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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 JULY 4, 1998
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
August 14, 1998 is as follows: 63,323,706.
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THE WARNACO GROUP, INC.
I N D E X
Page No.
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements:
Consolidated Condensed Balance Sheets - July 4, 1998 and January 3, 1998......... 3
Consolidated Condensed Statements of Income - Three and Six Months
Ended July 4, 1998 and July 5, 1997.......................................... 4
Consolidated Condensed Statements of Cash Flows - Six Months
Ended July 4, 1998 and July 5, 1997.......................................... 5
Notes to Consolidated Condensed Financial Statements............................. 6
Item 2 - Management's Discussion and Analysis of Results of Operations
and Financial Condition.......................................................... 11
PART II. OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders......................... 15
Item 6 - Exhibits and Reports on Form 8-K............................................ 15
- 2 -
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE WARNACO GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS)
JULY 4, JANUARY 3,
1998 1998
------------- -------------
(UNAUDITED)
ASSETS
Current assets:
Cash ......................................................... $ 16,540 $ 12,009
Accounts receivable - net .................................... 367,667 296,378
Inventories:
Finished goods ............................................. 422,579 340,246
Work in process ............................................ 131,882 107,495
Raw materials .............................................. 69,612 78,444
----------- -----------
Total inventories ............................................ 624,073 526,185
Other current assets ......................................... 46,733 45.228
----------- -----------
Total current assets ............................................ 1,055,013 879,800
Property, plant and equipment (net of accumulated depreciation of
$114,766 and $101,982, respectively) ......................... 189,609 130,400
Other assets:
Excess of cost over net assets acquired - net ................ 401,227 349,235
Other assets - net ........................................... 411,371 368,213
----------- -----------
Total other assets .............................................. 812,598 717,448
----------- -----------
$ 2,057,220 $ 1,727,648
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowing under foreign credit facilities .................... $ 26,485 $ 12,751
Current portion of long-term debt ............................ 8,877 7,850
Accounts payable ............................................. 264,163 289,817
Accrued liabilities .......................................... 92,626 116,892
Income taxes payable ......................................... 3,806 5,203
----------- -----------
Total current liabilities ....................................... 395,957 432,513
----------- -----------
Long-term debt .................................................. 684,708 354,263
Other long-term liabilities ..................................... 30,109 14,022
Deferred income taxes ........................................... 5,739 18,009
Company-Obligated Mandatorily Redeemable Convertible Preferred
Securities of Designer Finance Trust Holding Solely
Convertible Debentures ....................................... 101,292 100,758
Stockholders' equity:
Preferred Stock; $.01 par value .............................. -- --
Common Stock; $.01 par value ................................. 691 633
Additional paid-in capital ................................... 952,321 940,461
Cumulative translation adjustment ............................ (10,602) (14,838)
Accumulated deficit .......................................... (25,008) (63,900)
Treasury stock, at cost ...................................... (56,688) (38,567)
Notes receivable for common stock issued
and unearned stock compensation ............................ (21,299) (15,706)
----------- -----------
Total stockholders' equity ...................................... 839,415 808,083
----------- -----------
$ 2,057,220 $ 1,727,648
=========== ===========
This Statement should be read in conjunction with the accompanying
Notes to Consolidated Financial Statements.
