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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 3, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-10857
THE WARNACO GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-4032739
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF 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.
[X] Yes [ ] No
The number of shares outstanding of the registrant's Class A Common Stock as of
May 13, 1999 is as follows: 57,461,194.
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE WARNACO GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
APRIL 3, JANUARY 2,
1999 1999
----------------- --------------
ASSETS (UNAUDITED)
Current assets:
Cash.................................................................... $ 16,064 $ 9,495
Accounts receivable - net............................................... 262,170 199,369
Inventories:
Finished goods........................................................ 398,456 329,694
Work in process....................................................... 95,811 39,921
Raw materials......................................................... 51,443 52,404
--------------- --------------
Total inventories...................................................... 545,710 472,019
Other current assets.................................................... 37,245 26,621
--------------- --------------
Total current assets....................................................... 861,189 707,504
--------------- --------------
Property, plant and equipment (net of accumulated depreciation of
$129,372 and $119,891, respectively).................................... 217,741 224,260
--------------- --------------
Other assets:
Excess of cost over net assets acquired - net........................... 417,298 417,782
Other assets - net...................................................... 421,042 433,587
-------------- --------------
Total other assets......................................................... 838,340 851,369
-------------- --------------
$ 1,917,270 $ 1,783,133
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt....................................... $ 49,279 $ 30,231
Accounts payable........................................................ 487,231 503,326
Accrued liabilities..................................................... 116,971 131,316
Deferred income taxes................................................... 12,846 14,276
-------------- --------------
Total current liabilities.................................................. 666,327 679,149
-------------- --------------
Long-term debt............................................................. 583,608 411,886
-------------- -------------
Other long-term liabilities................................................ 11,676 12,129
-------------- --------------
Company-Obligated Mandatorily Redeemable Convertible Preferred
Securities of Designer Finance Trust Holding Solely
Convertible Debentures.................................................. 102,103 101,836
-------------- --------------
Stockholders' equity:
Common Stock; $.01 par value............................................ 652 652
Additional paid-in capital .......................................... 953,575 953,512
Accumulated other comprehensive income.................................. (20,475) (15,703)
Accumulated deficit..................................................... (159,379) (176,997)
Treasury stock, at cost................................................. (210,476) (171,559)
Unvested stock compensation............................................. (10,341) (11,772)
-------------- --------------
Total stockholders' equity................................................ 553,556 578,133
-------------- --------------
$ 1,917,270 $ 1,783,133
============== ==============
This Statement should be read in conjunction with the accompanying Notes to
Consolidated Condensed Financial Statements.
-2-
THE WARNACO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
-------------------------------
APRIL 3, APRIL 4,
1999 1998
----------- ---------------
(UNAUDITED)
Net revenues............................................................... $ 444,103 $ 419,208
Cost of goods sold......................................................... 290,014 299,658
---------- -----------
Gross profit............................................................... 154,089 119,550
Selling, general and administrative expenses............................... 101,874 96,163
---------- -----------
Operating income........................................................... 52,215 23,387
Interest expense........................................................... 16,833 13,633
----------- -----------
Income before income taxes and cumulative effect of
change in accounting principle......................................... 35,382 9,754
Provision for income taxes................................................. 12,490 3,666
----------- -----------
Income before cumulative effect of change in accounting principle.......... 22,892 6,088
Cumulative effect of change in accounting for deferred
start-up costs, net..................................................... -- (46,250)
----------- -----------
Net income (loss).......................................................... $ 22,892 $ (40,162)
=========== ===========
Basic earnings (loss) per common share:
Income before cumulative effect of change in accounting principle....... $ 0.39 $ 0.10
Cumulative effect of accounting change.................................. -- (0.75)
----------- -----------
Net income (loss)....................................................... $ 0.39 $ (0.65)
=========== ===========
Diluted earnings (loss) per common share:
Income before cumulative effect of change in accounting principle....... $ 0.39 $ 0.10
Cumulative effect of accounting change.................................. -- (0.73)
-------- --------
Net income (loss)....................................................... $ 0.39 $ (0.63)
======== ========
Cash dividends declared per share of common stock.......................... $ 0.09 $ 0.09
======== ========
Shares used in computing earnings per share:
Basic................................................................... 58,092 62,112
======== ========
Diluted................................................................. 59,354 63,743
======== ========
This Statement should be read in conjunction with the accompanying Notes to
Consolidated Condensed Financial Statements.
