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 April 5, 1997 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to _____________ COMMISSION FILE NUMBER 1-4715 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 20, 1997 is as follows: 51,765,384. PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS THE WARNACO GROUP, INC. CONSOLIDATED CONDENSED BALANCE SHEETS (IN THOUSANDS OF DOLLARS) April 5, 1997 January 4, 1997 ------------- --------------- (unaudited) ASSETS Current assets: Cash $ 9,582 $ 11,840 Accounts receivable - net 238,873 211,038 Inventories: Finished goods 250,560 227,929 Work in process 81,638 76,445 Raw materials 100,276 82,944 ---------- ---------- Total inventories 432,474 387,318 Other current assets 35,523 40,313 ---------- ---------- Total current assets 716,452 650,509 Property, plant and equipment, (net of accumulated depreciation of $91,577 and $85,244, respectively) 125,054 121,537 Other assets: Intangibles and other assets - net 383,289 370,898 ---------- ---------- $1,224,795 $1,142,944 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Borrowing under revolving credit facility $ 259,822 $ 146,960 Borrowing under foreign credit facilities 22,729 19,185 Current portion of long-term debt 47,220 49,281 Accounts payable and accrued liabilities 188,439 224,272 Accrued income taxes 1,143 195 ---------- ---------- Total current liabilities 519,353 439,893 ---------- ---------- Long-term debt 209,702 215,805 Other long-term liabilities 11,524 11,532 Stockholders' equity: Preferred Stock; $.01 par value - - Common Stock; $.01 par value 524 524 Capital in excess of par value 576,416 575,691 Cumulative translation adjustment (5,002) (3,307) Accumulated deficit (55,681) (69,667) Treasury stock, at cost (17,367) (12,030) Notes receivable for common stock issued and unearned stock compensation (14,674) (15,497) ---------- ---------- Total stockholders' equity 484,216 475,714 ---------- ---------- $1,224,795 $1,142,944 ========== ========== 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 OPERATIONS (IN THOUSANDS OF DOLLARS EXCEPT SHARE DATA) (UNAUDITED) THREE MONTHS ENDED ------------------------------ April 5, 1997 April 6, 1996 ------------- ------------- Net revenues $ 251,526 $ 206,480 Cost of goods sold 158,784 133,571 ----------- ------------ Gross profit 92,742 72,909 Selling, general and administrative expenses 53,214 40,561 ---------- ----------- Income before interest and income taxes 39,528 32,348 Interest expense 9,813 7,195 ----------- ------------ Income before income taxes 29,715 25,153 Provision for income taxes 11,589 9,935 ----------- ------------ Net income $ 18,126 $ 15,218 ============ ============ Net income per share $ 0.34 $ 0.29 ============ ============ Weighted average number of shares of common stock outstanding 54,085,433 53,240,235 ============ ============ 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 FLOW INCREASE (DECREASE) IN CASH (IN THOUSANDS OF DOLLARS) (UNAUDITED) Three Months Ended ----------------------------- April 5, 1997 April 6, 1996 ------------- -------------- Cash flow from operations: Net income $ 18,126 $ 15,218 Non-cash items included in net income: Depreciation and amortization 8,044 4,336 Amortization of unearned stock compensation 750 -- Income taxes paid (3,089) (434) Other changes in operating accounts (99,367) (90,418) --------- --------- Net cash used in operations before non-recurring items (75,536) (71,298) Payment of accruals related to exiting the Hathaway business, consolidating and realigning the intimate apparel division and other items (1,640) -- --------- --------- Net cash used in operations (77,176) (71,298) Cash flow from investing activities: Net proceeds from sale of fixed assets 51 148 Purchase of property, plant & equipment (9,891) (8,048) Payment for purchase of acquired assets and acquisition accruals (6,215) (14,000) Increase in intangible and other assets (8,931) -- --------- --------- Net cash used in investing activities activities (24,986) (21,900) Cash flow from financing activities: Borrowing under revolving credit facilities 116,503 96,308 Net proceeds from the exercise of options and repayment of notes receivable from employees 798 540 Repayments of debt (8,261) (321) Dividends paid (3,668) (3,624) Purchase of Treasury shares (5,337) -- Increase in deferred financing costs (131) (611) --------- --------- Net cash provided from financing activities 99,904 92,292 --------- --------- Increase (decrease) in cash (2,258) (906) Cash at beginning of period 11,840 6,162 --------- --------- Cash at end of period $ 9,582 $ 5,256 ========= ========= Other changes in operating accounts: Accounts receivable $ (27,835) $ (21,087) Inventories (45,156) (40,953) Other current assets 4,790 (6,280) Accounts payable and accrued liabilities (34,665) (24,244) Accrued income taxes 4,037 874 Other (538) 1,272 --------- --------- $ (99,367) $ (90,418) ========= ========= This statement should be read in conjunction with the accompanying Notes to Consolidated Condensed Financial Statements. 