-3-
THE WARNACO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- ----------------------
JULY 4, JULY 5, JULY 4, JULY 5,
1998 1997 1998 1997
-------- -------- -------- ---------
(UNAUDITED)
Net revenue .................................................. $438,874 $290,204 $858,082 $541,730
Cost of goods sold ........................................... 287,944 190,899 558,799 349,683
-------- -------- -------- --------
Gross profit ................................................. 150,930 99,305 299,283 192,047
Selling, administrative and general expenses ................. 95,975 60,480 192,138 113,694
-------- -------- -------- --------
Income before interest and income taxes ...................... 54,955 38,825 107,145 78,353
Interest expense ............................................. 15,146 10,702 28,779 20,515
-------- -------- -------- --------
Income before income taxes ................................... 39,809 28,123 78,366 57,838
Provision for income taxes ................................... 14,295 10,968 28,129 22,557
-------- -------- -------- --------
Net income ................................................... $ 25,514 $ 17,155 $ 50,237 $ 35,281
======== ======== ======== ========
Earnings per share:
Basic ................................................... $ 0.41 $ 0.33 $ 0.81 $ 0.69
======== ======== ======== ========
Diluted ................................................. $ 0.40 $ 0.32 $ 0.78 $ 0.66
======== ======== ======== ========
Cash dividends per share of common stock ..................... $ 0.09 $ 0.08 $ 0.18 $ 0.16
======== ======== ======== ========
Weighted average number of shares of common stock outstanding:
Basic ................................................... 62,603 51,274 62,358 51,269
======== ======== ======== ========
Diluted ................................................. 64,440 53,365 64,092 53,281
======== ======== ======== ========
This Statement should be read in conjunction with the accompanying
Notes to Consolidated Financial Statements.
-4-
THE WARNACO GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SIX MONTHS ENDED
-----------------------------
JULY 4, JULY 5,
1998 1997
-------- --------
(UNAUDITED)
Cash flow from operations:
Net income ...................................................... $ 50,237 $ 35,281
Non-cash items included in net income:
Depreciation and amortization .............................. 27,783 15,260
Amortization of unearned stock compensation ................ 2,089 1,500
Change in deferred income taxes ................................. 23,375 --
Other changes in operating accounts ............................. (222.191) (150,034)
--------- ---------
Net cash used in operations before non-recurring items .......... (118,707) (97,993)
Cash expenses related to non-recurring charges .................. (4,220) (3,462)
--------- ---------
Net cash used in operations ..................................... (122,927) (101,455)
--------- ---------
Cash flow from investing activities:
Proceeds from sale of fixed assets ......................... 304 437
Purchase of property, plant & equipment .................... (72,121) (20,309)
Payment of assumed liabilities and acquisition accruals ......... -- (10,768)
Acquisition of assets and licenses ......................... (40,986) --
Increase in intangible and other assets .................... (47,018) (7,073)
--------- ---------
Net cash used in investing activities ........................... (159,821) (37,713)
--------- ---------
Cash flow from financing activities:
Borrowing under revolving credit facilities ................ 328,956 164,211
Borrowing under term loan agreement ........................ 21,500 --
Proceeds from the exercise of options and payment of
notes receivable from employees ........................ 36,436 3,329
Purchase of treasury shares and payment of withholding taxes
on option exercises .................................... (53,766) (5,357)
Repayment of debt .......................................... (4,724) (18,713)
Increase in other assets and deferred financing costs ........... (33,057) (131)
Dividends paid ............................................. (10,378) (7,805)
--------- ---------
Net cash provided from financing activities ..................... 284,967 135,534
--------- ---------
Effect of exchange rate changes on cash ......................... 2,312 2,185
--------- ---------
Increase (decrease) in cash ..................................... 4,531 (1,449)
Cash at beginning of period ................................ 12,009 11,840
--------- ---------
Cash at end of period ...................................... $ 16,540 $ 10,391
========= =========
Other changes in operating accounts:
Accounts receivable ........................................ $ (71,998) $ (25,774)
Inventories ................................................ (92,123) (78,285)
Other current assets ....................................... (1,128) (6,823)
Accounts payable and accrued liabilities ................... (55,583) (41,268)
Income taxes payable ....................................... (1,359) 384
Other ........................................................... -- 1,732
--------- ---------
$(222,191) $(150,034)
========= =========
This Statement should be read in conjunction with the accompanying
Notes to Consolidated Financial Statements.
-5-
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
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 notes
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 July 4, 1998 as well as its results of operations and cash
flows for the periods ended July 4, 1998 and July 5, 1997. 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 notes
thereto included in the Company's Annual Report on Form 10-K for the fiscal year
ended January 3, 1998. Certain amounts for prior periods have been reclassified
to be comparable with the current period presentation.