-3-
THE WARNACO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED
---------------------------
APRIL 3, APRIL 4,
1999 1998
---------- -----------
(UNAUDITED)
Cash flow from operating activities:
Net income (loss).......................................................... $ 22,892 $ (40,162)
Non-cash items included in net income:
Depreciation and amortization......................................... 13,785 13,888
Cumulative effect of accounting change................................ -- 46,250
Amortization of unvested stock compensation........................... 1,431 964
Change in deferred income taxes....................................... 11,442 1,557
Other changes in operating accounts................................... (176,564) (167,866)
---------- -----------
Net cash from operating activities......................................... (127,014) (145,369)
---------- -----------
Cash flow from investing activities:
Disposals of fixed assets............................................. -- 1,781
Purchase of property, plant & equipment............................... (1,765) (31,611)
Increase in intangible and other assets............................... (10,223) (18,306)
---------- -----------
Net cash from investing activities......................................... (11,988) (48,136)
---------- -----------
Cash flow from financing activities:
Borrowing under revolving credit facilities........................... 197,604 245,893
Proceeds from the exercise of stock options and repayment of
notes receivable from employees..................................... 63 32,902
Payment of withholding tax on option exercises........................ - (38,095)
Purchase of treasury shares .......................................... (38,917) (9,357)
Repayments of debt.................................................... (3,500) (1,432)
Dividends paid........................................................ (5,304) (4,690)
Other................................................................. (453) (32,200)
---------- -----------
Net cash from financing activities......................................... 149,493 193,021
---------- -----------
Effect on cash due to currency translation................................. (3,922) 2,380
---------- -----------
Increase (decrease) in cash................................................ 6,569 1,896
Cash at beginning of period................................................ 9,495 12,009
---------- -----------
Cash at end of period...................................................... $ 16,064 $ 13,905
========== ===========
Other changes in operating accounts:
Accounts receivable.................................................... $ (62,801) $ (63,333)
Inventories............................................................ (73,691) (50,776)
Other current assets................................................... (9,662) 4,478
Accounts payable and accrued liabilities............................... (30,529) (59,219)
Accrued income taxes................................................... 119 984
---------- -----------
$(176,564) $ (167,866)
========== ===========
This Statement should be read in conjunction with the accompanying Notes to
Consolidated Condensed Financial Statements.
-4-
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements have been
prepared in accordance with generally accepted accounting principles and
Securities and Exchange Commission rules and regulations for interim financial
information. Accordingly, they do not contain all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of the Company, the accompanying
consolidated condensed financial statements contain all adjustments (all of
which were of a normal recurring nature) necessary to present fairly the
financial position of the Company as of April 3, 1999 as well as its results of
operations and cash flows for the periods ended April 3, 1999 and April 4, 1998.
Operating results for interim periods may not be indicative of results for the
full fiscal year. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K/A for the fiscal year ended January 2, 1999. Certain amounts for prior
periods have been reclassified to be comparable with the current period
presentation.
Start-Up Costs: In the fourth quarter of fiscal 1998, retroactive to the
beginning of fiscal 1998, the Company early adopted the provisions of SOP 98-5
requiring that pre-operating costs relating to the start-up of new manufacturing
facilities, product lines and businesses be expensed as incurred. The Company
recognized $46,250, after taxes ($71,484, pre-tax), as the cumulative effect of
a change in accounting to reflect the new accounting and write-off the balance
of unamortized deferred start-up costs as of the beginning of 1998. In addition,
the Company recognized in first quarter 1998 earnings approximately $14,322,
before taxes, related to 1998 costs that would have been deferred under the
Company's start-up accounting policy prior to the adoption of SOP 98-5. Prior to
the early adoption of SOP 98-5, start-up costs were deferred and amortized using
the straight line method, principally over five years.
-5-
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
NOTE 2 - EQUITY
As of April 3, 1999 and January 2, 1999, Class A common stock outstanding was
65,176,608 shares and 65,172,608 shares, respectively. On March 1, 1999, the
Board of Directors authorized the repurchase of an additional 10.0 million
shares of the Company's common stock to supplement its previously authorized
12.42 million share stock repurchase program. During the three months ended
April 3, 1999, the Company repurchased 425,700 shares under equity option
arrangements at a cost of approximately $17,000 and 890,600 shares in open
market purchases at a cost of approximately $21,900. A total of approximately
7.3 million shares have been repurchased under the current authorization of
22.42 million shares leaving approximately 15.1 million shares available to
repurchase. The Company has options outstanding on approximately 1.1 million
shares at an average forward price of $33.51 per share at April 3, 1999. These
option arrangements expire between May 1999 and August 1999. If the arrangements
were settled on a net cash basis at April 3, 1999, the Company would be
obligated to pay $9,200 based on the closing price of the Company's common
stock. After accounting for these options, the Company has approximately 14.0
million shares available to repurchase. As of April 3, 1999, treasury stock
includes approximately 7.4 million shares at a cost of $210,500.
