1
UNITED STATES 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
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended July 1, 2001 Commission file number 0-1790
RUSSELL CORPORATION
(Exact name of registrant as specified in its charter)
Alabama 63-0180720
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3330 Cumberland Blvd, Suite 800, Atlanta, Georgia 30339
and
755 Lee Street, Alexander City, Alabama 35011-0272
(Address of principal executive offices) (Zip Code)
(256) 500-4000
(Registrant's telephone number, including area code)
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, and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of each of the issuer's classes of common
stock.
Class Outstanding at August 6, 2001
Common Stock, Par Value $.01 Per Share 31,961,003 shares
(Excludes Treasury)
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RUSSELL CORPORATION
INDEX
Page No.
--------
Part I. Financial Information:
Item 1. Financial Statements
Consolidated Condensed Balance Sheets --
July 1, 2001 and December 30, 2000 2
Consolidated Condensed Statements of Operations --
Thirteen Weeks Ended July 1, 2001 and July 2, 2000 3
Twenty-six Weeks Ended July 1, 2001 and July 2, 2000 4
Consolidated Condensed Statements of Cash Flows --
Twenty-six Weeks Ended July 1, 2001 and July 2, 2000 5
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition 14
Item 3. Quantitative and Qualitative Disclosure about Market Risk 18
Part II. Other Information:
Item 1. Legal Proceedings 18
Item 6. Exhibits and Reports on Form 8-K 18
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PART I - FINANCIAL INFORMATION
RUSSELL CORPORATION
Consolidated Condensed Balance Sheets
(Dollars in Thousands Except Shares and Per Share Amounts)
(Unaudited)
July 1, December 30,
2001 2000
----------- ------------
ASSETS (Unaudited) (Note 1)
Current assets:
Cash $ 12,845 $ 4,193
Accounts receivable, net 190,881 198,610
Inventories - Note 2 482,379 406,446
Prepaid expenses and other current assets 40,932 30,892
----------- -----------
Total current assets 727,037 640,141
Property, plant & equipment 1,111,536 1,213,722
Less accumulated depreciation (681,083) (760,714)
----------- -----------
430,453 453,008
Other assets 58,544 60,011
----------- -----------
Total assets $ 1,216,034 $ 1,153,160
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 130,190 $ 129,456
Current maturities of long-term debt - Note 9 506,033 39,271
----------- -----------
Total current liabilities 636,223 168,727
Long-term debt, less current maturities -- 384,211
Deferred liabilities 74,487 74,282
Shareholders' equity:
Common stock, par value $.01 per share; authorized
150,000,000 shares, issued 41,419,958 shares 414 414
Paid-in capital 46,279 47,104
Retained earnings 698,174 716,460
Treasury stock, at cost (9,469,055 shares at
7/1/01 and 9,524,424 shares at 12/30/00) (224,789) (226,470)
Accumulated other comprehensive loss (14,754) (11,568)
----------- -----------
Total shareholders' equity 505,324 525,940
----------- -----------
Total liabilities & shareholders' equity $ 1,216,034 $ 1,153,160
=========== ===========
See accompanying notes to consolidated condensed financial statements.
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RUSSELL CORPORATION
Consolidated Condensed Statements of Operations
(Dollars in Thousands Except Shares and Per Share Amounts)
(Unaudited)
13 Weeks Ended
----------------------------------
July 1, July 2,
2001 2000
------------ -----------
Net sales $ 251,874 $ 282,462
Costs and expenses:
Cost of goods sold 198,192 209,216
Selling, general and administrative expenses 51,238 55,861
Interest expense 8,017 8,476
Other-net 13,113 4,241
------------ -----------
270,560 277,794
------------ -----------
Income (loss) before income taxes (18,686) 4,668
Provision (benefit) for income taxes (7,101) 2,196
------------ -----------
Net (loss) income $ (11,585) $ 2,472
============ ===========
Weighted-average common shares outstanding:
Basic 31,934,823 32,523,764
Diluted 31,934,823 33,052,135
Net (loss) income per common share:
Basic $ (0.36) $ 0.08
Diluted (0.36) 0.07
Cash dividends per common share $ 0.14 $ 0.14
See accompanying notes to consolidated condensed financial statements.
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RUSSELL CORPORATION
Consolidated Condensed Statements of Operations
(Dollars in Thousands Except Shares and Per Share Amounts)
(Unaudited)
26 Weeks Ended
--------------------------------------
July 1, July 2,
2001 2000
--------------- ---------------
Net sales $ 490,590 $ 534,444
Costs and expenses:
Cost of goods sold 371,852 396,513
Selling, general and administrative expenses 104,278 110,037
Interest expense 15,465 15,353
Other - net 14,071 7,053
--------------- ---------------
505,666 528,956
--------------- ---------------
Income (loss) before income taxes (15,076) 5,488
Provision (benefit) for income taxes (5,729) 2,550
--------------- ---------------
Net (loss) income $ (9,347) $ 2,938
=============== ===============
Weighted-average common shares outstanding:
Basic 31,920,104 32,595,360
Diluted 31,920,104 32,867,697
Net income (loss) per common share:
Basic $ (0.29) $ 0.09
Diluted (0.29) 0.09
Cash dividends per common share $ 0.28 $ 0.28
See accompanying notes to consolidated condensed financial statements.
