EXHIBIT (13)
FINANCIAL
REVIEW
RUSSELL CORPORATION AND SUBSIDIARIES
22
Ten-Year Selected Financial Highlights
24
Management's Discussion and Analysis
37
Consolidated Balance Sheets
38
Consolidated Statements of Operations
39
Consolidated Statements of Cash Flows
40
Consolidated Statements of Stockholders' Equity
41
Notes to Consolidated Financial Statements
62
Report of Ernst & Young LLP, Independent Auditors
INSIDE BACK COVER
Corporate Information
21
RUSSELL CORPORATION AND SUBSIDIARIES
TEN-YEAR SELECTED FINANCIAL HIGHLIGHTS
(Dollars in thousands, except Common Stock Data and Financial Statistics) 2002 2001 2000
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OPERATIONS
Net sales(a) $1,164,328 $1,160,925 $1,226,328
Cost of goods sold(a) 825,763 894,018 885,476
Earnings before interest and taxes ("EBIT")(b) 104,971 (54,269) 65,478
Interest expense 30,246 32,324 32,401
Income (loss) before income taxes(b) 74,725 (86,593) 33,077
Income tax (benefit) provision(b) 27,798 (31,107) 18,562
Net income (loss) applicable to common shares(b)(d) 34,306 (55,486) 14,515
- --------------------------------------------------------------------------------------------------------------------------
FINANCIAL DATA
Depreciation and amortization $ 45,061 $ 49,408 $ 54,645
Net income (loss) plus depreciation and amortization(d) 79,367 (6,078) 69,160
Capital expenditures 28,343 48,975 59,457
Working capital 385,118 401,816 471,414
Long-term debt, less current maturities 265,000 310,936 384,211
Stockholders' equity 467,253 454,231 525,940
Capital employed 732,253 765,167 910,151
Total assets 963,115 995,170 1,153,160
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COMMON STOCK DATA
Net income (loss) assuming dilution(b)(d) $ 1.06 $ (1.74) $ .44
Dividends .16 .46 .56
Book value 14.52 14.19 16.49
Price range:
High 19.55 20.84 22.94
Low 13.14 11.02 12.13
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FINANCIAL STATISTICS
Net sales divided by:
Receivables(c) 7.4 6.4 6.3
Inventories(c) 3.5 3.0 3.1
Capital employed(c) 1.6 1.4 1.3
Interest coverage(b) 3.5 (1.7) 2.0
Income (loss) before income taxes as a percent of sales(b) 6.4% (7.5)% 2.7%
Net income (loss) as a percent of sales(b)(d) 2.9% (4.8)% 1.2%
Net income (loss) as a percent of stockholders' equity (b)(c)(d) 7.4% (11.3)% 2.7%
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OTHER DATA
Net common shares outstanding (000s omitted) 32,186 32,008 31,896
Approximate number of common shareholders 9,000 8,800 8,000
(a) Fiscal 1999, 2000, 2001 and 2002 include costs associated with outbound
freight as cost of goods sold in accordance with EITF 00-10, as described
in Note 1 to the Consolidated Financial Statements. These freight costs for
fiscal 1999, 2000, 2001 and 2002 were $6,630,000, $8,750,000, $9,622,000
and $9,451,000, respectively. Fiscal 1992 through 1998 include such costs
as a reduction of net sales.
(b) Fiscal 1993 includes a noncash, pre-tax charge of $34,583,000 associated
with the write-down of certain fixed assets and goodwill. The after-tax
impact of this write-down on 1993 earnings was ($.56) per common share.
Fiscal 1998, 1999, 2000 and 2001 include pre-tax charges of $83,007,000,
$70,721,000, $65,011,000 and $144,092,000, respectively, associated with
restructuring, asset impairment and other unusual charges as described
under the "Multi-Year Restructuring and Reorganization Plan" section of
Management's Discussion and Analysis of Financial Condition and Results of
Operations. The after-tax impact of these charges on 1998, 1999, 2000 and
2001 earnings was ($1.46), ($1.38), ($1.46) and ($2.88), respectively, per
common share.
(c) Average of amounts at beginning and end of each fiscal year.
(d) Fiscal 2002 includes an extraordinary pre-tax charge of $20,100,000
($12,621,000, net of tax) associated with the termination and early
retirement of long-term indebtedness as described in Note 2 to the
Consolidated Financial Statements. The after-tax impact of this charge on
2002 earnings was ($.39) per common share.
22
1999 1998 1997 1996 1995 1994 1993
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$1,148,864 $ 1,180,118 $ 1,228,198 $ 1,244,204 $ 1,152,633 $1,098,259 $ 930,787
851,591 878,106 857,531 846,166 816,834 739,700 613,325
48,390 17,559 116,517 155,283 109,431 147,019 97,665
28,060 27,824 28,165 25,738 21,698 19,434 16,948
20,330 (10,265) 88,352 129,545 87,733 127,585 80,717
11,942 114 33,904 47,969 33,616 48,759 31,619
8,388 (10,379) 54,448 81,576 54,117 78,826 49,080
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$ 63,891 $ 74,368 $ 74,421 $ 72,226 $ 68,010 $ 67,042 $ 66,226
72,279 63,989 128,869 153,802 122,127 145,868 115,306
53,376 72,864 72,926 114,031 86,556 38,562 83,979
460,041 435,819 501,431 412,591 438,070 310,330 277,993
377,865 323,043 360,607 255,935 287,878 144,163 163,334
549,342 614,771 665,602 679,823 632,558 628,662 587,651
927,207 937,814 1,026,209 935,758 920,436 772,825 750,985
1,153,131 1,153,564 1,247,962 1,195,180 1,118,164 1,046,577 1,017,044
- ----------------------------------------------------------------------------------------------------------------
$ .25 $ (.29) $ 1.47 $ 2.11 $ 1.38 $ 1.96 $ 1.19
.56 .56 .53 .50 .48 .42 .39
16.74 17.31 18.25 17.87 16.34 15.84 14.54
25.12 33.88 38.38 33.75 31.25 32.63 36.87
12.13 18.00 25.00 23.13 22.00 24.00 26.00
- ----------------------------------------------------------------------------------------------------------------
6.2 5.6 5.3 5.5 5.3 5.6 5.3
3.0 3.2 3.4 3.7 3.8 3.9 3.7
1.2 1.2 1.3 1.3 1.4 1.4 1.2
1.7 .6 4.1 6.0 5.0 7.6 5.8
1.8% (.9)% 7.2% 10.4% 7.6% 11.6% 8.7%
.7% (.9)% 4.4% 6.6% 4.7% 7.2% 5.3%
1.4% (1.6)% 8.2% 12.4% 8.6% 13.0% 8.5%
- ----------------------------------------------------------------------------------------------------------------
32,814 35,519 36,463 38,049 38,715 39,689 40,405
8,000 8,000 10,100 12,300 12,300 13,000 13,000
23
RUSSELL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
We are a leading branded athletic, activewear and outdoor company with over a
century of success in marketing athletic uniforms, apparel and accessories for a
wide variety of sports, outdoor and fitness activities. Our brands include:
Russell Athletic(R), JERZEES(R), Mossy Oak(R), Cross Creek(R), Discus(R), and
Moving Comfort(R). On February 6, 2003, we acquired the majority of the assets
of Bike Athletic Company. Bike's products include athletic supporters, knee and
elbow pads, braces, protective equipment, team uniforms, and performance
apparel.