NOTE 3 - RESTRUCTURING
As a result of a strategic review of the Company's businesses, manufacturing and
other facilities, product lines and styles and worldwide operations following
significant acquisitions in 1996 and 1997, in the fourth quarter of 1998 the
Company initiated the implementation of programs designed to streamline
operations and improve profitability. These programs resulted in pre-tax charges
of approximately $40,000 related to costs to exit certain product lines and
styles, as well as facilities and realignment of Manufacturing and Distribution
activities, including charges related to inventory write-downs and employee
termination and severance benefits.
The details of the charges to these reserves in fiscal 1999, including costs
incurred and reserves remaining for costs estimated to be incurred through
completion of the aforementioned program, anticipated by the end of fiscal
1999, are summarized below:
FACILITIES EMPLOYEE
SHUTDOWNS TERMINATION
ASSET AND RETAIL OUTLET AND
WRITE-OFFS REALIGNMENT STORE CLOSINGS SEVERANCE TOTAL
-------------- ----------------- ---------------- -------------- -------------
Balance as of January 3, 1999 $ 1,600 $ 828 $ 572 $ 3,600 $ 6,600
Cash reductions (640) (145) (724) (1,509)
Non-cash reductions (231) (231)
-------------- ----------------- ---------------- -------------- -------------
Balance as of April 3, 1999 $ 1,369 $ 188 $ 427 $ 2,876 $ 4,860
============== ================= ================ ============== =============
The $4,860 reserve at April 3, 1999 relates principally to certain asset
write-offs and retail outlet store closures, anticipated to be utilized by the
end of the second quarter of fiscal 1999 and employee severance costs,
representing the remaining severance costs for employees terminated prior to
fiscal 1999, anticipated to be utilized by early fiscal 2000.
-6-
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
NOTE 4 - INVESTMENTS
During the first quarter of fiscal 1999, the Company received shares of common
stock in exchange for the early termination of a non-compete agreement with the
former principal stockholder of its Designer Holdings subsidiary. The fair
market value of the common stock on the date of issuance was $875, which was
recorded as a reduction of goodwill associated with the Designer Holdings
acquisition. The investment is classified as an available-for-sale security and
recorded at fair value. Unrealized gains at April 3, 1999 of $616 (net of
deferred income taxes of $346), were included as a separate component of
stockholders' equity. The Company did not have any marketable securities at
January 2, 1999. Marketable securities are included in other current assets at
April 3, 1999.
NOTE 5 - SUMMARIZED FINANCIAL INFORMATION
The following is summarized unaudited financial information of the Company's
wholly-owned subsidiary, Designer Holdings, as of April 3, 1999 and January 2,
1999 and for the fiscal quarters ended April 3, 1999 and April 4, 1998,
respectively, which is presented as required by reason of the public preferred
securities issued by Designer Holdings. Designer Holdings, acquired by the
Company in the fourth quarter of 1997, develops, manufactures and markets
designer jeanswear and sportswear for men, women and juniors and holds a 40-year
extendable license from Calvin Klein, Inc. to develop, manufacture and market
designer jeanswear and jeans related sportswear collections in North, South and
Central America under the Calvin Klein Jeans'r', CK Calvin Klein Jeans'r', and
CK/Calvin Klein/Khakis'r' labels.
BALANCE SHEET SUMMARY: APRIL 3, JANUARY 2,
1999 1999
------------ ------------
Current assets.................................... $ 166,786 $ 115,328
Noncurrent assets................................. 569,269 589,191
Current liabilities............................... 160,702 140,000
Noncurrent liabilities............................ 57,633 58,067
Redeemable preferred securities................... 102,103 101,836
Stockholders' equity.............................. 415,617 404,616
-7-
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
INCOME STATEMENT SUMMARY:
THREE MONTHS ENDED
----------- --------------
APRIL 3, APRIL 4,
1999(a) 1998(a)
----------- --------------
Net revenues...................................... $ 119,750 $ 109,153
Cost of good sold................................. 80,363 74,318
Net income........................................ 11,001 10,896
(a) Excludes net revenues of $10.7 million in the first quarter of fiscal
1999 and 1998, respectively, now reported as Retail Outlet Store
division net revenues. As a result of the continuing integration of
Designer Holdings into the operations of the Company, cost of goods
sold and net income associated with these net revenues cannot be
separately identified.