NOTE 2 - ACQUISITION
- --------------------
In June 1998, the Company acquired certain inventory and other assets as well as
the sub-license to produce Calvin Klein jeans and jeans-related products for
children in the United States, Mexico and Central and South America from
Commerce Clothing Company LLC ("Commerce") for approximately $36.9 million. A
preliminary allocation of the purchase price to the fair value of the assets
acquired is summarized below:
(in millions)
Inventories...................................... $ 5.3
Other current assets............................. 0.3
Fixed assets..................................... 0.3
Intangible and other assets...................... 39.0
Accrued liabilities.............................. (8.0)
------
Purchase price................................... $ 36.9
======
In addition, the Company entered into a supply agreement with a subsidiary of
Commerce whereby the Company will purchase, at a specified price, certain
products for a period of eighteen months.
In June 1998, the Company also acquired certain assets as well as the
sub-license to distribute Calvin Klein jeans, jeans-related products and khakis
for men and women in Mexico and Central Mexico from Macro Jeans S.A. de C.V. for
approximately $4.0 million.
NOTE 3 - CAPITAL STOCK
- ----------------------
On May 8, 1998, the Company's Board of Director's declared a quarterly cash
dividend of $0.09 per share to be paid on July 7, 1998 to shareholders of record
as of June 5, 1998. During the first half of fiscal 1998, the Company
repurchased approximately 583,000 shares under equity option
-6-
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
arrangements at a cost of approximately $20.5 million. A total of approximately
1.6 million shares have been repurchased under the current authorization of
12.42 million shares leaving approximately 10.8 million shares available to
repurchase. In addition, the Company has options outstanding on approximately
1.8 million shares at an average forward price of approximately $38.00 per
share. These option arrangements expire between August 1998 and March 1999.
After accounting for these options, the Company has approximately 9.0 million
shares available to repurchase. As of July 4, 1998, treasury stock includes
approximately 1.9 million shares at a cost of $56.7 million. The change in
additional paid-in capital during the first half of fiscal 1998 primarily
relates to stock options exercised in which shares were tendered for payment of
the exercise price of the options and the related employee withholding taxes,
net of related tax benefits to the Company.
NOTE 4 - RESTRICTED STOCK
- -------------------------
In May 1998, the Company's Board of Directors authorized the issuance of 182,903
shares of restricted stock to certain employees, including certain officers and
directors of the Company. The restricted shares vest ratably over four years and
will be fully vested in May 2002. The fair market value of the restricted shares
was approximately $7.7 million at the date of grant. The Company will recognize
compensation expense equal to the fair value of the restricted shares over the
vesting period.
NOTE 5 - NEW ACCOUNTING STANDARDS
- ---------------------------------
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" (SFAS No. 130) effective with the beginning of
fiscal 1998. SFAS No. 130 establishes standards for reporting and display of
changes in equity from nonowner sources in the financial statements; however,
the adoption of SFAS No. 130 has no impact on the Company's net earnings or
stockholders' equity. SFAS No. 130 requires, among other things, foreign
currency translation adjustments, which prior to adoption were reported
separately in stockholders' equity, to be included in other comprehensive
income.
Total comprehensive income was $25.4 million and $18.7 million for the three
month periods ended July 4, 1998 and July 5, 1997 and $52.9 million and $35.8
million for the six month periods ending July 4, 1998 and July 5, 1997,
respectively.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS
No. 131). In December 1997, the FASB issued SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits" (SFAS No. 132),
which revises disclosure requirements for employers' pension and other retiree
benefits. These statements are effective for the Company for fiscal 1998. The
Company is studying the application of these new statements to evaluate the
disclosure requirements. The adoption of these statements will have no impact on
the Company's consolidated financial position, liquidity, cash flows or results
of operations.