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Consolidated Condensed Statements of Cash Flows
(Dollars in Thousands)
(Unaudited)
26 Weeks Ended
---------------------------
July 1, July 2,
2001 2000
-------- --------
Operating Activities:
Net (loss) income $ (9,347) $ 2,938
Adjustments to reconcile net (loss) income to
cash used in operating activities:
Depreciation and amortization 26,002 27,776
Deferred income tax benefit (4,305) --
Loss on sale of property, plant & equipment 28 4,320
Non-cash restructuring, asset impairment and
other unusual charges 18,753 2,060
Foreign currency transaction (gain) loss (1,417) 684
Changes in operating assets and liabilities:
Accounts receivable 6,532 (7,907)
Inventories (82,453) (51,319)
Prepaid expenses and other current assets (12,047) (4,356)
Other assets (3,702) 2,891
Accounts payable and accrued expenses 7,186 1,488
Pension and other deferred liabilities 3,475 (208)
-------- --------
Net cash used in operating activities (51,295) (21,633)
Investing Activities:
Purchases of property, plant & equipment (24,706) (32,231)
Cash paid for acquisitions -- (23,450)
Proceeds from the sale of property, plant & equipment 7,589 1,924
-------- --------
Net cash used in investing activities (17,117) (53,757)
Financing Activities:
Borrowings on credit facility - net 89,029 96,441
Payments on notes payable (5,350) (5,350)
Dividends on common stock (8,939) (9,141)
Cost of common stock for treasury -- (4,636)
Distribution of treasury stock 856 --
-------- --------
Net cash provided by financing activities 75,596 77,314
Effect of exchange rate changes on cash 1,468 (885)
-------- --------
Net increase in cash 8,652 1,039
Cash balance at beginning of period 4,193 9,123
-------- --------
Cash balance at end of period $ 12,845 $ 10,162
======== ========
See accompanying notes to consolidated condensed financial statements.
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RUSSELL CORPORATION
Notes to Consolidated Condensed Financial Statements
1. The accompanying unaudited consolidated condensed financial statements
have been prepared in accordance with accounting principles generally
accepted in the United States for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the accompanying
interim consolidated condensed financial statements contain all
adjustments (consisting only of normal recurring accruals) necessary
to present fairly the financial position of the Company as of July 1,
2001, and the results of its operations for the thirteen and
twenty-six week periods ended July 1, 2001 and July 2, 2000, and its
cash flows for the twenty-six week period ended July 1, 2001 and July
2, 2000.
The balance sheet at December 30, 2000 has been derived from the
audited financial statements at that date but does not include all of
the information and footnotes required by accounting principles
generally accepted in the United States for complete financial
statements.
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 year ended December 30, 2000.
Certain prior year amounts have been reclassified to conform to the
fiscal year 2001 presentation. These changes had no impact on
previously reported results of operations or shareholders' equity.
The Company's revenues and income are subject to seasonal variations.
Consequently, the results of operations for the thirteen and
twenty-six week periods ended July 1, 2001 are not necessarily
indicative of the results to be expected for the full year.
2. The components of inventories consist of the following: (in thousands)
7/1/01 12/30/00 7/2/00
--------- -------- ---------
Finished goods $ 378,904 $293,587 $ 317,914
Work in process 71,040 69,568 89,156
Raw materials and supplies 37,530 41,718 40,202
--------- -------- ---------
487,474 404,873 447,272
LIFO and lower-of-cost or
market adjustments, net (5,095) 1,573 (4,956)
--------- -------- ---------
$ 482,379 $406,446 $ 442,316
========= ======== =========
3. On July 22, 1998, the Company announced the Board of Directors had
approved a three-year restructuring and reorganization plan to improve
the Company's global competitiveness. The results of operations for
the interim periods presented herein reflect one-time and other
unusual charges associated with the plan in accordance with accounting
principles generally accepted in the United States. Consequently, the
results of operations for the thirteen and twenty-six week periods
ended July 1, 2001 and July 2, 2000 are not necessarily indicative of
the results to be expected on an ongoing recurring basis when the
restructuring and reorganization plan is completed.
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The charges reflected in the consolidated condensed statements of operations
are as follows: (in thousands)
13 Weeks Ended 26 Weeks Ended
7/1/01 7/2/00 7/1/01 7/2/00
------- ------- ------- -------
Restructuring charges:
Employee termination charges $ 6,422 $ 2,860 $ 6,422 $ 8,265
Exit cost related to facilities 2,178 1,226 3,326 2,347
------- ------- ------- -------
8,600 4,086 9,748 10,612
------- ------- ------- -------
Asset impairment charges:
Impairment of facilities used in operations -- 1,668 -- 1,668
Impairment of facilities and equipment
held for disposal 11,014 1,265 11,774 2,777
------- ------- ------- -------
11,014 2,933 11,774 4,445
------- ------- ------- -------
Other unusual charges 6,963 1,178 7,777 2,488
------- ------- ------- -------
Totals before taxes $26,577 $ 8,197 $29,299 $17,545
======= ======= ======= =======
Totals after taxes $16,478 $ 4,919 $18,165 $10,527
======= ======= ======= =======
These charges have been classified in the consolidated condensed statements of
operations as follows: (in thousands)
13 Weeks Ended 26 Weeks Ended
7/1/01 7/2/00 7/1/01 7/2/00
------- ------- ------- -------
Cost of goods sold $11,993 $ 3,600 $12,033 $ 9,260
Selling, general and administrative expenses 479 1,109 1,159 1,631
Other, net 14,105 3,488 16,107 6,654
------- ------- ------- -------
$26,577 $ 8,197 $29,299 $17,545
======= ======= ======= =======
Charges recorded by segments were recorded as follows: (in thousands)
13 Weeks Ended 26 Weeks Ended
7/1/01 7/2/00 7/1/01 7/2/00
-------- ------- -------- -------
Restructuring charges:
Activewear $ 7,081 $ 4,086 $ 7,948 $ 9,547
International 1,519 -- 1,800 1,065
All Other -- -- -- --
-------- ------- -------- -------
$ 8,600 $ 4,086 $ 9,748 $10,612
======== ======= ======== =======
Asset impairment charges:
Activewear $ 12,367 $ 2,933 $ 13,127 $ 4,445
International (1,353) -- (1,353) --
All Other -- -- -- --
-------- ------- -------- -------
$ 11,014 $ 2,933 $ 11,774 $ 4,445
======== ======= ======== =======
Other unusual charges:
Activewear $ 6,963 $ 1,178 $ 7,777 $ 2,488
International -- -- -- --
All Other -- -- -- --
-------- ------- -------- -------
$ 6,963 $ 1,178 $ 7,777 $ 2,488
======== ======= ======== =======
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A summary of the activity related to the restructuring, asset
impairment and other unusual charges is as follows: (in thousands)
Cash related:
Liability at Expense Amount Liability at
30-Dec-00 Incurred Paid 1-Jul-01
------------ -------- -------- ------------
Exit costs related to facilities $ -- $ 3,326 $ 3,326 $ --
Employee termination charges 3,320 4,921 1,664 6,577
Other 2,406 2,299 2,927 1,778
-------- -------- -------- --------
$ 5,726 10,546 $ 7,917 $ 8,355
======== ======== ========
Non-cash related:
Impairment charges and other non-cash charges 18,753
--------
Total charges $ 29,299
========
During the second quarter 2001, the Company announced the closing of
two domestic sewing plants, one textile operation and one yarn
manufacturing facility. In connection with these closings,
approximately 770 employees were terminated during the quarter. Asset
impairment charges of $11.0 million and employee severance and related
costs of $6.4 million were recognized in the second quarter related to
these plant closings. The Company also incurred approximately $2.2
million in ongoing maintenance cost related to facilities that have
been closed in prior periods in connection with prior restructuring
activities. At July 1, 2001, the carrying value of idle facilities that
are held for sale amounts to $23.2 million. These facilities are
included in property, plant and equipment at their estimated fair
values less disposal costs.