Prior to its acquisition by the Company, Designer Holdings experienced
substantial sales growth. A significant portion of this sales growth was
achieved through distribution to jobbers and off-price retailers. Additionally,
Designer Holdings had also announced a significant increase in the number of its
outlet stores. The Company viewed this growth and expansion as detrimental to
the long-term integrity and value of the brand. To sustain its growth strategy,
Designer Holdings committed to large quantities of inventories. When the primary
department store distribution channel was unable to absorb all of Designer
Holdings' committed production, it increased sales to the secondary and tertiary
distribution channels, including sales to jobbers, off-price retailers and
Designer Holdings' own outlet stores, which were expanded to serve as an
additional channel of distribution. The Company's post-acquisition strategy did
not embrace the outlet store expansion or expansion of secondary channels of
distribution, thereby significantly eliminating product distribution, resulting
in excess inventory.
The Company had a different plan from that of Designer Holdings for
realization of inventories and accounts receivable, as follows: Based upon its
strategy for the business, it had to quickly dispose of significantly higher
than desirable levels of inventory. It had to stabilize relationships with its
core department store customers. It had to collect receivable balances from
customers with whom the Company would no longer do business, and had to respond
to challenges from the core department store customers who were adversely
impacted by channel conflict and brand image issues. Finally, the Company began
a complete redesign of the product, the impact of which would not be immediately
felt at retail due to the fact that Designer Holdings had already committed to
inventory that was in production to be delivered for the ensuing seasons.
The consequences related not only to the receivables and inventory
acquired, but also to the design, fabric and inventory purchases to which
Designer Holdings had previously committed. Immediately following the
acquisition, the Company began quickly liquidating excess inventories. Most of
these sales were below original cost. Not only did the Company fail to recover
cost (including royalties payable to the licensor), it was deprived of the
"reasonable gross profit" contemplated by APB Opinion 16 in valuing acquired
inventory. Accordingly, the Company reduced the historical carrying value of
inventory by $18 million. The $18 million fair value adjustment recorded
addressed all of these issues and represented the fair value of inventory
pursuant to APB Opinion 16.
The Company offered significant discounts (by negotiating settlements
on a customer by customer basis) to collect outstanding receivable balances in
light of product related issues raised, as well as the decision to discontinue
certain channels of distribution, realizing that these balances would become
increasingly more difficult to collect with the passage of time. In addition,
the core retail customers took substantial deductions against current invoices
for the Designer Holdings inventory in the stores, unilaterally revising the
economics of the initial sale transaction entered into by Designer Holdings.
Although these deductions relate to both the inventory acquired and
pre-acquisition accounts receivable, the decrease in asset value manifested
itself through accounts receivable as a result of these deductions. Accordingly,
the Company reduced the historical carrying value of accounts receivable by $31
million. The $31 million fair value adjustment, which was recorded pursuant to
APB Opinion 16, addresses these issues.
The Company believes that these strategies should enhance future
results of operations and cash flows, however, these fair value adjustments will
result in additional annual goodwill amortization of approximately $1.2 million.
In conjunction with the allocation of purchase price of Designer
Holdings to assets acquired and liabilities assumed, the Company recorded
accruals of approximately $48,313 pursuant to EITF 95-3. These charges relate
generally to employee termination and severance benefits, facility exit costs,
including lease termination costs (representing future lease payments on
abandoned facilities) and contract termination costs. The detail of the
charges to these reserves in fiscal 1999, including costs incurred and reserves
remaining for costs estimated to be incurred through completion of the
aforementioned programs, anticipated by the end of fiscal 1999, are summarized
below:
SEVERANCE AND FACILITY
OTHER EMPLOYEE EXIT
RELATED COSTS COSTS TOTAL
------------------------ ----------------- -----------------
Balance as of January 3, 1999 $9,522 $12,708 $22,230
Cash Reductions (1,064) (1,004) (2,068)
----------------------- ---------------- ----------------
Balance as of April 3, 1999 $8,458 $11,704 $20,162
======================= ================ ================
The $20,162 reserve at April 3, 1999 relates principally to certain facility
exit costs and employee severance costs, representing the remaining severance
costs for employees terminated prior to fiscal 1999, anticipated to be utilized
by the end of fiscal 1999.