We design, market and manufacture or source a variety of apparel products
including fleece, t-shirts, casual shirts, jackets, athletic shorts, socks and
camouflage attire for men, women, boys and girls. We are a leading supplier of
team uniforms and related apparel to college, high school and organized sports
teams. We are also the official uniform supplier of 15 Major League Baseball(R)
teams, including the Atlanta Braves, New York Yankees, San Francisco Giants, and
Seattle Mariners. In addition, we are the official uniform supplier to the U.S.
Olympic baseball team and Little League Baseball and an official uniform
supplier to Minor League Baseball. The Russell name has been associated with
high-quality apparel for more than 100 years and with team uniforms since 1932.
We operate our business in two segments: Domestic Activewear and International
Activewear. Domestic Activewear is further aligned by distribution channel:
Russell Athletic, Mass Retail and Artwear/Careerwear. The International
Activewear business sells our products in more than 40 countries.
CRITICAL ACCOUNTING POLICIES
The following discussion and analysis of our financial condition, results of
operations, liquidity and capital resources are based upon our consolidated
financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. Generally accepted
accounting principles require that we make estimates and judgments that affect
the reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an ongoing basis, we
evaluate our estimates, including those related to customer programs and
incentives, product returns, bad debts, inventories, investments, intangible
assets, long-lived assets, deferred income taxes, restructuring reserves,
pensions and other post-retirement benefits, contingencies, and litigation. We
base our estimates on historical experience and on various other assumptions
that we believe are reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.
We believe that some of our significant accounting policies involve a higher
degree of judgment or complexity than our other accounting policies. We have
identified the policies below as critical to our business operations and the
understanding of our results of operations. The impact and associated risks
related to these policies on our business operations are discussed throughout
Management's Discussion and Analysis of Financial Condition and Results of
Operations where such policies affect our reported and expected financial
results. For a detailed discussion on the application of these and other
accounting policies, see Note 1 to the consolidated financial statements.
REVENUE RECOGNITION. We recognize revenues, net of estimated sales returns,
discounts and allowances, when goods are shipped, title has passed, the sales
price is fixed and collectibility is reasonably assured. Substantially all of
our sales reflect FOB ("free-on-board") shipping point terms.
We record provisions for estimated sales returns and allowances on sales in the
same period as the related sales are recorded. These estimates are based on
historical sales returns, analyses of credit memo data and other known factors.
If the historical data we use to calculate these estimates do not properly
reflect future returns, net sales could either be understated or overstated.
TRADE ACCOUNTS RECEIVABLE. Trade accounts receivable consists of amounts due
from our normal business activities. We maintain an allowance for doubtful
accounts to reflect expected credit losses. We provide for bad debts based on
collection history and specific risks identified on a customer-by-customer
basis. A considerable amount of judgment is required to assess the ultimate
realization of accounts receivable and the credit-worthiness of each customer.
Furthermore, these judgments must be continuously evaluated and updated. For
example, we increased our reserve in the fourth quarter of fiscal 2001 and in
the third quarter of 2002 to reflect estimated losses related to Kmart
Corporation ("Kmart"). If the financial condition of other customers were to
deteriorate causing an impairment of their ability to make payments, additional
provisions for bad debts may be required in future periods. On the other hand,
if our ultimate recovery on prepetition receivables from Kmart or other
accounts we have reserved or written off exceeds our estimates, we may need to
decrease our reserves in the future.
INVENTORIES. Inventories are carried at the lower of cost or market, with cost
for a substantial portion of inventories determined under the Last-In, First-Out
(LIFO) method. We write down obsolete and unmarketable inventories to their
estimated net realizable value based upon, among other things, assumptions about
future demand and market conditions. If actual market conditions are less
favorable than we project, additional inventory write-downs may be required. As
part of our restructuring and reorganization
24
program announced in July 1998 and discussed later, we recorded significant
charges to write down discontinued product lines to their net realizable values.
It is possible that further write-downs may be necessary in the future. In 2002,
we recorded a LIFO charge of $10.3 million, or $.20 per share (of which $6.0
million, or $.12 per share, related to the liquidation of LIFO inventory
quantities carried at higher costs prevailing in prior years as compared with
our current manufacturing costs) due to lower inventory levels and lower
per-unit manufacturing costs.
DEFERRED TAX ASSETS. We record a valuation allowance to reduce deferred tax
assets to the amount that we believe is likely to be realized. While we have
considered future taxable income and ongoing prudent and feasible tax planning
strategies in assessing the need for the valuation allowance, if we determine
that we will not be able to realize all or part of our net deferred tax assets
in the future, we would make an adjustment to increase our valuation allowance
for deferred tax assets and that adjustment would be charged to income in the
period that we make the determination. Likewise, if we determine that we will be
able to realize more of our deferred tax assets than we currently expect, we
would adjust our deferred tax assets, which would have the effect of increasing
income in the period that we make the determination. We recorded $2.6 million,
$2.8 million and $4.0 million of valuation allowances related to net deferred
tax assets (primarily foreign and state net operating loss carryforwards) in
fiscal 2002, 2001 and 2000, respectively. At the end of fiscal 2002, our total
valuation allowance amounted to $13.5 million.
