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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 7, 1995
or
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number: 1-4715
The Warnaco Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware 95-4032739
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
90 Park Avenue
New York, New York 10016
(Address of registrant's principal executive offices)
(212) 661-1300
(Registrant's telephone number, including area code)
Copies of all communications to:
The Warnaco Group, Inc.
90 Park Avenue
New York, New York 10016
Attention: Vice President and General Counsel
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the registrant's Class A Common Stock
as of November 15, 1995 is as follows: 51,777,312
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PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements.
THE WARNACO GROUP, INC.
Consolidated Condensed Balance Sheets
(in thousands)
(unaudited)
October 7, January 7,
1995 1995
-------- --------
ASSETS
Current assets:
Cash.............................................. $ 2,927 $ 3,791
Accounts receivable-net........................... 194,788 148,659
Inventories:
Finished goods................................. 217,416 131,450
Work in process................................ 70,156 60,513
Raw materials.................................. 65,346 60,220
-------- --------
Total inventories............................ 352,918 252,183
Other current assets.............................. 27,697 15,892
-------- --------
Total current assets......................... 578,330 420,525
Property, plant and equipment net of accumulated
depreciation of $76,087 and $68,203............... 86,374 80,932
Intangible and other assets-net..................... 277,120 279,096
-------- --------
$941,824 $780,553
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowing under revolving credit facility......... $52,073 $115,679
Current portion of long-term debt................. 46,680 50,315
Borrowing under foreign credit facilities......... 285 9,822
Accounts payable and accrued liabilities.......... 124,706 137,624
Federal and other income taxes.................... 2,383 2,611
-------- --------
Total current liabilities.................... 226,127 316,051
Long-term debt...................................... 197,798 206,792
Other long-term liabilities......................... 12,032 17,238
Stockholders' equity:
Preferred stock; $.01 par value................... -- --
Class A common stock; $.01 par value.............. 521 421
Capital in excess of par value.................... 568,157 337,872
Cumulative translation adjustment................. (2,540) (1,732)
Accumulated deficit............................... (48,844) (83,897)
Treasury stock, at cost........................... (5,000) (5,000)
Notes receivable for common stock issued.......... (6,427) (7,192)
-------- --------
505,867 240,472
-------- --------
Total stockholders' equity................... $941,824 $780,553
======== ========
This statement should be read in conjunction with the accompanying
Notes to Consolidated Condensed Financial Statements.
THE WARNACO GROUP, INC.
Consolidated Condensed Statements of Operations
(in thousands except per share data)
(unaudited)
Third Quarter Ended Nine Months Ended
------------------------ -------------------------
October 7, October 8, October 7, October 8,
1995 1994 1995 1994
--------- --------- --------- ----------
Net revenues................................... $239,569 $217,872 $645,120 $555,905
Cost of goods sold............................. 154,941 147,976 425,449 378,643
-------- -------- -------- --------
Gross profit................................... 84,628 69,896 219,671 177,262
Selling, administrative and general expenses... 45,432 39,812 130,567 108,918
-------- -------- -------- --------
Income before loss on California earthquake,
interest and income taxes.................... 39,196 30,084 89,104 68,344
Loss on California earthquake.................. -- -- -- 3,000
-------- -------- -------- --------
Income before interest and income taxes........ 39,196 30,084 89,104 65,344
Interest expense............................... 10,017 7,873 27,852 23,586
-------- -------- -------- --------
Income before income taxes..................... 29,179 22,211 61,252 41,758
Provision for income taxes..................... 11,088 500 23,276 2,000
-------- -------- -------- --------
Net income..................................... $ 18,091 $ 21,711(1) $ 37,976 $ 39,758(1)
======== ======== ======== ========
Net income per share $ 0.41 $ 0.52(1) $ 0.89 $ 0.96(1)
======== ======== ======== ========
Weighted average number of common shares
outstanding.................................. 44,529 41,803 42,642 41,209
======== ======== ======== ========
<FN>
- --------
(1) Net income and net income per share before the loss on the California
earthquake and after a normalized provision for income taxes at an
effective income tax rate of 38% was $13,771 or $0.33 per share for
the third quarter of fiscal 1994 and $27,750 or $0.67 per share for
the nine months ended October 8, 1994.