In July 2001, the Company announced changes that will affect the Cross
Creek brand business. The Company plans to discontinue direct marketing
of the Cross Creek brand through the golf and retail channel and will
instead pursue a third party licensing strategy for this channel. The
Company will continue to market the Cross Creek brand through the
artwear channel, which is the brand's principal channel of
distribution. In addition, the Company will consolidate the remaining
Cross Creek textile operations into the current dyeing and finishing
plant in Mt. Airy, North Carolina. The continuing Cross Creek artwear
business will be consolidated within the other activewear segment
businesses based in Atlanta. The second quarter results reflect charges
of $9.0 million related to Cross Creek. Approximately 285 people will
be terminated in connection with these restructuring activities. The
costs associated with these terminations and other aspects of the Cross
Creek restructuring plan will be recognized during third quarter as
elements of the restructuring plan are implemented.
The Company also announced the signing of a letter of intent with
Frontier Spinning Mills, Inc. of North Carolina to modernize and
improve the competitiveness of the Company's yarn operations. The
letter of intent contemplates the transfer of certain spinning assets
and employees to a joint venture that will supply substantially all of
the Company's yarn needs. The Company's spinning facilities will
continue to operate as a part of Russell until the agreement with
Frontier is finalized. Asset impairment charges and other costs
associated with the sale or transfer of assets to the joint venture
will be recognized when the joint venture agreement is finalized.
4. The Company is a co-defendant in Locke, et al. v. Russell Corporation,
et al., in Jefferson County, Alabama. Fifteen families are plaintiffs
in this case, and the other defendant is Avondale Mills, Inc. The
claims asserted in the complaint are for trespass and nuisance relating
to property owned by the plaintiffs on Lake Martin in a subdivision of
Alexander City, Alabama. The plaintiffs in this case do not specify the
amount of damages they are seeking. The claims and allegations in this
case are virtually identical to those in Sullivan, et al. v. Russell
Corporation, et al., a case previously pending in Jefferson County,
Alabama, which was resolved through judgement being rendered in
Russell's favor by the Supreme Court of Alabama. The Company plans to
vigorously defend this suit.
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By letter dated January 13, 2000, the Company was notified by the
United States Department of Justice ("DOJ") that the DOJ intended to
institute legal proceedings against the Company and certain other
parties alleging violations by those parties of the Clean Water Act in
connection with the treatment and discharge of waste at a water
treatment facility operated by the City of Alexander City, Alabama.
Continuing discussions are being held with the DOJ with regard to the
proposed suit by the DOJ. The Company believes it is in compliance with
the Clean Water Act and will vigorously oppose the imposition of any
monetary penalties or injunctive relief in any lawsuit that may be
filed.
The Company is a party to various other lawsuits arising out of the
conduct of its business, the majority of which, if adversely
determined, would not have a material adverse effect upon the Company.
5. Earnings per share calculated in accordance with SFAS 128, Earnings Per
Share, are as follows: (in thousands except shares and per share
amounts)
13 Weeks Ended 26 Weeks Ended
------------------------------ ------------------------------
7/1/01 7/2/00 7/1/01 7/2/00
------------ ------------ ------------ ------------
Net (loss) income $ (11,585) $ 2,472 $ (9,347) $ 2,938
============ ============ ============ ============
Basic Calculation:
Weighted-average common shares outstanding 31,934,823 32,523,764 31,920,104 32,595,360
============ ============ ============ ============
Net (loss) income per common share-basic $ (0.36) $ 0.08 $ (0.29) $ 0.09
============ ============ ============ ============
Diluted Calculation:
Weighted-average common shares outstanding 31,934,823 32,523,764 31,920,104 32,595,360
Net common shares issuable
on exercise of dilutive stock options -- 528,371 -- 272,337
------------ ------------ ------------ ------------
31,934,823 33,052,135 31,920,104 32,867,697
============ ============ ============ ============
Net (loss) income per common share-diluted $ (0.36) $ 0.07 $ (0.29) $ 0.09
============ ============ ============ ============
6. For the periods ended July 1, 2001 and July 2, 2000, accumulated other
comprehensive loss as shown in the consolidated condensed balance
sheets was comprised of foreign currency translation adjustments and
adjustments related to hedging and derivatives, including interest rate
swap agreements, cotton futures contracts and foreign currency forward
contracts. The components of comprehensive income, net of tax, for
these periods were as follows: (In thousands)
13 Weeks Ended 26 Weeks Ended
---------------------- ----------------------
7/1/01 7/2/00 7/1/01 7/2/00
-------- -------- -------- --------
Net (loss) income $(11,585) $ 2,472 $ (9,347) $ 2,938
Foreign currency translation gain (loss) 691 (3,874) (1,038) (4,673)
Change in unrealized value of derivative
instruments (519) -- (1,570) --
Cumulative affect adjustment (SFAS 133) -- -- (578) --
-------- -------- -------- --------
Comprehensive loss $(11,413) $ (1,402) $(12,533) $ (1,735)
======== ======== ======== ========
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7. Russell Corporation has two reportable segments: activewear and
international operations. The Company's activewear segment consists of
three strategic business units that sell the following products to
sporting goods dealers, department and specialty stores, mass
merchants, wholesale clubs, college bookstores, screen printers,
distributors, and mail order catalogs: T-shirts, fleece products (such
as sweatshirts and pants), athletic uniforms and knit shirts. The
international strategic business distributes activewear products to
international locations in approximately 40 countries. Other segments
that do not meet the quantitative thresholds for determining reportable
segments sell fabrics to other apparel manufacturers, and manufacture
and sell socks to mass merchants. These are included in the "All Other"
data presented herein.