IMPAIRMENT AND DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT. Property, plant
and equipment is stated at historical cost, and depreciation is computed using
the straight-line method over the lives of the assets. We estimate the
depreciable lives of property, plant and equipment based on the period over
which the assets will be of economic benefit to us.
On December 30, 2001, we adopted FASB Statement of Financial Accounting
Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, which superseded SFAS No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. Under SFAS No.
144, we review these assets for impairment whenever events or changes in
circumstances indicate that their carrying amounts may not be recoverable. Most
of our property, plant and equipment are employed in integrated manufacturing
and distribution processes. Accordingly, we ordinarily cannot assess impairment
of assets held for use at the individual asset level, but rather we aggregate
them into logical groups for purposes of testing whether they are impaired. When
we identify assets that will be taken out of service through the ordinary course
of replacement and modernization or through restructuring activities, we shorten
the remaining useful lives and adjust the salvage values, as appropriate, to
recognize depreciation over the shortened remaining estimated useful lives.
Otherwise, we classify assets as held for sale and write down the carrying value
to their estimated net realizable values when we formulate a plan of disposal
and there is no operational requirement to continue their use. We periodically
evaluate the carrying values of assets held for sale to determine whether
revisions are needed to reflect changed circumstances, including market
conditions. Although we believe we have appropriately reduced the carrying value
of assets held for sale to their estimated recoverable amounts, net of disposal
costs, actual results could be different, and our results of operations in
future periods could reflect gains or losses on those assets.
IMPAIRMENT AND AMORTIZATION OF INTANGIBLE ASSETS. On December 30, 2001, we
adopted SFAS No. 142, Goodwill and Other Intangible Assets, which resulted in an
increase to net income of $1.1 million ($.03 per share) in 2002 due to the
elimination of amortization of goodwill and indefinite-lived intangible assets.
Under SFAS No. 142, amortization of goodwill is eliminated, however an annual
impairment test of goodwill is required 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 value. In performing these
annual impairment tests, we make assumptions regarding estimated future cash
flows and other factors to determine whether the carrying values are impaired,
and then, if impaired, to determine the amount of any impairment loss required
to reduce the carrying value to fair value. If these estimates or assumptions
change, we may be required to record impairment charges for these assets.
Purchased intangibles with indefinite economic lives are tested for impairment
annually using a lower of cost or fair value approach. In determining whether an
intangible has an indefinite life, we consider the expected use of the asset,
the expected useful lives of other assets to which the asset may relate; any
legal, regulatory, or contractual provisions; the level of maintenance
expenditures required to obtain the expected future cash flows from the asset;
and the effects of obsolescence, demand and other economic factors. In
performing these annual impairment tests, we make assumptions regarding
estimated future cash flows and other factors to determine whether the carrying
values are impaired, and then, if impaired, to determine the amount of any
impairment loss required to reduce the carrying value to fair value. If these
estimates or assumptions change, we may be required to record impairment charges
for these assets.
25
RUSSELL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS [CONTINUED]
Other intangibles continue to be amortized over their useful lives, ranging from
15 to 40 years, and reviewed for impairment using a process similar to that used
to evaluate property, plant and equipment.
PENSION BENEFITS. We account for defined benefit pension plans in accordance
with SFAS No. 87, Employers' Accounting for Pensions, which requires us to
recognize pension costs and liabilities based on an actuarial evaluation.
Inherent in these valuations are key assumptions including the discount rate at
which the pension obligations could be effectively settled, the anticipated rate
of future salary increases, and the assumed long-term rate of return on plan
assets. In determining the discount rate, we utilize the yield on high-quality
fixed-income investments currently available. The salary increase assumption is
based upon the historical experience and anticipated future management actions.
The assumed long-term rate of return on plan assets is based upon the
anticipated average rate of earnings on the invested funds of the pension plan.
Periodic changes in these key assumptions could have a significant impact on the
amount of recorded pension liabilities and on future pension benefit costs, even
though, SFAS No. 87 permits the effects of the performance of the pension plan's
assets and changes in pension assumptions on our computation of pension expense
be amortized over future periods. For instance, given the recent decreases in
interest rates and the significant declines in the actual return on our plan
assets over the last three years, we plan to decrease the discount rate from
7.25% in 2002 to 6.75% in 2003 and decrease the assumed long-term rate of return
from 9.5% in 2002 to 8.5% in 2003. We expect the changes in these assumptions,
offset somewhat by the change in the salary increase assumption from 4.0% in
2002 to 3.5% in 2003, will result in a $2.6 million increase in pension expense
in fiscal year 2003.
In addition to the impact on assumption changes, the significant declines in the
actual return on plan assets have resulted in our recognition of an additional
pension liability in our 2002 consolidated balance sheet and a charge to
stockholders' equity of approximately $17.9 million after tax.
RESTRUCTURING. With respect to our multi-year restructuring and reorganization
program announced in 1998 and discussed in detail in the following section, our
consolidated balance sheets reflect estimates related to those restructuring and
reorganization activities. We did not record any special charges in 2002.
However, during 2002 we settled some of our estimated restructuring liabilities
for more or less than the amounts accrued in prior periods. We also sold some of
our idle assets for more than we estimated, and we revised carrying values of
certain properties downward in 2002 to reflect difficult market conditions. On a
net basis, the differences between actual and estimated recoveries and
settlements and our revised estimates substantially offset in 2002. At the end
of fiscal 2002, we have approximately $2.3 million in remaining restructuring
liabilities. Our estimates for these costs could change if the actual costs of
termination benefits or other exit costs are different from our expectations. We
also had 10 idled properties remaining to be sold, which are reflected on our
consolidated balance sheet at approximately $15.0 million, representing our best
estimates of ultimate selling prices less disposal costs. We wrote these assets
down to their estimated fair values (less cost to sell) and suspended recording
depreciation on these properties when we first classified them as assets held
for disposal. We determined our estimated fair values, in most cases, by
reference to third-party appraisals, and, in certain cases, we performed
internal analyses based upon recent sales prices of comparable facilities (when
available). We have revised our initial estimates as needed based on changed
circumstances. Although we do not anticipate further significant changes, the
actual proceeds from the sales of these facilities and the actual costs to
dispose of these assets may differ from our current estimates, which would
require us to recognize a non-operating charge or credit to future earnings.