This statement should be read in conjunction with the accompanying
Notes to Consolidated Condensed Financial Statements.
THE WARNACO GROUP, INC.
Consolidated Condensed Statements of Cash Flow
(in thousands)
(unaudited)
Nine Months Ended
-----------------------
October 7, October 8,
1995 1994
----------- ---------
Cash flow from operations:
Net income $ 37,976 $ 39,758
Non-cash items included in net income:
Depreciation and amortization 14,412 14,644
Interest 1,236 832
Income taxes paid (2,584) (3,272)
Net change in other operating accounts (169,231) (65,570)
Other 5,184 (6,807)
-------- --------
Cash used in operations (113,007) (20,415)
Cash flow from investing activities:
Proceeds from the sale of fixed and other assets 5,932 1,375
Purchase of property, plant and equipment (18,142) (19,407)
Payment for purchase of Calvin Klein
underwear businesses and trademarks (5,000) (33,103)
Repurchase of Calvin Klein license-Canada (6,200) --
-------- --------
Cash used in investing activities (23,410) (51,135)
Cash flow from financing activities:
Borrowings (Repayments) under revolving credit
facilities (70,980) 76,909
Net proceeds from sale of common stock and
repayment of notes receivable from stockholders 224,339 1,672
Proceeds from other financing -- 8,626
Cash dividends paid (2,922) --
Increase in deferred financing costs (92) (415)
Purchase of treasury stock -- (5,000)
Repayments of debt (14,792) (9,437)
Cash provided from financing activities 135,553 72,355
-------- --------
Increase (decrease) in cash (864) 805
Cash at beginning of period 3,791 4,651
--------- ---------
Cash at end of period $ 2,927 $ 5,456
========= =========
This statement should be read in conjunction with the accompanying Notes
to Consolidated Condensed Financial Statements.
THE WARNACO GROUP, INC.
Consolidated Condensed Statements of Cash Flow
(in thousands)
(unaudited)
Third Quarter Ended
-----------------------
October 7, October 8,
1995 1994
---------- ---------
Net change in other operating accounts:
Accounts receivable $ (46,129) $ (41,715)
Inventories (100,735) (1,071)
Other current assets (11,805) (3,345)
Accounts payable and accrued liabilities (12,918) (21,439)
Income taxes payable 2,356 2,000
---------- ---------
$(169,231) $(65,570)
========== =========
This statement should be read in conjunction with the accompanying Notes
to Consolidated Condensed Financial Statements.
THE WARNACO GROUP, INC.
Notes to Consolidated Condensed Financial Statements
1. In the opinion of the Company, the accompanying consolidated condensed
financial statements contain all the adjustments (all of which were of a
normal recurring nature) necessary to present fairly the financial
position of the Company as of October 7, 1995 as well as its results of
operations and cash flows for the periods ended October 7, 1995 and
October 8, 1994. Operating results for interim periods may not be
indicative of results for the full fiscal year.
2. Certain amounts for prior periods have been reclassified to be comparable
with the current period presentation.
3. In February 1995, the Company terminated a license agreement for the
production of men's underwear and women's intimate apparel bearing the
Calvin Klein name in Canada. The Company now directly designs,
produces and markets Calvin Klein men's underwear and women's intimate
apparel in Canada. The cost of terminating the license agreement before
its expiration in the year 2000 was $6.2 million.
4. In September and October 1995 the Company sold 9,717,000 shares of its
Class A Common Stock in a public offering (the "Offering"). Net proceeds
from the Offering were approximately $224 million and were utilized to
repay amounts outstanding under the Company's Bank Credit Agreement.
