending,
34
consumer income growth, personal debt levels, rising energy costs and
energy shortages, and fluctuations in foreign currency exchange rates,
interest rates and stock market volatility;
o Changes in social, political, legal and other conditions affecting foreign
operations;
o Risks of increased sourcing costs, including costs for materials and labor;
o Any significant disruption in the Company's relationships with its
suppliers, manufacturers and employees, including its union employees;
o Work stoppages by any Company suppliers or service providers or by the
Company's union employees;
o The enactment of new legislation or the administration of current
international trade regulations, or executive action affecting
international textile agreements, including the United States' reevaluation
of the trading status of certain countries, and/or retaliatory duties,
quotas or other trade sanctions, which, if enacted, would increase the cost
of products purchased from suppliers in such countries; and
o Risks related to the Company's ability to establish, defend and protect its
trademarks and other proprietary rights and other risks relating to
managing intellectual property issues.
Risks Associated with Acquisitions and the Entry into New Markets
- -----------------------------------------------------------------
The Company, as part of its growth strategy, reviews from time to time its
possible entry into new markets, either through acquisitions, internal
development activities, or licensing. The entry into new markets (including the
development and launch of new product categories and product lines), is
accompanied by a variety of risks inherent in any such new business venture,
including the following:
o Risks that the new market activities may require methods of operations and
marketing and financial strategies different from those employed in the
Company's other businesses;
o Certain new businesses may be lower margin businesses and may require the
Company to achieve significant cost efficiencies. In addition, 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;
o Possible difficulties, delays and/or unanticipated costs in integrating the
business, operations, personnel, and/or systems of an acquired business;
o Risks that projected or satisfactory level of sales, profits and/or return
on investment for an acquired business will not be generated;
o Risks involving the Company's ability to retain and appropriately motivate
key personnel of the acquired business;
o Risks that expenditures required for capital items or working capital will
be higher than anticipated;
o Risks associated with unanticipated events and unknown or uncertain
liabilities;
o Uncertainties relating to the Company's ability to successfully integrate
an acquisition, maintain product licenses, or successfully launch new
products and lines; and
o With respect to businesses where the Company acts as licensee, the risks
inherent in such transactions, including compliance with terms set forth in
the applicable license agreements, including among other things the
maintenance of certain levels of sales, and the public perception and/or
acceptance of the licensor's brands or other product lines, which are not
within the Company's control.
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 2002 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in foreign currency exchange
rates and interest rates, which may adversely affect its financial position,
results of operations and cash flows.
In seeking to minimize the risks from interest rate fluctuations, the Company
manages exposures through the use of fixed rate financial instruments and, when
deemed appropriate, through the use of interest rate derivative financial
instruments. The Company does not use financial instruments for trading or other
speculative purposes. However, the Company, from time to time, may use interest
rate derivative financial instruments to help manage its exposure
35
to interest rate movements and reduce borrowing costs. Our objective for holding
interest rate derivative instruments is to decrease the volatility of earnings
and cash flow associated with fluctuation in these rates.
We finance our capital needs through available cash and marketable securities,
operating cash flow, letters of credit, commercial paper issuances, synthetic
lease and bank revolving credit facilities and other credit facilities. Our
commercial paper program, floating rate bank revolving credit facility and bank
lines expose us to market risk for changes in interest rates. We believe that
our Eurobond offering and the interest rate swap agreements, which are fixed
rate obligations, partially mitigate the risks with respect to variable interest
rates given that, as a general matter, fixed rate debt reduces the risk of
potentially higher variable rates.
The acquisitions of MEXX and MEXX Canada, which transact business in foreign
currencies, have increased the Company's exposure to exchange rate fluctuations.
We mitigate the risks associated with changes in foreign currency rates through
foreign exchange forward contracts to hedge transactions denominated in foreign
currencies for periods of generally less than one year and to hedge expected
payment of transactions with our non-U.S. subsidiaries, which now include MEXX
and MEXX Canada. Gains and losses on any ineffective portion of these contracts,
which hedge specific foreign currency denominated commitments, are recognized in
the period in which the transaction affects earnings.
As part of the European Economic and Monetary Union, a single currency (the
"Euro") has replaced the national currencies of the principal European countries
(other than the United Kingdom) in which the Company conducts business and
manufacturing. The conversion rates between the Euro and the participating
nations' currencies were fixed as of January 1, 1999, with the participating
national currencies being removed from circulation between January 1, 2002 and
June 30, 2002 and replaced by Euro notes and coinage. Under the regulations
governing the transition to a single currency, there is a "no compulsion, no
prohibition" rule, which states that no one can be prevented from using the Euro
after January 1, 2002 and no one was obliged to use the Euro before July 2002.
In keeping with this rule, the Company is currently using the Euro for invoicing
and payments. The transition to the Euro did not have a material adverse effect
on the business or consolidated financial condition of the Company.
At October 4, 2003, the Company had $44.7 million of floating rate debt,
representing 9.9% of our total debt outstanding as of such date. Our average
variable rate borrowing for the nine months ended October 4, 2003 was $57.7
million, with an average interest rate of 2.41%. If the nine months' average
rate increased or decreased by 10%, our interest expense would have changed by
$104,000; accordingly, we do not believe that our exposure to interest rate
changes is material.
Reference is also made to our 2002 Annual Report on Form 10-K, under the heading
"Certain Interest Rate and Foreign Currency Risks."
RECENT ACCOUNTING PRONOUNCEMENTS
In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 is effective for financial instruments entered into or modified after
May 31, 2003 and for interim periods beginning after June 15, 2003. The adoption
of SFAS No. 150 did not have a material impact on the Company's results of
operations and financial position.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS No. 149 amends SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," to require
more consistent reporting of contracts as either derivatives or hybrid
instruments. SFAS No. 149 is effective for contracts entered into or modified
after June 30, 2003. The Company adopted SFAS No. 149 on June 30, 2003. The
adoption of SFAS No. 149 did not have a material impact on the Company's results
of operations and financial position.