The Company evaluates performance and allocates resources based on
profit or loss from operations before interest and income taxes,
restructuring, reorganization and other unusual charges (Segment EBIT).
The accounting policies of the reportable segments are the same as
those described in Note One to the Company's consolidated financial
statements in its Annual Report on Form 10-K for the year ended
December 30, 2000, except that inventories are valued at standard cost
at the segment level, whereas a substantial portion of inventories are
valued on a Last-In, First-Out (LIFO) basis in the consolidated
financial statements. Intersegment transfers are recorded at the
Company's cost; there is no intercompany profit or loss on intersegment
transfers.
13 Weeks ended July 1, 2001
(In thousands)
Activewear International All Other Total
---------- ------------- ---------- ----------
Net sales $ 202,131 $ 19,502 $ 30,241 $ 251,874
Depreciation and
amortization expense 12,444 153 928 13,525
Segment EBIT 15,554 410 4,063 20,027
Total assets 1,057,471 73,512 85,051 1,216,034
13 Weeks ended July 2, 2000
(In thousands)
Activewear International All Other Total
---------- ------------- ---------- ----------
Net sales $ 215,472 $ 27,058 $ 39,932 $ 282,462
Depreciation and
amortization expense 11,787 591 1,067 13,445
Segment EBIT (loss) 23,365 (2,959) 6,692 27,098
Total assets 1,025,205 117,372 87,303 1,229,880
26 Weeks ended July 1, 2001
(In thousands)
Activewear International All Other Total
---------- ------------- ---------- ----------
Net Sales $ 396,674 $ 38,160 $ 55,756 $ 490,590
Depreciation and
amortization expense 23,894 253 1,855 26,002
Segment EBIT 32,148 873 7,377 40,398
Total assets 1,057,471 73,512 85,051 1,216,034
26 Weeks ended July 2, 2000
(In thousands)
Activewear International All Other Total
---------- ------------- ---------- ----------
Net Sales $ 412,216 $ 55,493 $ 66,735 $ 534,444
Depreciation and
amortization expense 23,446 1,202 2,133 26,781
Segment EBIT (loss) 43,817 (5,327) 11,788 50,278
Total assets 1,025,205 117,372 87,303 1,229,880
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A reconciliation of combined segment EBIT to consolidated income before
income taxes is as follows: (in thousands)
13 Weeks Ended 26 Weeks Ended
--------------------------- ---------------------------
7/1/01 7/2/00 7/1/01 7/2/00
-------- -------- -------- --------
Total segment EBIT $ 20,027 $ 27,098 $ 40,398 $ 50,278
Restructuring, asset impairment, and
other unusual charges (26,577) (8,197) (29,299) (17,545)
Unallocated amounts:
Corporate expenses (4,119) (5,757) (10,710) (11,892)
Interest expenses (8,017) (8,476) (15,465) (15,353)
-------- -------- -------- --------
Consolidated (loss) income before income taxes $(18,686) $ 4,668 $(15,076) $ 5,488
======== ======== ======== ========
8. As of December 31, 2000, the Company adopted FASB Statement No. 133. In
accordance with the provisions of Statement 133, the Company recorded a
transition adjustment during the first quarter of 2001. The impact of
this transition adjustment is to increase Accumulated Other
Comprehensive Loss by approximately $578,000 net of taxes and to
decrease net assets by approximately $578,000.
The Company uses derivatives, including futures contracts, forward
contracts and swap contracts, to manage its exposure to movements in
commodity prices, foreign exchange rates and interest rates,
respectively. Initially, upon adoption of the new derivative accounting
requirements, and prospectively, on the date a derivative contract is
entered into, the Company designates the derivative as either 1) a
hedge of a recognized asset or liability or an unrecognized firm
commitment (fair value hedge) or 2) a hedge of a forecasted transaction
or of the variability of cash flows to be received or paid related to a
recognized asset or liability (cash flow hedge).
For fair value hedges, both the effective and ineffective portion of
the changes in the fair value of the derivative, along with the gain or
loss on the hedged item that is attributable to the hedged risk, are
recorded in earnings. The effective portion of the changes in the fair
values of a derivative that is designated as a cash flow hedge is
recorded in Accumulated Other Comprehensive Loss. When the hedged item
is realized, the gain or loss included in Accumulated Other
Comprehensive Loss is relieved. Any ineffective portion of the changes
in the fair values of derivatives used as cash flow hedges are reported
in the Consolidated Condensed Statements of Operations.
The Company formally documents its hedge relationships, including
identification of the hedging instruments, and the hedged items, as
well as its risk management objectives and strategies for undertaking
the hedge transaction. Derivatives are recorded in the Consolidated
Condensed Balance Sheets at fair value. The Company also formally
assesses both at inception and at least quarterly, thereafter, whether
the derivatives that are used in hedging transactions are highly
effective in offsetting changes in either the fair values or cash flows
of the hedged item.