4 THE WARNACO GROUP, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS 1. 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 the adjustments (all of which were of a normal recurring nature) necessary to present fairly the financial position of the Company as of April 5, 1997 as well as its results of operations and cash flows for the periods ended April 5, 1997 and April 6, 1996. 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 for the fiscal year ended January 4, 1997. 2. Certain amounts for prior periods have been reclassified to be comparable with the current period presentation. 3. On May 14, 1997, the Company's Board of Directors authorized the repurchase of an additional 420,000 shares to supplement its previously authorized two million share stock repurchase program. 4. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share," which requires the dual presentation of Basic and Diluted Earnings per share. Pro Forma Basic and Diluted Earnings per share calculated in accordance with this standard would have been income of $0.35 and $0.34, respectively, for the three months ended April 5, 1997 and income of $0.30 and $0.29, respectively, for the three months ended April 6, 1996. The Company will adopt this standard as of January 3, 1998 as required. Early adoption is not permitted. 5 THE WARNACO GROUP, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS 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) (unaudited) Three Months Ended ----------------------------- April 5, April 6, 1997 1996 ---- ---- Net revenues $ 251.5 $ 206.5 Cost of goods sold 158.8 133.6 -------- -------- Gross profit 92.7 72.9 % of net revenues 36.9% 35.3% Selling, general and administrative expenses 53.2 40.6 ------ ------- Income before interest and income taxes 39.5 32.3 % to net revenues 15.7% 15.7% Interest expense 9.8 7.2 Provision for income taxes 11.6 9.9 ------- -------- Net income $ 18.1 $ 15.2 ======= ======= Net revenues in the first quarter of fiscal 1997 were $251.5 million, 21.8% higher than the $206.5 million recorded in the first quarter of fiscal 1996. Intimate apparel division net revenues increased 24.2% to $194.8 million in the first quarter of fiscal 1997 from $156.8 million in the first quarter of fiscal 1996. The increase in net revenues in the first quarter of fiscal 1997 compared to fiscal 1996 reflects $32.5 million related to the acquisitions of Lejaby, GJM and Bodyslimmers and an increase in Calvin Klein net revenues. International shipments in the first quarter of fiscal 1997, including Calvin Klein and Lejaby, increased 63.9% to $65.4 million from $39.9 million in the first quarter of fiscal 1996. 6 International sales accounted for 33.6% of total Divisional Net sales in the first quarter of fiscal 1997 compared to 25.4% of total Divisional Net sales in the first quarter of fiscal 1996, reflecting the Company's continuing expansion outside the United States. Menswear division net revenues increased 11.2% to $47.5 million in the first quarter of fiscal 1997 from $42.7 million in the first quarter of fiscal 1996. Excluding discontinued operations, net revenues increased 36.1% in fiscal 1997 compared to fiscal 1996, primarily due to an increase of 41% in Chaps. Gross profit increased 27.2% to $92.7 million in the first quarter of fiscal 1997 from $72.9 million in the first quarter of fiscal 1996. Gross margin was 36.9% in the first quarter of fiscal 1997, 160 basis points higher than the 35.3% recorded in the first quarter of fiscal 1996. The increase in gross profit reflects the higher net revenues, as noted above. The increase in gross profit as a percentage of net revenues reflects a higher mix of regular price sales, manufacturing efficiencies and the positive impact of discontinuing the Hathaway brand. Selling, general and administrative expenses increased to $53.2 million (21.1% of net revenues) in the first quarter of fiscal 1997 from $40.6 million (19.6% of net revenues) in the first quarter of fiscal 1996. The increase in