-7-
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
In February, 1998, the FASB approved the issuance of an AICPA Statement of
Position (SOP 98-5) requiring that pre-operating costs relating to the start-up
of new manufacturing facilities and product launches be expensed as incurred. It
has been the Company's consistent accounting policy to capitalize such costs for
amortization over appropriate periods not to exceed five years. Adoption of the
SOP will be required for the Company in fiscal 1999 and will be reported as
adoption of a change in accounting principle, net of tax. Based on amounts
capitalized at July 4, 1998 and projected pre-operating costs to be incurred
through the balance of the fiscal year, net of amortization, the impact of the
SOP could result in a non-cash charge of approximately $60 million, net of
income tax benefits.
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 is evaluating the impact that this statement will have on the
Company's financial statements.
NOTE 6 - DEBT
- -------------
In April 1998, the Company amended a 1996 bank credit agreement (the
"Agreement") to increase a revolving loan facility to 480 million French Francs
from 120 million French Francs. Borrowings under the Agreement bear interest at
LIBOR plus .40% and mature on December 31, 2001.
In July 1998, the Company amended its $300 million Trade Letter of Credit
Facility (the "L/C Facility") to increase the size of the facility to $450
million, to extend the borrowing period for amounts due under the maturing
letters of credit from 120 days to 180 days, to extend the maturity of the L/C
Facility to July 29, 1999 and to eliminate certain restrictions relating to debt
and investments. In conjunction with the amendment of the L/C Facility, the
Company also amended its $600 million revolving credit facility and its $200
million 364-day credit facility to allow for the increase in the L/C Facility
and the elimination of certain restrictions relating to debt and investments.
The Company uses derivative financial instruments in the management of interest
rate and foreign currency exposures. The Company does not use derivative
financial instruments for trading or speculative purposes. During the first half
of fiscal 1998, the Company entered into new interest rate swap agreements and
amended certain existing interest rate swap agreements with several of its
lenders to convert variable rate borrowings of $450.0 million to fixed rate
borrowings at 4.99%. The agreements mature in March 2001 with regard to
borrowings of $250.0 million and September 2002 with regard to borrowings of
$200.0 million. The agreements are extendable at the option of the lenders
expiring from March 2006 through September 2009 at fixed rates ranging from
5.87% to 6.28% on borrowings of $575.0 million.
-8-
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL SATEMENTS - (Continued)
NOTE 7 - SUMMARIZED FINANCIAL AND PRO-FORMA INFORMATION
- -------------------------------------------------------
The following is summarized unaudited financial information of the Company's
wholly-owned subsidiary, Designer Holdings as of July 4, 1998 and January 3,
1998 and for the six month periods ended July 4, 1998 and June 30, 1997,
respectively. Designer Holdings, acquired by the Company in the fourth quarter
of 1997, develops, manufactures and markets designer jeanswear and jeans-related
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.
(DOLLARS IN THOUSANDS)
BALANCE SHEET SUMMARY: JULY 4, JANUARY 3,
1998 1998
---------- ----------
Current assets...................................................... $ 132,922 $ 129,285
Noncurrent assets................................................... 478,287 497,557
Current liabilities................................................. 70,314 104,458
Noncurrent liabilities.............................................. 58,934 59,800
Redeemable preferred securities..................................... 101,292 100,758
Stockholders' equity................................................ 380,669 361,826
INCOME STATEMENT SUMMARY: SIX MONTHS ENDED
-----------------------------
JULY 4, JUNE 30,
1998(a) 1997(b)
---------- ----------
Net revenues........................................................ $ 203,230 $ 226,855
Cost of good sold................................................... 137,243 158,869
Net income.......................................................... 18,843 11,018
(a) Excludes net revenues of $35.7 million now reported as Retail
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.
(b) The summarized income statement information for the six months ended
June 30, 1997 is presented on a historical basis and does not
reflect the effect of the acquisition by the Company. Certain
amounts have been reclassified to cost of goods sold to conform to
the current year presentation.
The following summarized unaudited pro forma information combines the historical
results of operations of the Company with Designer Holdings, after the effects
of estimated purchase accounting adjustments, assuming the acquisition had
occurred at the beginning of fiscal 1997. The pro forma information does not
reflect any cost savings or other benefits anticipated as a result of the
acquisition. The pro forma information does not purport to be indicative of the
results that would have been obtained if the operations had actually been
combined during the period presented nor are they indicative of future results
for the combined companies.