Interest rate swap agreement-To manage interest rate risk, the Company
has entered into an interest rate swap that effectively fixes the
interest payments of a certain floating rate debt instrument. The
interest rate swap agreement is accounted for as a cash flow hedge that
was set up so that the cash flows from the interest rate swap perfectly
offset the changes in the cash flows associated with the floating rate
of interest on the debt. The interest rate swap qualifies for the
"short-cut" method as defined in Statement 133. The transition
adjustment to record the fair value of the interest rate swap was a
loss of $557,000 ($345,000 net of taxes) with an offsetting entry to
Accumulated Other Comprehensive Loss. There has been no amount
reclassified from Accumulated Other Comprehensive Loss to net earnings
during the year ended July 1, 2001. The fair value of the swap
decreased by $379,000 year-to-date, causing Accumulated Other
Comprehensive Loss to decrease to $1,168,000 ($724,000 net of taxes).
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Foreign currency forward contracts- The Company generates international
revenues and expenses from its activities in various parts of the world
and, as a result, is exposed to movement in foreign currency exchange
rates. As of July 1, 2001, the Company had entered into foreign
exchange forward contracts through December 2001 to reduce the effect
of fluctuating foreign currencies on anticipated purchases of inventory
and sale of goods denominated in currencies other than the functional
currencies of international subsidiaries. Gains and losses on the
derivatives are intended to offset gains and losses on the hedged
transactions in an effort to reduce the earnings volatility resulting
from fluctuating foreign currency exchange rates. The foreign exchange
forward contracts are primarily accounted for as cash flow hedges. The
principal currencies hedged by the Company include the US Dollar,
European EURO, Mexican peso and British pound sterling. There was no
transition adjustment recorded upon adoption of FAS 133, as there were
no significant foreign currency forward contracts impacted by the
statement. The fair value of all forward contracts, as of July 1, 2001,
is $377,000 ($234,000 net of taxes). The Company anticipates that
approximately $377,000 ($234,000 net of taxes) will be reclassed to net
earnings during the next twelve months when the anticipated
transactions occur. The change in fair value of the forward contracts
increased net assets and Accumulated Other Comprehensive Income by
$567,000 ($352,000 net of taxes) year-to-date. The gains reclassified
into net earnings year-to-date were $190,000 ($118,000 net of taxes).
The Company also was a party to foreign exchange forward contracts
during the first quarter that did not qualify for hedge accounting
under Statement 133. The Company recorded these contracts at fair value
with the related changes in fair value, which amounted to a gain of
$903,000 ($560,000 net of taxes) reported in income in the first
quarter 2001.
Futures contracts- Raw materials used by the Company are subject to
price volatility caused by weather, supply conditions and other
unpredictable factors. The Company has entered into futures contracts
through December 2001 and beyond to hedge commodity (primarily cotton)
price risk on anticipated purchases. The futures contracts are
accounted for as cash flow hedges. The transition adjustment to record
the fair value of the futures contracts on the Company's Consolidated
Condensed Balance Sheets was a loss of $376,000 ($233,000 net of taxes)
with an offsetting entry to Accumulated Other Comprehensive Loss. The
Company reclassifies gains and losses on futures contracts designated
as cash flow hedges from Accumulated Other Comprehensive Loss in the
period during which the hedged item affects earnings. The change in
fair value of the commodity futures contracts decreased net assets and
increased Accumulated Other Comprehensive Loss by $2,234,000 (net of
taxes) year-to-date. Losses reclassified to current earnings during the
thirteen and twenty-six week periods ended July 1, 2001 amounted to
$152,000 and $810,000 (net of taxes), respectively. The Company
anticipates that the unrealized loss of $1,657,000 (after tax) recorded
in Accumulated Other Comprehensive Loss as of July 1, 2001 will be
reclassified into net income during the next twelve months.
9. Recording charges during the second quarter of 2001 associated with the
expansion of the Company's ongoing restructuring plan caused the
Company's ratio of long-term debt to total capitalization to exceed the
ratio permitted under the Company's principal long-term debt agreements
as of July 1, 2001. The Company obtained agreements from the parties to
the affected debt agreements to waive compliance with the applicable
covenants until September 17, 2001.
Concurrently with obtaining the waivers, the Company reached agreement
with certain of the bank group lenders under the Company's revolving
credit facility to loan the Company an additional $75 million in
seasonal bridge financing in order to finance peak working capital
requirements which traditionally occur during the bridge loan period.
This bridge financing is due October 31, 2001. This loan is secured by
a pledge of substantially all of the Company's domestic accounts
receivable. As part of obtaining this financing, the Company also
obtained waivers or amendments under its outstanding debt agreement of
various other covenants relating to, among other things, limitations on
the amount of the Company's outstanding debt and its debt service
coverage ratios and certain inter-company transactions. Such waivers
are also effective through September 17, 2001. The Company will apply
the proceeds from any asset sales out of the ordinary course of
business and certain capital raising transactions in excess of certain
amounts to repay the bridge loan.
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The Company agreed with such lenders to increase the interest rates on
its outstanding debt and to include additional covenants in the
agreements with respect to its outstanding debt requiring that any more
restrictive covenants for the benefit of the holders of any outstanding
debt (whether currently existing debt or debt incurred in the future)
be included in such agreements and that such lenders be accorded equal
treatment with respect to any additional security or mandatory
prepayment provided for the benefit of any other debt instrument. The
Company also agreed to secure most of its outstanding debt by a pledge
of substantially all of its assets to secure such debt by September 17,
2001 (or, with respect to certain of such debt which will require
shareholder action in order for the Company to be able to secure such
debt, by December 31, 2001, provided that the Company meets certain
deadlines with respect to seeking such shareholder approval prior to
such date). In addition, during the term of this bridge loan, the
Company has agreed that dividends paid on its common stock will not
exceed the per share rate currently in effect.