STOCK COMPENSATION. Awards under our incentive compensation plans (as more fully
described in Note 7 to the consolidated financial statements) may include
incentive stock options, non-qualified stock options, reload stock options and
restricted shares. These awards are accounted for in accordance with Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees.
On January 5, 2003, we adopted SFAS No. 123, Accounting and Disclosure of
Stock-Based Compensation, as amended by SFAS No. 148. We also adopted the
prospective transition provisions of SFAS No. 148. Therefore, the adoption of
SFAS No. 123 will have no effect on our historical results of operations or on
our financial position as of January 4, 2003. However, in future years we will
recognize compensation expense based on the fair value of all forms of stock
compensation. Because we will apply this new method only to future grants and
awards, we cannot predict at this time what the impact will be on our future
results of operations.
MULTI-YEAR RESTRUCTURING AND REORGANIZATION PLAN
In July 1998, we adopted a restructuring and reorganization program with the
objective of (1) transitioning our company from a manufacturing-driven business
to a consumer-focused organization that markets branded apparel products and (2)
creating an efficient, low-cost operating structure with the flexibility to take
advantage of future opportunities to reduce our costs. The plan originally
called for the closing of a number of our world-wide facilities, which included
selected manufacturing plants, distribution centers and offices; expanding
production outside the United States; consolidating and downsizing the licensed
products businesses; disposing of owned shopping-center real estate;
reorganizing the corporate structure; and other cost-savings activities. The
plan also called for the
26
establishment of a dual headquarters in Atlanta, GA, in addition to Alexander
City, AL. In July 2001, we announced an extension of this program to align the
organization by distribution channel to provide stronger customer service,
supply chain management, and more cost-effective operations.
As a result of our restructuring and reorganization program: (1) 100% of our
yarn requirements are now purchased from Frontier Yarns, LLC, our 45.3% owned
yarn joint venture, Frontier Spinning Mills, Inc., our joint venture partner,
and other third-party suppliers; (2) we reduced our U.S. employee base by
approximately 65% from 16,200 in 1998 to 5,700 at the end of 2001; (3) the
percentage of products sourced, excluding socks, has increased to approximately
26% in 2002 from 5% in 1998; and (4) over 99% of our products (excluding socks)
sold are now assembled offshore, compared to approximately 8% in 1997. We also
closed 35 facilities and exited unprofitable businesses and product lines
representing approximately $150 million of sales as measured by the last full
year of operations for each business. The cost savings associated with these
initiatives were the primary drivers of improved gross margins in fiscal years
1999, 2000 and 2002. Although we experienced cost savings in fiscal 2001, these
savings were more than offset by the adverse effects of pricing pressures
(primarily in our artwear and mass retail products), curtailed production
schedules to reduce inventory, higher cotton costs, higher costs associated with
adding product features, and higher energy costs. In total, we incurred $234.1
million in after-tax charges related to this program, all of which were
recognized in our consolidated statements of operations in 1998 through 2001.
The following is a summary of our restructuring activities since the adoption of
the plan in July 1998 and the related restructuring, asset impairment and other
unusual activities ("special charges") associated with those charges from the
inception of the plan in 1998 to 2002.
1998 RESTRUCTURING ACTIVITIES. During 1998, we began moving a substantial part
of our sewing and assembly operations to facilities primarily in Central America
and Mexico owned by us and by third parties. In connection with this transition,
we closed four domestic sewing and assembly facilities and reconfigured two
others. To further control costs, we realigned and consolidated certain
manufacturing and distribution functions and facilities to achieve a more
orderly and efficient product flow of goods throughout the manufacturing and
distribution process. We also closed 34 retail or outlet stores and two
distribution centers, and we terminated approximately 2,000 employees. We also
discontinued certain licensed products and recorded charges for the termination
of the related agreements. These 1998 charges are more fully described in our
fiscal 2000 Annual Report under Note 10 to the consolidated financial
statements.
1999 RESTRUCTURING ACTIVITIES. During 1999, we closed 14 domestic sewing and
assembly facilities, as well as two yarn-manufacturing facilities and one
cloth-fabrication facility. We continued the reconfiguration of a major
distribution facility, which was substantially completed by the end of 1999.
Additionally, on October 15, 1999, we announced the closing of our Scottish
manufacturing plants in Bo'ness and Livingston, which were closed by the end of
fiscal 2000. The economics of maintaining a manufacturing base in Scotland were
no longer viable because of the ongoing impact of increased competition within
the European marketplace and because many of our competitors sourced their
product requirements from developing countries. Since the closure of our
Scottish manufacturing facilities, we have sourced substantially all of our
European apparel product requirements from contractors. We also terminated
approximately 450 employees. In addition, we established our dual headquarters
in Atlanta, GA. These 1999 charges are more fully described in our fiscal 2001
Annual Report under Note 9 to the consolidated financial statements.
2000 RESTRUCTURING ACTIVITIES. During 2000, we continued to move sewing and
assembly operations to facilities primarily in Central America and Mexico owned
by us and by third parties. We also began sourcing product from South America.
In connection with this transition, we closed six domestic apparel operations, a
textile research facility and one yarn-manufacturing facility; announced the
restructuring of the Russell Athletic business in Europe, the Cross Creek brand
in Australia and the Woodbrook brand in Europe; and we terminated approximately
1,700 employees.
2001 RESTRUCTURING ACTIVITIES. During 2001, we announced further revisions to
the scope of our 1998 restructuring and reorganization program, including:
CORPORATE REALIGNMENT. We began the realignment of our organizational structure
by distribution channel (rather than by brand) to provide stronger customer
service, supply chain management and more cost-effective operations. As part of
this reorganization, the Cross Creek apparel artwear business, headquartered in
Mt. Airy, North Carolina, was consolidated with our artwear business
headquartered in Atlanta, GA. The Cross Creek private label business and textile
operations remain at Mt. Airy. We also announced the discontinuance of direct
selling of the Cross Creek brand through golf pro-shops and department stores
and announced our intention to pursue a third-party licensing strategy for this
direct business channel.
We continue to sell the Cross Creek brand through our Artwear/ Careerwear
business line, which is this brand's principal channel of distribution.