5. On October 12, 1995, the Company entered into (i) a $450 million Bank
Credit Agreement (the "$450 Million Credit Agreement") with The Bank of
Nova Scotia and Citibank, N.A. as managing agents, Citibank, N.A. as
documentation agent, The Bank of Nova Scotia as paying agent, competitive
bid agent, swingline bank and issuing bank (the "Paying Agent"), and
certain banks party thereto and (ii) a $100 million Bank Credit Agreement
(the "364-Day Revolver" and, collectively with the $450 Million Credit
Agreement, the "Bank Credit Agreements") with The Bank of Nova Scotia and
Citibank, N.A. as managing agents, The Bank of Nova Scotia as paying
agent, Citibank, N.A. as documentation agent and certain banks party
thereto. The Bank Credit Agreements replaced the Company's previous $500
million credit agreement (the "1993 Financing"). The $450 Million Credit
Agreement provides for a term loan of $200 million and a five-year
revolving loan of $250 million. The 364-Day Revolver provides for a
364-day revolving loan of $100 million which is renewable upon the
satisfaction of certain conditions. Amounts outstanding under the Bank
Credit Agreements currently bear interest at the Paying Agent's base rate,
or at LIBOR plus 0.4250%. In addition, the Company has the option of
placing a portion of amounts outstanding under the revolving loan under
the $450 Million Credit Agreement for competitive bids. The rate of
interest payable on amounts outstanding under the Bank Credit Agreements
decrease as the Company's implied senior debt rating, as determined by
certain credit rating agencies, improves. Amounts outstanding under the
Bank Credit Agreements are not limited by any borrowing base and are
unsecured. The Company is required to pay a commitment fee on unused
portions of the revolving commitments under the Bank Credit Agreements,
currently equal to 0.1750% per annum. The commitment fee decreases as the
Company's implied senior debt rating, as determined by certain credit
rating agencies, improves.
The Bank Credit Agreements contain various covenants requiring the
Company to maintain certain financial tests which as of fiscal 1995 year end
will be as follows: (1) minimum net worth of $225 million, (2) leverage ratio
of 0.550 to 1 and, (3) fixed charge coverage ratio of 1.20 to 1.0.
Item 2.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Results of Operations.
STATEMENT OF OPERATIONS (selected data)
(amounts in millions of dollars)
Quarter ended Nine months ended
-------------------- --------------------
October 7,October 8, October 7,October 8,
1995 1994 1995 1994
-------------------- --------------------
Net revenues $239.6 $217.9 $645.1 $555.9
Cost of goods sold 155.0 148.0 425.4 378.6
------- ------- ------- -------
Gross profit 84.6 69.9 219.7 177.3
% to net revenues 35.3% 32.1% 34.1% 31.9%
Selling, administrative and general
expenses 45.4 39.8 130.6 108.9
Loss on California earthquake -- -- -- 3.0
------- ------- ------- -------
Income before interest and income
taxes 39.2 30.1 89.1 65.4
% to net revenues 16.4% 13.8% 13.8% 11.8%
Interest expense 10.0 7.9 27.8 23.6
Provision for income taxes 11.1 0.5 23.3 2.0
------- ------- ------- -------
Net income $ 18.1 $ 21.7 $ 38.0 $ 39.8
======= ======= ======= =======
Income before loss on California
earthquake and after giving effect
to a normalized tax provision $ 18.1 $ 13.8 $ 38.0 $ 27.7
======= ======= ======= =======
Net revenues in the third quarter of fiscal 1995 were $239.6 million,
10.0% higher than the $217.9 million recorded in the third quarter of fiscal
1994. Net revenues for the first nine months of fiscal 1995 were $645.1
million, 16.0% higher than the $555.9 million recorded in the first nine
months of fiscal 1994.
Intimate apparel division net revenues increased 15.8% in the third
quarter of fiscal 1995 to $177.1 million from $152.9 million in the third
quarter of fiscal 1994. The increase was achieved despite the $21.3 million
of net revenues generated by the Miracle-Bra and Avon launch revenues in the
third quarter of fiscal of 1994. Excluding these revenues, intimate apparel
division net revenues increased 39.8% in the third quarter of fiscal 1995
compared to fiscal 1994. Domestic Warner's and Olga revenues in department
stores increased 11.6%, Fruit of the Loom net revenues in the mass merchandise
market increased 34.0%. Calvin Klein net revenues increased 150% due to the
successful launch of the women's intimate apparel business on January 1, 1995
and improved market penetration in the men's underwear business. The
Company's international divisions achieved a 34.2% increase in net revenues.