The Company is negotiating with its lenders to further amend the
covenants in its principal long-term debt agreements to reflect the
effect of the additional restructuring charges on the Company's future
operating results and financial condition. The Company anticipates
completing these negotiations and effecting the required pledge of
assets prior to September 17, 2001. However, because the current waiver
agreements do not extend beyond the next 12 months, the Company has
classified its principal debt facilities as current liabilities in the
accompanying Consolidated Condensed Balance Sheets as of July 1, 2001.
10. Recent Accounting Pronouncements
In July 2001, the FASB issued SFAS No. 142, Goodwill and Intangible
Assets. SFAS No. 142 eliminates amortization of goodwill, and requires
an impairment-only model to recording the value of goodwill. SFAS No.
142 requires that impairment be tested at least annually at the
reporting unit level, using a two-step impairment test. The first step
determines if goodwill is impaired by comparing the fair value of the
reporting unit as a whole to the book value. If a deficiency exists,
the second step measures the amount of the impairment loss as the
difference between the implied fair value of goodwill and its carrying
amount. Purchase intangibles with indefinite economic lives would be
tested for impairment annually using a lower of cost or fair value
approach. Other intangibles will continue to be amortized over their
useful lives and reviewed for impairment in accordance with SFAS No.
121, Accounting for the Impairment of Long-lived Assets and Long-lived
Assets to be Disposed of. The provisions of the statement will be
effective for fiscal years beginning after December 15, 2001. Upon
adoption, goodwill related to acquisitions completed before the date of
adoption would be subject to the provisions of the statement.
Amortization of the remaining book value of goodwill would cease and
the new impairment-only approach would apply. A transitional impairment
test of all goodwill is required to be completed within six months of
adopting SFAS No. 142. Any impairment charge resulting from the
transitional impairment test will be recognized as a cumulative effect
of a change in accounting principle. Impairment charges thereafter
would be reported in operating income. The Company plans to adopt SFAS
No. 142 in the first quarter of 2002 and is unable to reasonably
estimate the effect of adoption on its financial position or results of
operations at this time.
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Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
RESULTS OF OPERATIONS
Thirteen weeks ended July 1, 2001 compared to July 2, 2000
NET SALES. Net sales decreased 10.8%, or $30,588,000, to $251,874,000 for second
quarter 2001 from $282,462,000 during the comparable prior year period. The
overall net decrease consisted of a 6.2% decline, or $13,341,000 within the
Company's Activewear segment; a 27.9% decline, or $7,556,000 within the
Company's International segment; and a 24.3% decline, or $9,691,000, for all
other. Overall dozens shipped within the Activewear segment were down
approximately 10% over the comparable prior year period. Favorable product mix
changes within the Activewear segment offset the negative impact of lower
selling prices within certain categories. Of the decline in the International
segment sales, approximately $2,700,000 was related to the restructuring of
certain product lines in Europe during the second half of fiscal year 2000. The
decrease in net sales for all other was attributable to a decline in fabric
sales to other manufacturers and a decrease in sock sales.
GROSS MARGIN %. The Company's overall gross margin percentage decreased to 21.3%
for second quarter 2001 versus 25.9% in the comparable prior year period.
Excluding the impact of restructuring, asset impairment, and other unusual
charges ("special charges"), as described in Note 3 to the consolidated
condensed financial statements, of $11,993,000 and $3,600,000 for 2001 and 2000,
respectively, the overall gross margin percentage decreased to 26.1% for 2001
from 27.2% for 2000. Gross margins were negatively impacted by the overall net
decrease in sales mentioned above, which includes price reductions; higher
cotton and energy costs; and product improvements. However, gross margins
continue to be positively impacted by the Company's on-going efforts in
improving and streamlining its manufacturing processes.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A). SG&A as a percent of net sales
increased to 20.3% for second quarter 2001 versus 19.8% in the comparable prior
year period. Excluding the impact of special charges of $479,000 and $1,109,000
for 2001 and 2000, respectively, SG&A as a percent of net sales increased to
20.2% for 2001 from 19.4% for 2000.
EARNINGS BEFORE INTEREST AND TAXES (EBIT). The Company's overall EBIT as a
percent of net sales decreased to 6.3% for second quarter 2001 from 7.6% in the
comparable prior year period when calculated exclusive of special charges of
$26,577,000 and $8,197,000 for 2001 and 2000, respectively. The Activewear
segment EBIT, exclusive of special charges, as a percent of net sales is 7.7%
for second quarter 2001 down from 10.8% for second quarter 2000. This decline is
attributed to the overall net decreased sales, which includes price reductions;
higher cotton and energy costs; and product improvements mentioned above. The
International segment EBIT, exclusive of special charges, as a percent of net
sales increased to 2.1% for second quarter 2001 up from a negative 10.9% for
second quarter 2000. The improvement within the International segment was due to
the elimination of losses during fiscal 2000 related to the sales elimination
mentioned above from the restructuring of certain product lines in Europe during
the second half of fiscal year 2000. In addition, product costs within the
International segment were lower due to the closure of manufacturing facilities
in Scotland during fiscal 2000 and the increased use of third party suppliers.
The all other EBIT, exclusive of special charges, as a percent of net sales
decreased to 13.4% for second quarter 2001 down from 16.8% for second quarter
2000 and is primarily due to the net sales decrease mentioned above.
Twenty-six weeks ended July 1, 2001 compared to July 2, 2000
NET SALES. Net sales decreased 8.2%, or $43,854,000, to $490,590,000 for the
twenty-six weeks ended July 1, 2001 from $534,444,000 during the comparable
prior year period. The overall net decrease consisted of a 3.8% decline, or
$15,542,000 within the Company's Activewear segment; a 31.2% decline, or
$17,333,000 within the Company's International segment; and a 16.5% decline, or
$10,979,000, for all other. Overall dozens shipped within the Activewear segment
were down approximately 6% over the comparable prior year period. Favorable
product mix changes within the Activewear segment offset the negative impact of
lower selling prices within
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certain categories. Of the decline in the International segment sales,
approximately $9,200,000 was related to the restructuring of certain product
lines in Europe during the second half of fiscal year 2000. The decrease in net
sales for all other was attributable to a decline in fabric sales to other
manufacturers and a decrease in sock sales.