Approximately 300 positions were eliminated in connection with these
restructuring activities.
27
RUSSELL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS [CONTINUED]
YARN OPERATIONS. We closed four yarn-spinning facilities, terminated
approximately 400 domestic employees and entered into a joint venture agreement
with Frontier Spinning Mills, Inc. (Note 8). On December 28, 2001, we
established a joint venture company, Frontier Yarns, LLC ("Frontier Yarns") in
which we have a minority position. As part of this transaction, we agreed to
sell or lease our remaining yarn spinning assets and transfer most of our
remaining yarn employees to Frontier Yarns, which now supplies most of our
yarn needs.
2002 RESTRUCTURING ACTIVITIES. We did not record any special charges in 2002.
However, during 2002 we settled some of our estimated restructuring liabilities
for more or less than the amounts accrued in prior periods. We also sold some of
our idle assets for more than we estimated, and we revised carrying values of
certain properties downward in 2002 to reflect difficult market conditions. On a
net basis, the differences between actual and estimated recoveries and
settlements and our revised estimates substantially offset in 2002.
Over the period from 1998 to 2001 as we implemented our multi year
restructuring and reorganization plan, we incurred a total of $354.8 million in
pre-tax charges, $234.1 million (on an after-tax basis), of which $131.6 million
was cash related. These charges primarily consisted of employee severance, exit
costs and asset impairment losses.
These charges have been classified in our consolidated statements of operations
as follows:
Fiscal Year Total 2002 2001 2000 1999 1998
- ----------------------------------------------------------------------------
(In millions)
Cost of goods sold $116.2 $ -- $ 43.8 $18.2 $32.0 $22.2
Selling, general and
administrative expenses 24.7 -- 1.6 3.7 6.1 13.3
Other - net 213.9 -- 98.7 43.1 32.6 39.5
- ----------------------------------------------------------------------------
Total before taxes 354.8 -- 144.1 65.0 70.7 75.0
============================================================================
Total after taxes 234.1 -- 91.9 47.6 46.6 48.0
============================================================================
Cash related 131.6 -- 48.4 26.8 37.1 19.3
Non-cash related $223.2 $ -- $ 95.7 $38.2 $33.6 $55.7
We substantially completed our multi-year restructuring and reorganization
program in 2001. At the end of fiscal 2002, we had $2.3 million in remaining
restructuring liabilities, which we expect will be substantially paid in fiscal
2003. Although the majority of the facilities idled by our restructuring
initiatives have been disposed of, we have 10 idle properties remaining to be
sold, which are reflected in our balance sheet at $15.0 million. This value
represents our best estimate of future selling prices less disposal costs. We
expect most, if not all, of these properties will be sold in 2003; however,
given current market conditions, it may take longer to liquidate some of these
properties. In 2002, we decreased the carrying value of some of these properties
by $5.4 million to reflect difficult market conditions for industrial and
warehouse properties in the geographic areas where these properties are located;
however, these write-downs were offset by $5.8 million of gains realized on
sales of properties and equipment that we had written down in prior years. We do
not anticipate incurring any further charges related to our multi-year
restructuring and reorganization program, other than to the extent our estimated
restructuring liabilities and the carrying value of idled assets differ from the
amounts ultimately realized upon settlement of the liabilities and sale of the
assets.
RESULTS OF OPERATIONS
Our results of operations are affected by numerous factors, including
competition, general economic conditions, seasonal variation, raw material
costs, mix of products sold and plant utilization. Typically, demand for our
products is higher during the third and fourth quarters of each fiscal year.
Changes in the weather also affect the demand for our products, particularly for
our fleece products. In addition, some of our athletic and activewear products
are generally available from multiple sources and our customers often purchase
products from more than one source. To remain competitive, we review and adjust
our pricing structure from time to time.
Our product mix affects our overall gross profit margin. Additionally, plant
utilization levels are important to our profitability because a substantial
portion of our total production cost is fixed. The cost of yarn is a significant
component of our cost of goods sold. As a result of our restructuring and
reorganization program, in 2002, we began purchasing all of our yarn from
Frontier Yarns, Frontier Spinning Mills, Inc., and other third-party suppliers.
Yarn prices fluctuate principally as a result of supply and demand in the yarn
and raw cotton markets. Furthermore, fluctuations in petroleum prices can
influence the prices of chemicals, dyestuffs and polyester yarn. Accordingly, we
adjust the timing and size of our raw material purchases when necessary to
minimize the impact of these market forces and pricing fluctuations.
28
The following information is derived from our audited consolidated statements of
operations for our fiscal years ended January 4, 2003 (fiscal 2002), December
29, 2001 (fiscal 2001) and December 30, 2000 (fiscal 2000).
Fiscal Year 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------
(Dollars in millions)
Net sales $1,164.3 100.0% $1,160.9 100.0% $1,226.3 100.0%
Cost of goods sold 825.8 70.9% 894.0 77.0% 885.5 72.2%
- ------------------------------------------------------------------------------------------------------------------
Gross profit 338.5 29.1% 266.9 23.0% 340.8 27.8%
Selling, general and administrative expenses 235.8 20.3% 226.5 19.5% 230.0 18.8%
Other - net (2.2) (0.2)% 94.7 8.2% 45.4 3.7%
- ------------------------------------------------------------------------------------------------------------------
Earnings (loss) before interest and taxes (EBIT) 104.9 9.0% (54.3) (4.7)% 65.4 5.3%
Interest expense 30.2 2.6% 32.3 2.8% 32.4 2.6%
- ------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 74.7 6.4% (86.6) (7.5)% 33.0 2.7%
Provision (benefit) for income taxes 27.8 2.4% (31.1) (2.7)% 18.5 1.5%
- ------------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary item 46.9 4.0% (55.5) (4.8)% 14.5 1.2%
- ------------------------------------------------------------------------------------------------------------------
Extraordinary item, net of tax (12.6) (1.1)% -- -- -- --
- ------------------------------------------------------------------------------------------------------------------
Net (loss) income $ 34.3 2.9% $ (55.5) (4.8)% $ 14.5 1.2%
==================================================================================================================
SPECIAL CHARGES. The following represents special charges associated with our
restructuring and reorganization plan for 2000 through 2002. Although there was
no impact on earnings in 2002 for special charges, adjustments were made to the
carrying value of assets and restructuring reserves. See Note 9 to the
consolidated financial statements for further details and discussion related to
these charges and adjustments.