selling, general and administrative expenses primarily reflects the higher sales volume, as noted above. The increase in selling, general and administrative expenses as a percentage of net revenues reflects higher advertising to support the Marilyn Monroe and Calvin Klein businesses (increasing from 3.7% to 4.8% of net revenues) and higher amortization expense related to intangible assets from the acquisitions completed in fiscal 1996, partially offset by cost savings from the consolidation implemented in 1996. Interest expense increased $2.6 million to $9.8 million in the first quarter of fiscal 1997 compared to $7.2 million in the first quarter of fiscal 1996. The increase reflects interest costs attributable to the three acquisitions completed in fiscal 1996. 7 The provision for income taxes for the first quarter of fiscal 1997 reflects an estimated effective income tax rate of 39.0% for the 1997 fiscal year. Net income for the first quarter of fiscal 1997 was $18.1 million, an increase of 19.1% compared to net income of $15.2 million in the first quarter of fiscal 1996. The increase in net income reflects the increased operating income noted above partially offset by higher interest expense. CAPITAL RESOURCES AND LIQUIDITY. On May 11, 1995, consistent with the Company's goal of providing increased shareholder value, the Company declared a quarterly cash dividend of $0.07 per share. The Company has since declared nine successive quarterly cash dividends. In fiscal 1997, the Company increased its quarterly cash dividend from $0.07 per share to $0.08 per share. 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 in operations before the payment of accruals related to exiting the Hathaway business, consolidation and realignment of the intimate apparel division and other items was $75.5 million in the first quarter of fiscal 1997 compared to $71.3 million in the first quarter of fiscal 1996. The increase in cash used in operating activities reflects higher seasonal working capital usage primarily due to higher sales. Net cash used in operations for the first quarter of fiscal 1997 also includes $1.6 million of the payment of accruals related to exiting the Hathaway business, consolidating and realigning the intimate apparel division and other items which were completed in fiscal 1996. 8 Cash used in investing activities was $25.0 million for the first quarter of fiscal 1997 compared to $21.9 million in the first quarter of fiscal 1996. Capital expenditures were $9.9 million in the first quarter of fiscal 1997 compared to $8.0 million in the first quarter of fiscal 1996. Payment for the purchase of acquired assets and acquisition accruals includes $14.0 million related to the purchase of GJM in fiscal 1996 and $6.2 million related to the payment of acquisition accruals, primarily Lejaby, in fiscal 1997. In addition, $8.9 million was paid related to intangibles and other assets in the first quarter of fiscal 1997. Cash provided from financing activities was $99.9 million in the first quarter of fiscal 1997 compared to $92.3 million in the first quarter of fiscal 1996. The balance under the Company's revolving credit agreements which normally increases during the first quarter of the fiscal year was $116.5 million in the first quarter of fiscal 1997 compared to $96.3 million in the first quarter of fiscal 1996. The Company repaid $8.3 million of long term debt in the first quarter of fiscal 1997 compared to $0.3 million in the first quarter of fiscal 1996. The Company repurchased 162,800 shares of its common stock in the first quarter of fiscal 1997 at a total purchase price of approximately $5.3 million. The Company has purchased approximately $12.4 million of its common stock under the current repurchase program, representing 412,800 shares of its common stock. 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 working capital 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. 9 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. 11.1 Earnings per share. 27.1 Financial Data Schedule (b) Reports of Form 8-K. No reports on Form 8-K were filed during the first quarter of fiscal 1997. 10 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 20, 1997 By: /s/ WILLIAM S. FINKELSTEIN -------------------------- William S. Finkelstein Director, Senior Vice President and Chief Financial Officer Principal Financial and Accounting Officer Date: May 20, 1997 By: /s/ Stanley P. Silverstein -------------------------- Stanley P. Silverstein Vice President, General Counsel and Secretary 11