(dollars in thousands)
SIX MONTHS ENDED
JULY 5, 1997
--------------------
Statement of Income Data:
Net revenues.................................................... $768,600
Net income...................................................... $ 44,900
Income per common share:
Basic...................................................... $0.73
=====
Diluted.................................................... $0.70
=====
-9-
THE WARNACO GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL SATEMENTS - (Continued)
The final assessment of the purchase accounting estimates have not yet been
completed. During the six months ended July 4, 1998, adjustments to these
estimates increased the excess of cost over net assets acquired by $15.8
million.
NOTE 8 - CASH FLOW INFORMATION
- ------------------------------
SIX MONTHS ENDED
----------------------------
JULY 4, JULY 5,
1998 1997
----------- ----------
Cash paid for:
Interest............................................................... $26,992 $20,061
Income taxes, net of refunds received................................... (1,740) 3,688
NOTE 9 - EARNINGS PER SHARE
- ---------------------------
The following table sets forth the computation of basic and diluted earnings per
share:
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------- ------------------------------
JULY 4, JULY 5, JULY 4, JULY 5,
1998 1997 1998 1997
--------- --------- ---------- -----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
Numerator for basic and diluted earnings
per share:
Net income ................................. $25,514 $17,155 $50,237 $35,281
======= ======= ======= =======
Denominator for basic earnings per share--
weighted average shares ................. 62,603 51,274 62,358 51,269
------- ------- ------- -------
Effect of dilutive securities:
Employee stock options .................. 1,335 1,583 1,267 1,597
Restricted stock shares ................. 502 508 467 415
------- ------- ------- -------
Dilutive potential common shares ........... 1,837 2,091 1,734 2,012
------- ------- ------- -------
Denominator for diluted earnings per share--
weighted average adjusted shares ........ 64,440 53,365 64,092 53,281
======= ======= ======= =======
Basic earnings per share ................... $ 0.41 $ 0.33 $ 0.81 $ 0.69
======= ======= ======= =======
Diluted earnings per share ................. $ 0.40 $ 0.32 $ 0.78 $ 0.66
======= ======= ======= =======
Options to purchase 255,000 shares of common stock at prices ranging from $39.25
to $42.00 per share were outstanding during the first half of fiscal 1998 but
were not included in the computation of diluted earnings per share because the
options' exercise price was greater than the average market price of the common
shares. The options, which expire from March 2008 through June 2008 were still
outstanding as of July 4, 1998.
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.
-10-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
RESULTS OF OPERATIONS
STATEMENTS OF INCOME (SELECTED DATA)
(AMOUNTS IN MILLIONS OF DOLLARS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------- ----------------------------
JULY 4, JULY 5, JULY 4, JULY 5,
1998 1997 1998 1997
------------- ---------- ----------- ----------
Net revenues ............................... $ 438.9 $ 290.2 $ 858.1 $ 541.7
Cost of goods sold ......................... 288.0 190.9 558.8 349.7
-------- -------- -------- --------
Gross profit ............................... 150.9 99.3 299.3 192.0
% of net revenues ....................... 34.4% 34.2% 34.9% 35.5%
Selling, administrative and general expenses 96.0 60.5 192.1 113.7
-------- -------- -------- --------
Income before interest and income taxes .... 54.9 38.8 107.2 78.3
% to net revenues ....................... 12.5% 13.4% 12.5% 14.5%
Interest expense ........................... 15.1 10.7 28.8 20.5
Provision for income taxes ................. 14.3 10.9 28.2 22.5
-------- -------- -------- --------
Net income ................................. $ 25.5 $ 17.2 $ 50.2 $ 35.3
======== ======== ====== ========
Net revenues in the second quarter of fiscal 1998 were $438.9 million, $148.7
million or 51.2% higher than the $290.2 million recorded in the second quarter
of fiscal 1997. 1998 net revenues include $110.5 million associated with the
acquisition of Designer Holdings, completed in the fourth quarter of 1997.