In January 2003, the FASB issued FIN 46, which addresses consolidation by
business enterprises of certain variable interest entities, commonly referred to
as special purpose entities. The third party lessor does not meet the definition
of a variable interest entity under FIN 46, and therefore consolidation by the
Company is not required.
36
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on the existing disclosure
requirements for most guarantees, including loan guarantees such as standby
letters of credit. It also clarifies that at the time a company issues a
guarantee, the company must recognize an initial liability for the fair market
value of the obligations it assumes under that guarantee and must disclose that
information in its interim and annual financial statements. The initial
recognition and measurement provisions of FIN 45 apply on a prospective basis to
guarantees issued or modified after December 31, 2002. The adoption of FIN 45
did not have a material impact on the Company's financial statements.
ITEM 4. CONTROLS AND PROCEDURES
The Company's management, under the supervision and with the participation of
the Company's Chief Executive Officer and Chief Financial Officer, have
evaluated the Company's disclosure controls and procedures as of October 4,
2003, and have concluded that the Company's disclosure controls and procedures
are effective in ensuring that all material information required to be filed in
this quarterly report has been made known to them in a timely fashion. There was
no change in the Company's internal control over financial reporting during the
third quarter of fiscal 2003 that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Various legal actions are pending against the Company. Although the outcome of
any such actions cannot be determined with certainty, management is of the
opinion that the final outcome of any of these actions should not have a
material adverse effect on the Company's results of operations or financial
position. Please refer to Note 10 and Note 24 of Notes to Consolidated Financial
Statements in our 2002 Annual Report on Form 10-K.
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
relationship with the factories, have violated various federal and state laws.
One action, filed in California 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 the United States District Court
for the Central District of California, and later transferred to the District of
Hawaii and, in Spring 2001, to the United States District Court for the District
of the Northern Mariana Islands, 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 "FLSA Action").
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 Actions. Eighteen other apparel companies also settled these claims at
that time. As part of the settlement, the Company was 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"), currently
pending in the United States District Court for the District of the Northern
Mariana Islands. The Brylane Action mirrors portions of the larger Federal
Action but does not include RICO and certain of the other claims alleged in that
case.
37
After the transfer of the Federal Action and the Brylane Action to Saipan, the
Court ruled on and denied in most material respects the non-settling defendants'
motion to dismiss the Federal Action. The court in Saipan held a hearing on
February 14, 2002 on Plaintiffs' motions to certify the proposed class and to
preliminarily approve the settlement. On May 10, 2002, the court issued an
opinion and order granting preliminary approval of the settlement and of similar
settlements with certain other retailers and also certifying the proposed class.
The Ninth Circuit Court of Appeals subsequently denied the non-settling
defendants' petition for interlocutory review of the grant of class
certification. At the end of September 2002, plaintiffs and all of the factory
and retailer non-settling defendants other than Levi Strauss & Co. reached
agreement to settle the Federal Action, the State Court Action and the FLSA
action. At a hearing held on October 31, 2002, the Court granted conditional
preliminary approval of the September 2002 settlement and scheduled a Fairness
Hearing to determine whether to grant final approval to the prior settlement
agreements and the September 2002 settlement. The Fairness Hearing was held on
March 22, 2003. At the conclusion, the Court reserved final decision on whether
to approve the settlement agreements and the September 2002 settlement. On April
23, 2003, the Court entered an Order and Final Judgment Approving Settlement and
Dismissing with Prejudice the Brylane Action. Management is of the opinion that
implementation of the terms of the approved settlement will not have a material
adverse effect on the Company's financial position or results of operations.
ITEM 5. OTHER INFORMATION
During the quarterly period covered by this filing, the Audit Committee of the
Company's Board of Directors approved the engagement of the Company's external
auditors to perform certain non-audit services to assist management in its
compliance with certain regulatory and compliance, tax planning and due
diligence matters.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1* Certification of Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2* Certification of Chief Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1* Certification of Chief Executive Officer Pursuant to Section 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2* Certification of Chief Financial Officer Pursuant to Section 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Current Reports on Form 8-K.
A Current Report on Form 8-K was filed with the SEC on July 31, 2003 by the
Company relating to the results of operations for the three and six-month
periods ended July 5, 2003.
A Current Report on Form 8-K was filed with the SEC on August 15, 2003 by
the Company relating to blackout periods under the Liz Claiborne, Inc.
401(k) Savings and Profit Sharing Plan (the "Savings Plan Blackout
Period").
A Current Report on Form 8-K was filed with the SEC on October 30, 2003 by
the Company relating to the results of operations for the three and
nine-month periods ended October 4, 2003.
A Current Report on Form 8-K was filed with the SEC on November 5, 2003 by
the Company relating to the Employment Agreement entered into on November
3, 2003 with Paul R. Charron, as Chairman and Chief Executive Officer of
the Company.
38
A Current Report on Form 8-K was filed with the SEC on November 12, 2003 by
the Company relating to the agreement to purchase ENYCE HOLDINGS LLC.
* Filed herewith.
39
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: November 13, 2003
LIZ CLAIBORNE, INC. LIZ CLAIBORNE, INC.
By: /s/ Michael Scarpa By: /s/ Elaine H. Goodell
----------------------------- -------------------------------------
MICHAEL SCARPA ELAINE H. GOODELL
Senior Vice President - Vice President - Corporate Controller
Chief Financial Officer and Chief Accounting Officer
(Principal financial officer) (Principal accounting officer)