-8-
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
NOTE 6 - CASH FLOW INFORMATION
THREE MONTHS ENDED
-----------------------------
APRIL 3, APRIL 4,
1999 1998
----------- -----------
Cash paid for:
Interest, including $770 and $1,317 capitalized in fiscal 1999
and 1998, respectively.............................................. $ 16,311 $ 13,653
Income taxes, net of refunds received.................................. 3,800 3,308
NOTE 7 - EARNINGS PER SHARE
THREE MONTHS ENDED
----------------------------
APRIL 3, APRIL 4,
1999 1998
---------- ----------
Numerator for basic and diluted earnings (loss) per share:
Income before cumulative effect of change in accounting.................... $ 22,892 $ 6,088
Cumulative effect of change in accounting.................................. -- (46,250)
---------- ----------
Net income (loss).......................................................... $ 22,892 $ (40,162)
========== ==========
Denominator for basic earnings per share -- weighted average shares........ 58,092 62,112
---------- ----------
Effect of dilutive securities:
Employee stock options.................................................. 216 1,199
Restricted stock shares................................................. 445 432
Shares under put option contracts....................................... 601 --
---------- ----------
Dilutive potential common shares........................................ 1,262 1,631
---------- ----------
Denominator for diluted earnings per share --
weighted average adjusted shares...................................... 59,354 63,743
========== =========
Basic earnings per share before cumulative effect of
change in accounting.................................................... $ 0.39 $0.10
======== ======
Diluted earnings per share before cumulative effect of
change in accounting.................................................... $ 0.39 $0.10
======== ======
Options to purchase shares of common stock that were outstanding during the
fiscal 1999 and 1998 first quarter but were not included in the computation of
diluted earnings per share because the option exercise price was greater than
the average market price of the common shares are shown below.
APRIL 3, APRIL 4,
1999 1998
-------------- -------------
Number of shares under option.......................................... 12,638,208 6,229,102
Range of exercise prices............................................... $25.50-$42.88 $35.50-$36.44
Incremental shares issuable on the assumed conversion of the preferred
securities (1,653,177 shares) were not included in the computation of diluted
earnings per share as the impact would have been antidilutive.
-9-
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
NOTE 8 - BUSINESS SEGMENTS
The Company designs, manufactures and markets apparel within the Intimate
Apparel and Sportswear and Accessories markets and operates a Retail Outlet
Store Division for the disposition of excess and irregular inventory. Transfers
to the Retail Outlet Stores occur at standard cost and are not reflected in net
revenues of the Intimate Apparel or Sportswear and Accessories segments. The
Company evaluates the performance of its segments based on earnings before
interest, taxes, and amortization of intangibles and deferred financing costs
and restructuring, special charges and other non-recurring items, as well as the
effect of the early adoption of SOP 98-5 and charges relating to the fiscal 1998
restatement for an inventory adjustment for production and inefficiency costs
("Adjusted EBIT"). Information by business segment is set forth below:
SPORTSWEAR RETAIL
INTIMATE AND OUTLET
APPAREL ACCESSORIES STORES TOTAL
---------- ----------- ------- -----
Three months ended April 3, 1999:
Net revenues............................................... $ 211,647 $ 208,262 $ 24,194 $ 444,103
Adjusted EBITDA............................................ 47,700 33,800 700 82,200
Depreciation............................................... 4,400 2,200 600 7,200
Adjusted EBIT.............................................. 43,300 31,600 100 75,000
Three months ended April 4, 1998:
Net revenues............................................... $ 218,044 $ 176,755 $ 24,409 $ 419,208
Adjusted EBITDA............................................ 47,700 26,700 1,500 75,900
Depreciation............................................... 3,600 900 500 5,000
Adjusted EBIT.............................................. 44,100 25,800 1,000 70,900
A reconciliation of total segment Adjusted EBIT to total consolidated income
before taxes and cumulative effect of a change in accounting principle for the
quarters ended April 3, 1999 and April 4, 1998, respectively, is as follows:
THREE MONTHS ENDED
----------------------------
APRIL 3, APRIL 4,
1999 1998
---------- ----------
Total Adjusted EBIT for reportable segments..................................... $ 75,000 $ 70,900
General corporate expenses not allocated........................................ 16,185 13,210
Amortization.................................................................... 6,600 5,500
Effect of early adoption of SOP 98-5............................................ -- 14,481
Charges related to an inventory adjustment for production and
inefficiency costs........................................................... -- 14,322
Interest expense................................................................ 16,833 13,633
---------- ----------
Income before income taxes and cumulative effect of a change
in accounting principle...................................................... $ 35,382 $ 9,754
========= ==========
-10-
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCLUDING SHARE DATA)
NOTE 9 - COMPREHENSIVE INCOME
THREE MONTHS ENDED
---------------------------
APRIL 3, APRIL 4,
1999 1998
----------- -----------
Net income (loss) .............................................................. $ 22,892 $ (40,162)
--------- ----------
Other comprehensive income (loss):
Foreign currency translation adjustments..................................... (5,388) 4,340
Unrealized holding gains..................................................... 962 --
Tax provision on unrealized holding gains.................................... (346) --
--------- ---------
Total other comprehensive income (loss)......................................... (4,772) 4,340
--------- ---------
Comprehensive income (loss)..................................................... $ 18,120 $ (35,822)
========= =========
The components of accumulated other comprehensive income (loss) as of April 3,
1999 and January 2, 1999 are as follows:
APRIL 3, JANUARY 2,
1999 1999
------------- -------------
Foreign currency translation adjustments.......................... $ (21,091) $ (15,703)
Unrealized holding gains, net..................................... 616 --
------------- -------------
Total accumulated other comprehensive income (loss)............... $ (20,475) $ (15,703)
============= =============
-11-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
RESULTS OF OPERATIONS.