Fiscal Year 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------
(In millions)
Cost of goods sold $ -- $ 43.8 $18.2
Selling, general and administrative expenses -- 1.6 3.7
Other - net -- 98.7 43.1
- ------------------------------------------------------------------------------------------------------------------
-- 144.1 65.0
Benefit for income taxes -- (52.2) (17.4)
- ------------------------------------------------------------------------------------------------------------------
Net special charges $ -- $ 91.9 $47.6
==================================================================================================================
UNAUDITED PRO FORMA RESULTS OF OPERATIONS. The following represents our
consolidated statements of operations adjusted to remove the impact of the
special charges described above. We have provided this pro forma information to
make comparisons of our operating results for 2002 (which did not reflect any
net special charges) more meaningful in relation to prior years.
Fiscal Year 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------
(Dollars in millions)
Net sales $1,164.3 100.0% $1,160.9 100.0% $1,226.3 100.0%
Cost of goods sold 825.8 70.9% 850.2 73.2% 867.3 70.7%
- ------------------------------------------------------------------------------------------------------------------
Gross margin 338.5 29.1% 310.7 26.8% 359.0 29.3%
Selling, general and administrative expense 235.8 20.3% 224.9 19.4% 226.3 18.5%
Other - net (2.2) (0.2)% (4.0) (0.3)% 2.3 0.2%
- ------------------------------------------------------------------------------------------------------------------
Earnings before interest and taxes (EBIT) 104.9 9.0% 89.8 7.7% 130.4 10.6%
Interest expense 30.2 2.6% 32.3 2.7% 32.4 2.6%
- ------------------------------------------------------------------------------------------------------------------
Income before income taxes 74.7 6.4% 57.5 5.0% 98.0 8.0%
Provision for income taxes 27.8 2.4% 21.1 1.9% 35.9 2.9%
- ------------------------------------------------------------------------------------------------------------------
Income before extraordinary item 46.9 4.0% 36.4 3.1% 62.1 5.1%
- ------------------------------------------------------------------------------------------------------------------
Extraordinary item, net of tax (12.6) (1.1)% -- -- -- --
- ------------------------------------------------------------------------------------------------------------------
Net income $ 34.3 2.9% $ 36.4 3.1% $ 62.1 5.1%
==================================================================================================================
29
RUSSELL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS [CONTINUED]
2002 VS. 2001
NET SALES. In fiscal 2002 (a 53-week period), our net sales increased $3.4
million, or 0.3%, to $1.164 billion versus $1.161 billion in fiscal 2001 (a
fifty-two week period). However, after excluding $19.4 million in sales from
businesses that were acquired or discontinued, 2002 net sales on an ongoing
basis increased 2.0% over ongoing net sales for fiscal 2001. This increase in
sales from ongoing businesses was driven by new and expanded programs in both
our Domestic and International Activewear segments. The businesses that were
discontinued principally consisted of the direct marketing of our Cross Creek(R)
brand to golf pro-shops and department stores and yarn sales in our Domestic
Activewear segment.
For the 2002 fiscal year, net sales in our Domestic Activewear segment totaled
$1.076 billion, a decline of $4.0 million, or 0.4%, from net sales of $1.080
billion in fiscal 2001. However, after excluding $19.4 million in sales from
businesses that were acquired or discontinued, 2002 net sales on an ongoing
basis in our Domestic Activewear segment increased 1.5% over ongoing net sales
for fiscal 2001. Overall dozens shipped within the Domestic Activewear segment
during fiscal 2002 were up 5.0% from the prior year. The increases in sales and
dozens shipped were primarily driven by new and expanded fall programs, such as
a national expansion of men's and boys' fleece at JCPenney and a national men's
fleece program at Sam's Club. Other new and expanded programs which increased
net sales include Vintage Varsity(TM) by Russell Athletic, the rollout of
no-show socks, a broadened product offering for Mossy Oak and the introduction
of Discus(R) branded products at Sears. The increases in sales and dozens
shipped were offset by price reductions on some of our products, primarily in
the Artwear/ Careerwear and Mass Retail distribution channels.
For the 2002 fiscal year in our Domestic Activewear segment:
- - Net sales in our Russell Athletic channel increased $22.4 million, or 8.0%,
to $302.7 million, while dozens shipped were up 10.6% from fiscal 2001. The
increase in sales and dozens shipped were primarily driven by new and
expanded fall programs such as a national expansion of men's and boys'
fleece at JCPenney and the introduction of our Discus brand at Sears. To a
lesser extent, sales and dozens shipped were also positively impacted by
new and expanded programs in our college bookstore business. These
increases were partially offset by lower sales in our team sports business
during the first half of fiscal 2002 primarily due to order processing and
shipping delays we experienced during the reconfiguration of our Alexander
City, AL distribution center and during the implementation phase of our new
order processing and fulfillment system. These systems have been fully
operational since June 2002 and the distribution center has been shipping
at or above historical levels.
- - Net sales in our Mass Retail channel increased $13.6 million, or 4.0%, to
$350.2 million, while overall dozens shipped were up 5.0% from fiscal 2001.
The increases in sales and dozens shipped were due to increased sales of
our Mossy Oak and JERZEES brands as well as increased sock sales. The
increases in sales and dozens shipped were somewhat offset by lower
pricing. To a lesser extent, the increases in sales and dozens shipped were
partially offset by lower sales to Kmart. Our 2002 sales to Kmart were
$30.1 million, a decrease of $6.6 million from the $36.7 million in fiscal
2001.
- - Net sales in our Artwear/Careerwear channel decreased $39.9 million, or
8.6%, to $423.4 million, while overall dozens shipped were down 1.4% from
fiscal 2001. However, after excluding sales from our private label and
discontinued businesses, our 2002 ongoing net sales to the distributor
market was $399.2 million, a decrease of $20.3 million, or 4.8% from fiscal
2001. These decreases reflect industry-wide lower prices, primarily in the
promotional t-shirt market, and reduced corporate purchasing of our higher
priced products, such as sports shirts, denims and wovens.