GROSS MARGIN %. The Company's overall gross margin percentage decreased to 24.2%
for the twenty-six weeks ended July 1, 2001 versus 25.8% in the comparable prior
year period. Excluding the impact of special charges of $12,033,000 and
$9,260,000 for 2001 and 2000, respectively, the overall gross margin percentage
decreased to 26.7% for 2001 from 27.5% for 2000. Gross margins were negatively
impacted by the overall net decrease in sales mentioned above, which includes
price reductions; higher cotton and energy costs; and product improvements.
However, gross margins continue to be positively impacted by the Company's
on-going efforts in improving and streamlining its manufacturing processes.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A). SG&A as a percent of net sales
increased to 21.3% for the twenty-six weeks ended July 1, 2001 versus 20.6% in
the comparable prior year period. Excluding the impact of special charges of
$1,159,000 and $1,631,000 for 2001 and 2000, respectively, SG&A as a percent of
net sales increased to 21.0% for 2001 from 20.3% for 2000.
EARNINGS BEFORE INTEREST AND TAXES (EBIT). The Company's overall EBIT as a
percent of net sales decreased to 6.1% for the twenty-six weeks ended July 1,
2001 from 7.2% in the comparable prior year period when calculated exclusive of
special charges of $29,299,000 and $17,545,000 for 2001 and 2000, respectively.
The Activewear segment EBIT, exclusive of special charges, as a percent of net
sales is 8.1% for the twenty-six weeks ended July 1, 2001 down from 10.6% in the
comparable prior year period. This decline is attributed to the overall net
decreased sales, which includes price reductions; higher cotton and energy
costs; and product improvements mentioned above. The International segment EBIT,
exclusive of special charges, as a percent of net sales increased to 2.3% for
the twenty-six weeks ended July 1, 2001 up from a negative 9.6% in the
comparable prior year period. The improvement within the International segment
was due to the elimination of losses during fiscal 2000 related to the sales
elimination mentioned above from the restructuring of certain product lines in
Europe during the second half of fiscal year 2000. In addition, product costs
within the International segment were lower due to the closure of manufacturing
facilities in Scotland during fiscal 2000 and the increased use of third party
suppliers. The International segment also experienced gains related to the
closeout of certain foreign currency forward contracts during the first quarter
ended April 1, 2001. The all other EBIT, exclusive of special charges, as a
percent of net sales decreased to 13.2% for the twenty-six weeks ended July 1,
2001 down from 17.7% in the comparable prior year period and is primarily due to
the net sales decrease mentioned above.
RESTRUCTURING ACTIVITIES
During the second quarter 2001, the Company announced the closing of two
domestic sewing plants, one textile operation and one yarn manufacturing
facility. In connection with these closings, approximately 770 employees were
terminated during the quarter. Asset impairment charges of $11.0 million and
employee severance and related costs of $6.4 million were recognized in the
second quarter related to these plant closings. The Company also incurred
approximately $2.2 million in ongoing maintenance cost related to facilities
that have been closed in prior periods in connection with prior restructuring
activities. Total restructuring, asset impairment and other unusual charges
recognized in the second quarter amounted to $26.6 million ($16.5 million after
tax).
On July 26, 2001 the Board of Directors announced the expansion of its
restructuring plans to further improve the Company's global competitiveness.
Management expects to incur additional restructuring charges related to the
revised restructuring plan in the range of $70 to $80 million after tax
(including $11.4 million recorded in the second quarter). Activities to
implement the plan are expected to be substantially completed in the current
fiscal year. When fully implemented, these actions are expected to reduce
ongoing costs in excess of $20 million annually. With the expansion of these
plans, the total costs of the Company's restructuring plans since its inception
in mid-1998 is estimated to be in the $220 to $230 million range, after-tax.
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The elements of the additional restructuring include aligning the organization
by distribution channels to provide stronger focus on customer service, supply
chain management and cost-effective operations.
As part of this reorganization, the current Cross Creek Apparel artwear business
headquartered in Mt. Airy, North Carolina, will be combined with the artwear
business headquartered in Atlanta. The Cross Creek private label business and
textile operations will remain in Mt. Airy. During the second quarter, the
Company also announced that it intends to license the Cross Creek brand to the
golf and retail channels of distribution. The Company will continue to sell the
Cross Creek brand through the artwear channel, which is the brand's principal
channel of distribution. The expected impact to net sales of the Cross Creek
reorganization will be approximately $20 million on an annual basis in the
Activewear segment. However, elimination of these sales is not expected to have
a significant impact on operating margins. Approximately 285 employees will be
terminated in connection with these restructuring activities in the second half
of the year. The costs associated with these terminations and other aspects of
the Cross Creek restructuring plan, which are part of the range of additional
costs described above, will be recognized during the third quarter as elements
of the restructuring plan are implemented.
In July 2001 the Company also announced plans to restructure its yarn spinning
operations. The Company has signed a letter of intent with Frontier Spinning
Mills, Inc. of Sanford, North Carolina, to create a joint venture that will
supply substantially all of the Company's yarn needs. The letter of intent
contemplates the transfer of certain spinning assets and employees to the
joint venture. It is anticipated that a final agreement will be reached by
December 31, 2001. Asset impairment and other costs associated with the sale or
transfer of assets to the joint venture are expected to be recognized when the
joint venture is finalized. By entering into this joint venture, the Company
expects to achieve efficiencies in yarn production resulting in a reduction in
its yarn cost.
As indicated last quarter, the Company's European business has stabilized and is
projected to be profitable in 2001. The Company announced the restructuring of
its Russell Athletic(R) business in Europe during the third quarter of 2000. The
Company has signed some license agreements for Russell Athletic(R) for Germany,
Austria, and Switzerland.