STATEMENT OF OPERATIONS (SELECTED DATA)
THREE MONTHS ENDED
--------------------------
APRIL 3, APRIL 4,
1999 1998
---------- ----------
(AMOUNTS IN MILLIONS OF DOLLARS)
(UNAUDITED)
Net revenues............................................................... $ 444.1 $ 419.2
Cost of goods sold ........................................................ 290.0 299.6
------- --------
Gross profit............................................................... 154.1 119.6
% of net revenues...................................................... 34.7% 28.5%
Selling, general and administrative expenses.............................. 101.9 96.2
------- --------
Operating income........................................................... 52.2 23.4
% to net revenues...................................................... 11.8% 5.6%
Interest expense........................................................... 16.8 13.6
Provision for income taxes................................................. 12.5 3.7
------- --------
Income before cumulative effect of change in accounting principle.......... $ 22.9 $ 6.1
======= ========
Net revenues in the first quarter of fiscal 1999 were $444.1 million, $24.9
million or 5.9% higher than the $419.2 million recorded in the first quarter of
fiscal 1998.
Net revenues in the Sportswear and Accessories division increased $31.5
million or 17.8% to $208.3 million in the first quarter of fiscal 1999 compared
with $176.8 million in the first quarter of fiscal 1998. The CK Kids acquisition
added $18.8 million to net revenues in the current fiscal quarter. The
improvement was principally due to increased Calvin Klein Jeanswear net revenues
of $14.1 million. Chaps net revenues were flat as systems implementation
problems disrupted approximately $10.0 million of shipments. The systems issues
have since been resolved.
Intimate Apparel division net revenues decreased $6.4 million or 2.9% to
$211.6 million in the first quarter of fiscal 1999 from $218.0 million in the
first quarter of fiscal 1998. Discontinued product lines accounted for $7.6
million of the decrease during the quarter. Excluding discontinued product
lines, net revenues increased $1.2 million or 0.6%. Net revenues in the Calvin
Klein Underwear segment improved $6.9 million or 10.6% to $71.7 million in the
first quarter. The strong results were due to improved international revenues,
particularly Europe and Asia. Lejaby net revenues improved $2.2 million or 7.6%
to $31.3 million. The Shapewear division revenues also increased by $3.2 million
or 114%. The core Warner's/Olga businesses were lower during the quarter by
$11.4 million, reflecting a lower level of off-price sales. International sales
accounted for 34.7% of total divisional net sales in the first quarter of fiscal
1999 compared with 33.0% of total divisional net sales in the first quarter of
fiscal 1998, with the increase due to the improvements noted earlier for Calvin
Klein Europe and Asia.
The Retail Outlet Store division net revenues were essentially flat at
$24.2 million in the first quarter of fiscal 1999 compared with $24.4 million in
fiscal 1998.
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Gross profit increased $34.5 million or 28.9% to $154.1 million in the
first quarter of fiscal 1999 compared with $119.6 million in the first quarter
of fiscal 1998. Gross margin was 34.7% in the first quarter of fiscal 1999
compared with 28.5% in the first quarter of fiscal 1998. The improvement in
gross margin is a result of a decline in start-up costs of $14.5 million
and production and inefficiency costs of $14.3 million, a decrease in
off-price sales and lower costs resulting from the Company's 1998 restructuring.
As part of the 1998 restructuring, the Company realigned factories, consolidated
facilities and reduced headcount, resulting in a more favorable cost structure.
Selling, general and administrative expenses increased $5.7 million or 5.9%
to $101.9 million (22.9% of net revenues) in the first quarter of fiscal 1999
compared with $96.2 million (22.9% of net revenues) in the first quarter of
fiscal 1998. The increase in selling, general and administrative expenses
primarily reflects an increase in marketing expenses of $2.8 million, primarily
for the Sportswear and Accessories division and higher corporate expenses of
$3.0 million, primarily related to information systems and year 2000 remediation
expenses.
Operating Profit
Intimate Apparel Division. Operating profit before special charges decreased
$800,000 or 1.8% to $43.3 million in the first quarter of fiscal 1999 compared
with $44.1 million in fiscal 1998, due to lower gross profit. Fiscal 1998
includes $14.5 million of SOP 98-5 start-up costs and $14.3 million of an
inventory adjustment for production and inefficiency costs.