Intimate apparel division net revenues in the first nine months of fiscal
1995 increased 22.6% to $482.5 million from $393.4 million recorded in the
first nine months of fiscal 1994. The higher net revenues primarily reflect
increases of 16% in domestic Warner's and Olga in department and specialty
stores, 48.2% increase in Fruit of the Loom net revenues in the mass
merchandise market and 186% in Calvin Klein net revenues, which compares a
full nine months in fiscal 1995 to 6 1/2 months in fiscal 1994. In addition,
the international division's net revenues increased 19.5%.
Menswear division net revenues of $49.7 million decreased 7.8% from $53.9
million in the third quarter of fiscal 1994. Excluding the discontinued
brands of Dior Accessories and Puritan for fiscal 1994, menswear division net
revenues are essentially flat to last year for the third quarter and for the
first nine months of fiscal 1995. Excluding the discontinued brands, menswear
division net revenues increased 9.5% in the first nine months of fiscal 1995
compared to the first nine months of fiscal 1994. The increase primarily
reflects an increase of 11.0% in Chaps net revenues compared to the first nine
months of fiscal 1994.
Gross profit in the third quarter of fiscal 1995 increased 21.1% to $84.6
million from the $69.9 million recorded in the third quarter of fiscal 1994.
Gross profit as a percentage of net revenues improved 320 basis points to
35.3% in the third quarter of fiscal 1995 from 32.1% in the comparable fiscal
1994 period. The increase in gross profit as a percentage of net revenues
reflects increased manufacturing efficiencies in the Company's intimate
apparel plants and a more favorable mix of regular price sales driven by
Calvin Klein, Warner's and Olga. Gross profit for the first nine months of
fiscal 1995 increased 23.9% to $219.7 million compared to $177.3 million in
the first nine months of fiscal 1994. Gross profit as a percentage of net
revenues increased to 34.1% in the first nine months of fiscal 1995 compared
to 31.9% in the first nine months of last year. The increase in gross profit
reflects manufacturing efficiencies and the more favorable mix, as noted
above.
Selling, administrative and general expenses increased to $45.4 million
(19.0% of net revenues) from the $39.8 million (18.3% of net revenues)
recorded in the third quarter of fiscal 1994. The increase in selling,
administrative and general expense reflects the increased sales volume noted
above and an increase in marketing and advertising expenses primarily related
to Calvin Klein. Selling, administrative and general expenses for the first
nine months of fiscal 1995 increased to $130.6 million (20.2% of net
revenues) from the $108.9 million (19.6% of net revenues) recorded in the
first nine months of fiscal 1994. The increase in selling, administrative and
general expenses in the first nine months of fiscal 1995 compared to fiscal
1994 reflects higher sales volume and the increase in marketing expenses noted
above.
Interest expense increased to $10.0 million in the third quarter of
fiscal 1995 from $7.9 million recorded in the third quarter of fiscal 1994.
Interest expense increased to $27.8 million in the first nine months of fiscal
1995 from $23.6 million recorded in the first nine months of fiscal 1994. The
increase in interest expense is due primarily to an increase in interest rates
of nearly 150 basis points since last year. Interest expense in future
periods will be reduced by approximately 40% on currently outstanding debt
due to the recently completed equity offering which reduced outstanding debt
by approximately $224 million. The Company has entered into interest rate swap
agreements which effectively fix the interest rate on $150 million of the
Company's debt at a LIBOR interest rate of 5.99% for three years to October
1998, which limits the impact of future increases in interest rates.
The provision for income taxes for the third quarter of fiscal 1995 was
$11.1 million compared to $0.5 million in the third quarter of fiscal 1994.
The Company's effective tax rate for the first nine months of fiscal 1995 was
38% compared to 4.8% for the first nine months of fiscal 1994. The increase
in effective tax rate in 1995 compared to 1994 reflects the utilization of the
Company's net operating loss carryforwards in the first nine months of fiscal
1994, which offset the Company's 1994 federal income tax provision, leaving
only a 4.8% state tax provision.
The first quarter of fiscal 1994 included a non-recurring loss of $3.0
million, related to the deductible portion of the Company's insurance policy
on the January 1994 California earthquake which temporarily shut down the Olga
Division's distribution center.