During the second quarter of fiscal 1998, the Company acquired the sub-license
to produce Calvin Klein jeans and jeans-related products for children in the
United States, Mexico and Central and South America, as well as the sub-license
to distribute Calvin Klein jeans, jeans- related products and khakis for men and
women in Mexico and Central America. These acquisitions contributed $8.9 million
to net revenues during the current quarter. Excluding the impact of the above
acquisitions, net revenues increased $29.3 million or 10.1%. Net revenues for
the six months ended July 4, 1998 were $858.1 million, an increase of $316.4
million or 58.4 % over the $541.7 million in the first half of fiscal 1997.
Acquisitions contributed $239.3 million to net revenues for the six month period
ended July 4, 1998. Excluding net revenues attributable to the Calvin Klein
acquisitions, net revenues increased $77.1 million or 14.2%.
Intimate apparel division net revenues increased $6.5 million or 3.0% to $220.5
million from $214.0 million in the second quarter of fiscal 1997. The increase
in net revenues in the second quarter of fiscal 1998 compared with fiscal 1997
was generated by a strong increase in core domestic branded products, the result
of the continued success of Olga's Simply Perfect and Warner's Naked Truth
lines. Partially offsetting these increases were declines in private label net
revenues, reflecting the Company's objective to reduce private label business.
International results were impacted by changes in foreign currency exchange
rates. Net revenues for the six months ended July 4, 1998 increased $29.7
million or 7.3% to $438.5 million compared with $408.8 million in the first six
months of 1997. The increase was due to stronger shipments of core domestic
branded products.
Sportswear division net revenues increased $122.4 million or 196.2% to $184.8
million in the second quarter of fiscal 1998. The acquisition of Designer
Holdings in the fourth quarter of 1997 added $94.1 million to the Sportswear
division's net revenues. Additionally, the acquisition of the Calvin Klein
jeanswear children's sub-license and Mexico sub-license contributed $8.9 million
to net revenues. Excluding these acquisitions, net revenues increased by $19.4
million or 31.1%. This increase is attributable to a 33.7% increase in Chaps by
Ralph Lauren domestic and international
-11-
shipments. Net revenues for the six months ended July 4, 1998 increased $251.7
million or 229.0% to $361.6 million compared with $109.9 million in the first
six months of fiscal 1997. Excluding the Calvin Klein jeanswear and kidswear
acquisitions for the six-month period, net revenues increased by $39.5 million
or 35.9%. The increase for the six months primarily reflects an increase in net
revenues of 37.1% in Chaps by Ralph Lauren and an 18.9% increase for Calvin
Klein accessories.
Gross profit increased $51.6 million or 52.0% to $150.9 million in the second
quarter of fiscal 1998 compared with $99.3 million in the second quarter of
fiscal 1997. Gross profit as a percentage of net revenues increased 20 basis
points to 34.4% in the second quarter of fiscal 1998 compared with 34.2% in the
second quarter of fiscal 1997. The improvement in gross margin was a result of
greater manufacturing efficiencies in the intimate apparel division. Gross
profit for the first six months of fiscal 1998 increased $107.3 million or 55.9%
to $299.3 million from $192.0 million in the first six months of fiscal 1997.
Gross profit as a percentage of net revenues was 34.9% for the six months of
fiscal 1998 compared with 35.5% in 1997. The year-to-date gross margin reflects
the inclusion of the jeanswear business, which carries a lower gross margin.
Excluding the jeanswear business, gross margins were 35.6%, up 10 basis points.
Selling, administrative and general expenses increased $35.5 million or 58.7% to
$96.0 million (21.9% of net revenues) in the second quarter of fiscal 1998
compared with $60.5 million (20.8% of net revenues) in the second quarter of
fiscal 1997. Selling, administrative and general expenses for the first six
months of fiscal 1998 increased $78.4 million or 69.0% to $192.1 million (22.4%
of net revenues) compared with $113.7 million (21.0% of net revenues) in fiscal
1997. The increase in selling, administrative and general expenses is due
primarily to higher marketing and corporate expenses reflecting additional
headcount and costs associated with information services related to new systems
and the year 2000 implementation.