Sportswear and Accessories Division. Operating profit increased $5.8 million or
22.5% to $31.6 million in the first quarter of fiscal 1999 compared with $25.8
million in fiscal 1998. The increase is attributable to the 17.8% sales increase
mentioned above.
Retail Outlet Stores Division. Operating profit decreased $900,000 to $100,000
in the first quarter of fiscal 1999 compared with $1.0 million in the first
quarter last year. The decrease is attributable to increased markdowns required
to lower inventory.
Interest expense increased $3.2 million to $16.8 million in the first
quarter of fiscal 1999 compared with $13.6 million in the first quarter of
fiscal 1998. The increase reflects the funding of the Company's recent
acquisitions and stock buyback program.
The provision for income taxes for the first quarter of fiscal 1999
reflects an estimated effective income tax rate of 35.3%.
Net income for the first quarter of fiscal 1999 was $22.9 million compared
with income of $6.1 million before the cumulative effect of a change in
accounting principle in the first quarter of fiscal 1998. The increase in net
income reflects the higher net revenues and associated gross profit mentioned
above.
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CAPITAL RESOURCES AND LIQUIDITY.
The Company's liquidity requirements arise primarily from its debt service
requirements and the funding of its 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 in operations was $(127.0) million in the first quarter of fiscal
1999 compared with $ (145.4) million in the first quarter of fiscal 1998. The
increase in cash from operating activities reflects higher net income partially
offset by higher seasonal working capital usage primarily due to the 6% higher
sales.
Cash used in investing activities was $ (12.0) million for the first
quarter of fiscal 1999 compared with $ (48.1) million in the first quarter of
fiscal 1998. Capital expenditures were $1.8 million in the first quarter of
fiscal 1999 compared with $31.6 million in the first quarter of fiscal 1998.
Fiscal 1999 included amounts for information systems implementations (net of
reimbursements received of $24.0 million) and store fixture programs.
Cash provided from financing activities was $149.5 million in the first
quarter of fiscal 1999 compared with $193.0 million in the first quarter of
fiscal 1998. The increase in the Company's revolving credit balance during the
first quarter of the fiscal year of $197.6 million was lower than the $245.9
million increase in the first quarter of fiscal 1998 due to the favorable cash
flows from operating and investing activities as previously discussed. The
Company paid approximately $38.9 million for the repurchase of approximately 1.3
million shares in the first quarter of fiscal 1999 compared with $9.4 million in
the first quarter of fiscal 1998. In 1998, in exchange for shares received from
option holders with a fair market value of $38.1 million, the Company paid $38.1
million of withholding taxes on options that were exercised during the year. The
Company repaid $3.5 million of long-term debt in the first quarter of fiscal
1999 compared with $1.4 million in the first quarter of fiscal 1998.
The Company believes that funds available under its existing credit
arrangements and cash flow to be generated from future operations will be
sufficient to meet the working capital, share repurchase and capital expenditure
needs of the Company, including dividends and interest and principal payments on
outstanding debt obligations for the next twelve months and for the next several
years.
YEAR 2000 COMPLIANCE.
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. These programs, including some
that are critical to the Company's operations, could fail to properly process
data that contain dates after 1999 unless they are modified or replaced.
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Following a comprehensive review of current systems and future requirements
to support international growth, the Company initiated a program to replace
existing capabilities with enhanced hardware and software applications. The
objectives of the program are to achieve competitive benefits for the Company,
as well as assuring that all information systems will meet Year 2000 compliance.
Full implementation of this program is expected to require expenditures of
approximately $7.0 million over the next three to six months, primarily for Year
2000 compliance and system upgrades. Funding requirements have been incorporated
into the Company's capital expenditure planning and are not expected to have a
material adverse impact on financial condition, results of operations or
liquidity. The implementation and testing processes are approximately 70%
complete and are anticipated to be completed in the third quarter of fiscal
1999.
As a part of its Year 2000 process, the Company intends to test its Year 2000
readiness for critical business processes and application systems. The Company
anticipates that minor issues will be identified during this test period and
intends to address such issues during the first half of fiscal 1999. The Company
has contacted key suppliers and vendors in order to determine the status of such
third parties' Year 2000 remediation plans. Evaluation of suppliers' and
vendors' readiness is currently on-going. The Company recognizes the need for
Year 2000 contingency plans in the event that remediation is not fully
successful or that the remediation efforts of its vendors, suppliers and
governmental/regulatory agencies are not timely completed. This process was
begun in fiscal 1998 and is essentially complete at this time. The Company's
contingency planning includes upgrading current information systems operating
and application software to Year 2000 compliance. Such remediation costs will be
charged to operations as incurred.