International Activewear segment net sales for fiscal 2002 were $88.0 million,
an increase of 9.1%, or $7.4 million, reflecting an increase of 19.3% in dozens
shipped over fiscal 2001. New product introductions in Europe mainly drove the
increase in sales and dozens shipped. Net sales were also positively impacted by
the strengthening of the euro and British pound against the U.S. dollar. These
increases were partially offset by a change in the mix of products sold and
lower pricing in Europe.
GROSS PROFIT AND GROSS MARGIN. Our gross profit was $338.5 million, or a 29.1%
gross margin, for fiscal 2002 versus a gross profit of $266.9 million, or a
23.0% gross margin, in the prior year. Excluding the $43.8 million pre-tax
impact of last year's special charges, gross profit in fiscal 2001 was $310.7
million, or a 26.8% gross margin.
During fiscal 2002, our gross profit was positively impacted by: (1) lower fiber
costs and conversion cost savings from our yarn joint venture; (2) improved
plant utilization; (3) a better mix of products sold and higher sales volumes;
(4) the completion of our restructuring and reorganization program; and (5)
other ongoing efforts to improve and streamline our manufacturing processes as
well as our continued focus on reducing expenses.
The benefits we realized from the factors above were partially offset by: (1)
pricing pressures primarily in Artwear/Careerwear and Mass Retail channels; (2)
LIFO charges reflecting our lower inventory levels and a lower per-unit
manufacturing cost on our products resulting from the success of our
restructuring and reorganization program; and, (3) an inventory charge
associated with the reconfiguration of our Russell Athletic distribution center
in Alexander City, AL.
30
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A"). For fiscal 2002, our SG&A expenses
were $235.8 million, or 20.3% of net sales, versus $226.5 million, or 19.5% of
net sales, in the comparable prior year period. Excluding last year's special
charges of $1.6 million, SG&A expenses were $224.9 million, or 19.4% of net
sales, during fiscal 2001.
During the 2002 third quarter, we increased our bad debt reserve by $5.0 million
(pre-tax) to provide for potential additional losses on our pre-petition
receivables from Kmart, which brought our reserve level to 90% of the $12.4
million pre-petition accounts receivable balance due from Kmart. Excluding this
charge, our SG&A expenses for fiscal 2002 would have been $230.8 million, or
19.8% of net sales. On a comparable basis, excluding last year's special charges
and the charge of $6.2 million in the 2001 fourth quarter related to
establishing a bad debt reserve for Kmart, our SG&A expenses would have been
$218.7 million, or 18.8% of net sales, in fiscal 2001.
During fiscal 2002, we benefited from lower selling expenses associated with the
reorganization of our Cross Creek apparel business and lower marketing expenses.
Other general and administrative costs across our operations (primarily higher
bonuses, insurance and commission costs) and increased costs in connection with
the reconfiguration of our Alexander City, AL distribution center more than
offset the benefits from these lower expenses during the 2002 fiscal year.
OTHER-NET. Other-net was income of $2.2 million in fiscal 2002 versus an expense
of $94.7 million in fiscal 2001. Excluding the $98.7 million pre-tax impact of
the 2001 special charges, other-net was income of $4.0 million in fiscal 2001.
The decrease of $1.8 million in other-net was primarily due to fewer gains on
the sales of nonoperating assets and fewer gains on foreign currency forwards
during fiscal 2002.
EARNINGS BEFORE INTEREST AND TAXES ("EBIT"). Our consolidated EBIT in fiscal
2002 before the extraordinary item was $104.9 million, or 9.0% of net sales,
versus a loss of $54.3 million in the prior year. Excluding the pre-tax impact
of the 2001 special charges of $144.1 million, consolidated EBIT in fiscal 2001
was $89.8 million, or 7.7% of net sales. Exclusive of the charge in the 2002
third quarter related to our bad debt reserve for Kmart, our EBIT would have
been $109.9 million, or 9.4% of net sales, in fiscal 2002. On a comparable
basis, excluding last year's special charges and the $6.2 million charge in the
2001 fourth quarter related to Kmart, our EBIT would have been $96.0 million, or
8.3% of net sales, in fiscal 2001.
In fiscal 2002, our Domestic Activewear segment EBIT was $124.0 million, or
11.5% of the segment's net sales, versus a loss of $40.1 million in fiscal 2001.
Exclusive of the 2001 special charges of $144.0 million, our Domestic Activewear
segment EBIT was $103.9 million, or 9.6% of the segment's net sales, in fiscal
2001. The increase in our Domestic Activewear segment EBIT for fiscal 2002 was
primarily attributable to the benefits from the factors described above in the
gross profit and the SG&A sections of this year-over-year comparison.
In fiscal 2002, our International Activewear segment EBIT was a loss of $0.8
million versus $2.3 million in fiscal 2001. Exclusive of 2001 special charges of
$0.1 million, our International Activewear segment EBIT was $2.4 million, or
3.0% of the segment's net sales, in fiscal 2001. The decrease in our
International Activewear segment EBIT for fiscal 2002 was primarily attributable
to: (1) higher costs associated with product features and SG&A increases in
Mexico; (2) fewer gains on foreign currency forwards and SG&A increases in
Europe; and (3) lower sales and increased marketing expenses in Japan.
INCOME TAXES. For information concerning our income tax provisions, as well as
information regarding differences between our effective tax rates and applicable
statutory tax rates, see Note 6 to the consolidated financial statements.
2001 VS. 2000
NET SALES. Net sales decreased 5.3%, or $65.4 million, to $1.161 billion for
fiscal 2001 (a 52-week period) from $1.226 billion for fiscal 2000 (a 52-week
period). Fiscal 2001 net sales included a decrease of $29.9 million as a result
of discontinued businesses, which was partially offset by an incremental $12.2
million related to our acquisitions of Haas Outdoors' apparel business (Mossy
Oak) and A&C International (Three Rivers(R)) made during fiscal 2000.
For fiscal 2001, net sales in our Domestic Activewear segment totaled $1.080
billion, which was a decline of 3.2%, or $35.6 million, from net sales of $
1.116 billion in fiscal 2000. Overall dozens shipped within the Domestic
Activewear segment were down 2% from the prior year.