Net income for the third quarter of fiscal 1995 was $18.1 million. Income
for the third quarter of fiscal 1994 adjusted to reflect a normalized tax
provision of 38% was $13.8 million, therefore, on a comparable basis, net
income for the third quarter of fiscal 1995 of $18.1 million is 31.4% higher
than the fully taxed income of $13.8 million recorded in the third quarter of
fiscal 1994. As reported net income for the third quarter of fiscal 1994 was
$21.7 million. Net income on a comparable basis for the first nine months of
fiscal 1995 of $38.0 million was 36.9% higher than the fully taxed income of
$27.7 million, before the loss on the California earthquake recorded in the
first nine months of fiscal 1994. As reported net income for the nine months
of fiscal 1994 was $39.8 million.
Capital Resources and Liquidity.
In September and October 1995 the Company sold 9,717,000 shares of its
Class A Common Stock for $24 per share in a public offering (the "Offering").
Net proceeds from the Offering were approximately $224 million and were used
to reduce the bank debt outstanding under the Company's 1993 Financing. On
October 12, 1995, the Company entered into the Bank Credit Agreements with
substantially all of its existing banks for a total of $550 million. The Bank
Credit Agreements provide the Company with a term loan in the amount of $200
million, a 364 day revolving loan in the amount of $100 million and a five
year revolving loan in the amount of $250 million. The Bank Credit Agreements
reduced the Company's effective borrowing rate from LIBOR plus 50 basis points
to LIBOR plus 42.5 basis points and released all collateral from the banks
providing the Company with increased financial flexibility.
Consistent with the Company's goal of providing increased shareholder
value, on November 7, 1995 the Company declared its third quarterly cash
dividend of $0.07 per share. The dividend payment of approximately $3.7
million will be paid on January 8, 1996 to shareholders of record as of
December 1, 1995.
The Company's liquidity requirements arise primarily from its debt
service requirements and the funding of the Company's working capital needs,
primarily inventory and accounts receivable. The Company's borrowing
requirements are seasonal, with peak working capital needs generally arising
at the end of the second quarter and during the third quarter of the fiscal
year. The Company typically generates nearly all of its operating cash flow
in the fourth quarter of the fiscal year reflecting third and fourth quarter
shipments and the sale of inventory built during the first half of the fiscal
year.
Cash used by operations in the first nine months of fiscal 1995 was
$113.0 million compared to a use of $20.4 million in the comparable 1994
period. The use of cash in the first nine months of the Company's fiscal year
is a result of seasonal increases in working capital, primarily inventory and
accounts receivable. The increase in cash used in operations in the first
nine months of fiscal 1995 compared to the first nine months of fiscal 1994
reflects higher investment in working capital, primarily inventory and
accounts receivable to support the increased sales volume in the fourth
quarter of fiscal 1995, as well as the strong growth of the Calvin Klein
business. The increase in inventory is concentrated in intimate apparel and in
inventory in transit (on the water from our overseas contractors) to support
future sales growth. The increase in accounts receivable reflects the sales
growth noted above, days sales outstanding were equal to last year at 48 days.
On November 8, 1995 the Company had over $280 million of additional
credit available under its various credit agreements. The Company believes
that the funds available under its existing credit agreements together with
cash flow to be generated from future operations will be sufficient to meet
the working capital and capital expenditure needs of the Company, including
dividend, interest and principal payments on outstanding debt obligations, for
the next twelve months and for the foreseeable future.
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
10.1 Credit Agreement dated October 12, 1995 among Warnaco Inc.,
The Warnaco Group, Inc. and the various banks and lending
institutions named therein.
10.2 Credit Agreement dated October 12, 1995 among Warnaco Inc.,
The Warnaco Group, Inc. and the various banks and lending
institutions named therein.
11.1 Earnings per share.
(b) Reports on Form 8-K.
None.
SIGNATURES
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.
THE WARNACO GROUP, INC.
Date: November 14, 1995
By: /s/ WILLIAM S. FINKELSTEIN
----------------------------------
William S. Finkelstein
Director, Senior Vice President
and Chief Financial Officer
Principal Financial and Accounting
Officer
Date: November 14, 1995
By: /s/ WALLIS H. BROOKS
----------------------------------
Wallis H. Brooks
Vice President and Corporate
Controller