The Company recognizes that issues related to Year 2000 constitute a material
known uncertainty. The Company also recognizes the importance of ensuring its
operations will not be adversely affected by Year 2000 issues. It believes that
the processes described above will be effective to manage the risks associated
with the problem. However, there can be no assurance that the process can be
completed on the timetable described above or that the remediation process will
be fully effective. The failure to identify and remediate Year 2000 problems or,
the failure of key third parties who do business with the Company or
governmental regulatory agencies to timely remediate their Year 2000 issues
could cause system failures or errors and business interruptions.
This Year 2000 update should be read in conjunction with the Company's
disclosure under "Statement Regarding Forward-looking Disclosures".
NEW ACCOUNTING STANDARDS
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No.
133). This statement, which is effective for the fiscal year beginning January
3, 2000, establishes accounting and reporting standards for derivative
instruments and hedging activities. SFAS No. 133 requires the recognition of all
derivatives as either assets or liabilities in the statement of financial
position along with the measurement of such instruments at fair value.
Management believes, based on current activities, that the implementation of
SFAS No. 133 will not have a material impact on the Company's consolidated
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financial position, liquidity, cash flows or results of operations.
STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE
This Report includes "forward-looking statements" within the meaning of
Section 27A of Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended which represent the Company's
expectations or beliefs concerning future events that involve risks and
uncertainties, including those associated with the effect of national and
regional economic conditions, the overall level of consumer spending, the
performance of the Company's products within the prevailing retail environment,
customer acceptance of both new designs and newly-introduced product lines, and
financial difficulties encountered by customers. All statements other than
statements of historical facts included in this quarterly report, including,
without limitation, the statements under Management's Discussion and Analysis of
Financial Condition, are forward-looking statements. Although the Company
believes that the expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to have
been correct.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk related to changes in interest rates
and foreign currency exchange rates, and selectively uses financial instruments
to manage these risks. The Company does not enter into financial instruments for
speculation or for trading purposes.
Interest Rate Risk
The Company is subject to market risk from exposure to changes in interest
rates based primarily on its financing activities. The Company enters into
interest rate swap agreements, which have the effect of converting the Company's
variable rate obligations to fixed rate obligations, to reduce the impact of
interest rate fluctuations on cash flow and interest expense. As of April 3,
1999, approximately $ 610.0 million of interest-rate sensitive obligations were
swapped to achieve a fixed rate of 5.99%, limiting the Company's risk to any
future shift in interest rates. As of April 3, 1999, the net fair value
liability of all financial instruments (primarily interest rate swap agreements)
with exposure to interest rate risk was approximately $ 10.8 million. As of
April 3, 1999, the Company had approximately $493.0 million of obligations
subject to variable interest rates in excess of such obligations that had been
swapped to achieve a fixed rate. A hypothetical 10% adverse change in interest
rates as of April 3, 1999 would have had a $0.7 million unfavorable impact on
the Company's pre-tax earnings and cash flow over the three-month period. The
fair value of the Company's interest rate swap agreements are based upon quotes
from brokers and represent the cash requirement if the existing agreements had
been settled at quarter-end.
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Foreign Exchange Risk
The Company has foreign currency exposures related to buying, selling and
financing in currencies other than the functional currency in which it operates.
These exposures are primarily concentrated in the Canadian dollar, Mexican peso,
Hong Kong dollar, British pound and the Euro. The Company enters into foreign
currency forward and option contracts to mitigate the risk of doing business in
foreign currencies. The Company hedges currency exposures of firm commitments
and anticipated transactions denominated in non-functional currencies to protect
against the possibility of diminished cash flow and adverse impacts on earnings.
As of April 3, 1999, the net fair value asset of financial instruments with
exposure to foreign currency risk, which included primarily currency option
contracts, was $ 0.4 million. The potential decrease in fair value resulting
from a hypothetical 10% adverse change in quoted foreign currency exchange rates
would be limited to $ 0.4 million, the fair value of these options.
Equity Price Risk
The Company entered into combination put-call contracts to facilitate the
repurchase of its common stock. At April 3, 1999, the Company has contracts
covering approximately 1.1 million shares of common stock with an average
forward price of $33.51. At April 3, 1999, the net fair value liability of these
contracts was approximately $9.2 million.
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the first quarter of
fiscal 1999.
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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: May 16, 2000 By: /s/ WILLIAM S. FINKELSTEIN
-----------------------------
William S. Finkelstein
Director, Senior Vice President
and Chief Financial Officer
Principal Financial and Accounting
Officer
Date: May 16, 2000 By: /s/ STANLEY P. SILVERSTEIN
-----------------------------
Stanley P. Silverstein
Vice President, General Counsel
and Secretary
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