Interest expense increased $4.4 million in the second quarter of fiscal 1998 to
$15.1 million. Interest expense for the six months ended July 4, 1998 increased
$8.3 million to $28.8 million from $20.5 million in the first six months of
fiscal 1997. The increase in 1998 interest expense reflects the funding of the
Company's recent acquisitions and stock buyback program.
The provision for income taxes for the second quarter of fiscal 1998 and for the
first six months of fiscal 1998 reflects an estimated full year effective tax
rate of approximately 36.0%.
Net income for the second quarter of fiscal 1998 was $25.5 million, an increase
of $8.3 million or 48.3% compared with $17.2 million in the second quarter of
fiscal 1997. Net income for the first six months of fiscal 1998 increased $14.9
million or 42.2% to $50.2 million compared with $35.3 million in the first six
months of fiscal 1997. The increase for both the quarter and six months reflects
higher net revenues and associated gross profit mentioned above.
CAPITAL RESOURCES AND LIQUIDITY
The Company's liquidity requirements arise primarily from its debt service
requirements, capital expenditures related to the Company's year 2000 compliance
program and the funding of the Company's working capital needs, primarily
inventory and accounts receivable. The Company's borrowing requirements are
seasonal, with peak 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.
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Cash used in operations before non-recurring items was $118.7 million in the
first half of fiscal 1998 compared with $98.0 million in the first half of
fiscal 1997. The increase in cash used in operating activities reflects higher
working capital usage primarily due to higher sales and seasonal increases in
working capital, primarily inventory.
Cash used in investing activities was $159.8 million for the first half of
fiscal 1998 compared with $37.7 million in the first half of fiscal 1997.
Capital expenditures were $72.1 million in the first half of fiscal 1998,
compared with $20.3 million in the first half of fiscal 1997 and included
amounts for information systems related to year 2000 compliance and store
fixture programs for Calvin Klein Jeans "shop in shops". During the second
quarter of 1998, the Company acquired certain inventory and other assets as well
as the sub-license to produce Calvin Klein jeans and jeans-related products for
children in the United States, Mexico and Central and South America. In
addition, the Company acquired certain assets as well as the sub-license to
distribute Calvin Klein jeans and jeans-related products and khakis for men and
women in Mexico and Central America. The purchase price of these acquisitions
was approximately $40.9 million.
Cash provided from financing activities was $285.0 million in the first half of
fiscal 1998 compared with $135.5 million in the first half of fiscal 1997. The
increase in the Company's revolving credit balance during the first half of
fiscal 1998 was $329.0 million compared with $164.2 million in the first half of
fiscal 1997 due to increased working capital requirements on higher sales, the
funding of the most recent acquisitions and stock repurchase program and capital
expenditures for the Company's year 2000 compliance program. The Company paid
approximately $53.8 million for the repurchase of shares and withholding taxes
on option exercises in the first half of fiscal 1998. The Company repurchased
approximately 583,000 shares of its common stock in the first half of fiscal
1998 at an average cost of approximately $35.12 per share or approximately $20.5
million. The Company has purchased approximately 1.6 million shares of its
common stock under the current repurchase authorization of 12.42 million shares,
leaving approximately 10.8 million shares available to repurchase. The Company
has options outstanding on approximately 1.8 million shares at an average
forward price of $38.00 per share, expiring between August 1998 and March 1999.
In April 1998, the Company amended its 1996 Bank Credit Agreements (the
"Agreement") to increase its revolving loan facilities to 480 million French
Francs from 120 million French Francs. Borrowings under the Agreement bear
interest at LIBOR plus .40% and mature on December 31, 2001. In July 1998, the
Company amended its $300 million Trade Letter of Credit Facility (the "L/C
Facility") to increase the size of the facility to $450 million, to extend the
borrowing period for amounts due under the maturing letters of credit from 120
days to 180 days, to extend the maturity of the L/C Facility to July 29, 1999
and to eliminate certain restrictions relating to debt and investments. The
amount of borrowings available under both the 1996 Bank Credit Agreements and
the L/C Facility was increased to accommodate the internal growth of the
Company's business as well as the increased demand for finished product
purchases stemming from the acquisition of Designer Holdings in the fourth
quarter of 1997 and the acquisition of the CK Kids business in the second
quarter of 1998. In conjunction with the amendment of the L/C Facility, the
Company also amended its $600 million revolving credit facility and its $200
million 364-day credit facility to allow for the increase in the L/C Facility
and the elimination of certain restrictions relating to debt and investments.