LIQUIDITY AND CAPITAL RESOURCES
The Company's current ratio was 1.1 and 4.3 at July 1, 2001 and July 2,
2000, respectively. The significant decrease in the current ratio was primarily
attributable to the reclassification of outstanding borrowings under the
Company's principal debt facilities (see Note 9 to financial statements) in the
second quarter 2001. Total debt to capitalization increased to 50.0% at July 1,
2001 versus 47.8% at July 2, 2000 reflecting the effects of the Company's
ongoing restructuring activities and increased borrowings to fund a somewhat
greater seasonal build up of inventories in the current fiscal year than in
fiscal 2000.
Required cash for operations and to fund purchases of property, plant
and equipment and dividends was principally provided by borrowings under the
Company's revolving credit facility during the period ended July 1, 2001.
Recording charges during the second quarter of 2001 associated with the
expansion of the Company's restructuring plan caused the Company's ratio of
long-term debt to total capitalization to exceed the ratio permitted under the
Company's principal long-term debt agreements as of July 1, 2001. The Company
obtained agreements from the parties to the affected debt agreements to waive
compliance with the applicable covenants until September 17, 2001.
Concurrently with obtaining waivers, the Company reached agreement with
certain of the bank group lenders under the Company's revolving credit facility
to loan the Company an additional $75 million in seasonal bridge financing in
order to finance peak working capital requirements which traditionally occur
during the bridge loan period. The bridge financing is due October 31, 2001.
This loan is secured by a pledge of substantially all of the Company's domestic
accounts receivable. As part of obtaining this financing, the Company also
obtained waivers or amendments under its outstanding debt agreement of various
other covenants relating to, among other
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things, limitations on the amount of the Company's outstanding debt and its debt
service coverage ratios and certain inter-company transactions. Such waivers are
also effective through September 17, 2001. The Company will apply the proceeds
from any asset sales out of the ordinary course of business and certain capital
raising transactions in excess of certain amounts to repay the bridge loan.
The Company agreed to increase the interest rates on its outstanding
debt and to include additional covenants in the agreements with respect to its
outstanding debt requiring that any more restrictive covenants for the benefit
of the holders of any outstanding debt (whether currently existing debt or debt
incurred in the future) be included in such agreements and that such lenders be
accorded equal treatment with respect to any additional security or mandatory
prepayment provided for the benefit of any other debt instrument. The Company
also agreed to secure most of its outstanding debt by a pledge of substantially
all of its assets to secure such debt by September 17, 2001 (or, with respect to
certain of such debt which will require shareholder action in order for the
Company to be able to secure such debt, by December 31, 2001, provided that the
Company meets certain deadlines with respect to seeking such shareholder
approval prior to such date). In addition, during the term of this bridge loan,
the Company has agreed that dividends paid on its common stock will not exceed
the per share rate currently in effect.
The Company is negotiating with its lenders to further amend the
covenants in its principal long-term debt agreements to reflect the effect of
the additional restructuring charges on the Company's future operating results
and financial condition. The Company anticipates completing these negotiations
and effecting the required pledge of assets prior to September 17, 2001.
However, because the current waiver agreements do not extend beyond the next 12
months, the Company has classified its principal debt facilities as current
liabilities in the Consolidated Condensed Balance Sheet as of July 1, 2001.
Although management fully expects that the agreements will be amended to provide
for the continuation of the facilities on a long-term basis, there can be no
assurance that the Company will be able to successfully complete such
negotiations and security agreements by September 17, 2001, or in the
alternative, obtain further extension of the waiver agreements. Because the
recently announced additions to the Company's restructuring plan are intended to
improve asset utilization and involve largely non-cash charges against operating
income, the Company believes the additional restructuring charges will not
prevent the Company from being able to comply with its obligations and covenants
under its credit agreements in the future because management anticipates they
will be revised and the Company will be able to continue meeting its other
obligations on a current basis.
CONTINGENCIES
For information concerning ongoing litigation of the Company, see Note
4 to the Consolidated Condensed Financial Statements.
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FORWARD LOOKING INFORMATION
This quarterly report on Form 10-Q, including management's discussion
and analysis, contains certain statements that describe the Company's beliefs
concerning future business conditions and prospects, growth opportunities and
the outlook for the Company based upon information currently available. Wherever
possible, the Company has identified these "forward-looking" statements (as
defined in Section 21E of the Securities and Exchange Act of 1934) by words such
as "anticipates," "believes," "intends," "estimates," "expects," "projects" and
similar phrases. These forward-looking statements are based upon assumptions the
Company believes are reasonable. Such forward-looking statements are subject to
risks and uncertainties which could cause the Company's actual results,
performance and achievements to differ materially from those expressed in, or
implied by, these statements, including among other matters, the ability of the
Company to complete its additional restructuring program within the parameters
outlined for such program, the ability of the Company to successfully negotiate
amendments to its current debt agreements on appropriate terms, the ability to
effect the restructuring within the projected timeframe in line with expected
savings, significant competitive activity, including promotional and price
competition, currency exchange rates, interest rates, wage increases, increases
in raw material and energy costs, changes in customer demand for the Company's
products, inherent risks in the market place associated with new products and
new product lines, including uncertainties about trade and consumer acceptance
and other risk factors listed from time to time in the Company's SEC reports and
announcements. The Company assumes no obligation to update publicly any
forward-looking statements whether as a result of new information, future events
or otherwise.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
The Company is exposed to market risks relating to fluctuations in
interest rates, currency exchange rates and commodity prices. There has been no
material change in the Company's market risks that would significantly affect
the disclosures made in the Annual Report on Form 10-K for the year ended
December 30, 2000.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Contingencies
For information concerning ongoing litigation of the Company, see Note
4 to the Consolidated Condensed Financial Statements.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
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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.
RUSSELL CORPORATION
-------------------------------------
(Registrant)
Date 8/15/01 /s/ Robert D. Martin
------------------------ -------------------------------------
Robert D. Martin
Senior Vice President, and
Chief Financial Officer
Date 8/15/01 /s/ Larry E. Workman
------------------------ -------------------------------------
Larry E. Workman, Controller
(Principal Accounting Officer)
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