YEAR 2000 AND ECONOMIC AND MONETARY UNION ("EMU") COMPLIANCE.
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
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benefits for the Company, as well as assuring that all information systems will
meet "year 2000" and EMU compliance. Full implementation of this program is
expected to require expenditures, primarily capital, of approximately $60.0
million over the next three years, primarily for year 2000 compliance. 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. Approximately $35.2 million has
been incurred through July 4, 1998 and such amounts are included in property and
equipment.
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
speculative or trading purposes. The Company has interest rate agreements with
several financial institutions to limit exposure to interest rate volatility.
Additionally, the Company enters into foreign currency forward and option
contracts to mitigate the risks 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. The
Company's currency exposures vary, but are primarily concentrated in the
Canadian dollar, Mexican peso, British pound, German mark, French franc and Hong
Kong dollar.
The value of market risk sensitive instruments is subject to change as a
result of movement in market rates and prices. Based on a hypothetical
(one-percentage point) increase in interest rates, the potential losses in
future earnings, fair value and cash flows are immaterial.
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PART II -- OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the Annual Meeting of Shareholders of the Company held on May 8, 1998, the
three nominees to the Board of Directors were elected as follows:
For Against Withheld
---------- ---------- -----------
William S. Finkelstein.................. 51,925,509 -- 949,101
Walter F. Loeb.......................... 52,177,255 -- 697,355
Stewart A. Resnick...................... 52,211,669 -- 662,941
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
10.1 -- Amendment No. 1, dated as of July 31, 1998, to the Credit Agreement
dated as of August 12, 1997, among Warnaco Inc. and The Warnaco Group,
Inc., as Borrowers, and The Bank of Nova Scotia, as Managing Agent and
Administrative Agent and Citibank, N.A., as Managing Agent, and certain
other lenders named therein.
10.2 -- Amendment No. 1, dated as of July 31, 1998, to the Credit Agreement
dated as of November 26, 1997, among Warnaco Inc. and The Warnaco Group,
Inc., as Borrowers, and The Bank of Nova Scotia, as Managing Agent and
Administrative Agent and Citibank, N.A., as Managing Agent, and certain
other lenders named therein.
10.3 -- Fifth Amended and Restated Credit Agreement, dated as of July 31,1998,
among Warnaco Inc., as the U.S. Borrower, Designer Holdings, Ltd. and
other wholly-owned domestic subsidiaries as designated from time to
time, as the Sub-Borrowers, Warnaco (HK) Ltd., Warnaco B.V., Warnaco
Netherlands B.V. and Warnaco Holland B.V., as the Foreign Borrowers, The
Warnaco Group, Inc., as a Guarantor, and Societe Generale, as the
Documentation Agent, Citibank, N.A., as the Syndication Agent, and The
Bank of Nova Scotia, as the Administrative Agent, and certain other
lenders named therein.
27.1 -- Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the second quarter of fiscal 1998.
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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: August 18, 1998 By: /s/ WILLIAM S. FINKELSTEIN
----------------------------
William S. Finkelstein
Director, Senior Vice President
and Chief Financial Officer
Principal Financial and
Accounting Officer
Date: August 18, 1998 By: /s/ STANLEY P. SILVERSTEIN
----------------------------
Stanley P. Silverstein
Vice President, General Counsel
and Secretary
STATEMENT OF DIFFERENCES
------------------------
The section symbol shall be expressed as............................... 'SS'
The registered trademark symbol shall be expressed as.................. 'r'