For the 2001 fiscal year in our Domestic Activewear segment:
- - Net sales for Russell Athletic were $280.4 million, a decrease of $6.9
million, or 2.4%, from fiscal 2000. This decrease in net sales was
principally driven by lower volumes and pricing largely due to the economic
slowdown and unseasonably warm weather during the peak fall sell-through
season.
31
RUSSELL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS [CONTINUED]
- - Despite warmer than normal weather during the fall and winter months, net
sales in the Mass Retail business line increased $5.9 million, or 1.8%, to
$336.6 million versus net sales of $330.7 million in fiscal 2000. This
increase in net sales was largely attributable to our market share growth
and higher sales in certain key categories such as camouflage apparel (our
Mossy Oak brand). Partially offsetting the increase in our Mossy Oak sales,
we experienced some price reductions in our JERZEES branded products and
lower volumes of sock sales.
- - Even though we gained market share in our Artwear/Careerwear channel, net
sales decreased $34.7 million, or 7.0%, to $463.3 million in fiscal 2001
versus net sales of $498.0 million in fiscal 2000. This decrease in net
sales was primarily due to industry-wide volume declines and lower prices,
which were largely attributable to the general economic slowdown.
For fiscal 2001, net sales in our International Activewear segment totaled $80.6
million, which was a decline of $29.8 million, or 27.0%, from net sales of
$110.4 million in fiscal 2000. Approximately $15.2 million of the decline in the
International Activewear segment was related to the elimination of unprofitable
product lines in Europe during the second half of fiscal 2000. The weaker euro
and British pound sterling accounted for approximately $2.7 million of the net
sales decline. The remaining net sales decrease in our International Activewear
segment was primarily related to lower shipment volumes in Europe due to a
general market slowdown and inventory rebalancing by distributors.
GROSS PROFIT AND GROSS MARGIN. Our gross profit was $266.9 million, or a 23.0%
gross margin, in fiscal 2001 versus a gross profit of $340.8 million, or a 27.8%
gross margin, in fiscal 2000. Excluding the impact of special charges of $43.8
million in fiscal 2001 and $18.2 million in fiscal 2000, our gross profit
decreased to $310.7 million, or a 26.8% gross margin, in fiscal 2001 versus a
gross profit of $359.0 million, or a 29.3% gross margin, in fiscal 2000. Gross
margins were adversely impacted by pricing pressures (primarily in our Artwear
products), curtailed production schedules to reduce inventory (estimated at
$19.7 million or $.38 per share versus fiscal 2000), higher cotton costs, higher
costs associated with adding product features in 2001 and higher energy costs.
However, these negative impacts to our gross margins were partially offset by
cost savings attributed to our restructuring and reorganization program and our
other ongoing efforts to improve and streamline our manufacturing processes, as
well as our continued focus on reducing expenses.
SG&A. SG&A was $226.5 million, or 19.5% of net sales, in fiscal 2001 versus
$230.0 million, or 18.8% of net sales, in fiscal 2000. Excluding the impact of
special charges of $1.6 million in fiscal 2001 and $3.7 million in fiscal 2000,
SG&A was $224.9 million, or 19.4% of net sales, in fiscal 2001 versus $226.3
million, or 18.5% of net sales, in fiscal 2000. Excluding the impact of special
charges in both fiscal years and the impact of a $6.2 million charge in 2001
related to our accounts receivable for Kmart, SG&A was $218.7 million, or 18.8%
of net sales, in fiscal 2001 versus $226.3 million, or 18.5% of net sales, in
fiscal 2000. Our reduction in SG&A expenses was principally due to lower selling
expenses associated with the reorganization of our Cross Creek apparel business
and lower marketing expenses. This improvement was partially offset by
additional expenses associated with higher inventory levels and distribution
costs.
OTHER-NET. Other-net was a charge of $94.7 million in fiscal 2001 versus a
charge of $45.4 million in fiscal 2000. The increase year-over-year was largely
due to (1) special charges of $98.7 million in fiscal 2001 and $43.1 million in
fiscal 2000 relating to our multi-year restructuring and reorganization plan;
(2) costs of evaluating two potential acquisitions; and (3) costs relating to
amending our debt agreements, partially offset by gains on the sales of assets
and gains on foreign currency forwards in fiscal 2001.
EBIT. Consolidated EBIT was a loss of $54.3 million, or (4.7)% of net sales, in
fiscal 2001 versus $65.4 million, or 5.3% of net sales, in fiscal 2000.
Exclusive of special charges of $144.1 million in fiscal 2001 and $65.0 million
in fiscal 2000, consolidated EBIT was $89.8 million, or 7.7% of net sales, in
fiscal 2001 versus $130.4 million, or 10.6% of net sales, in fiscal 2000.
Domestic Activewear segment EBIT was a loss of $40.1 million in fiscal 2001
versus $119.2 million in fiscal 2000. Exclusive of special charges of $144.0
million in fiscal 2001 and $39.4 million in fiscal 2000, Domestic Activewear
segment EBIT was $103.9 million, or 9.6% of the segment's net sales, in fiscal
2001 versus $158.6 million, or 14.2% of the segment's net sales in fiscal 2000.
This decrease is primarily attributed to pricing pressure (primarily in
Artwear/Careerwear), curtailed production schedules to reduce inventory, higher
cotton costs, higher costs associated with adding product features in 2001 and
higher energy costs.
The International Activewear segment EBIT was $2.3 million in fiscal 2001
versus $(33.4) million in fiscal 2000. Exclusive of special charges of $0.1
million in fiscal 2001 and $25.6 million in fiscal 2000, the International
Activewear segment EBIT was $2.4 million, or 3.0% of net sales, in fiscal 2001
versus $(7.8) million, or (7.1)% of net sales, in fiscal 2000. The improvement
in the International Activewear segment was primarily due to the elimination of
unprofitable product lines in Europe during the second half of fiscal 2000. In
addition, product costs within the International Activewear segment were lower
due to the closure of the Scottish manufacturing facilities in 2000 and the
replacement of that production with lower-priced products sourced from
third-party suppliers.
32
LIQUIDITY AND CAPITAL RESOURCES
Total debt to capitalization decreased to 37.2% at the end of fiscal 2002,
versus 44.0% at fiscal 2001. The decrease was primarily attributable to our
strategic initiative to reduce our investment in working capital, which resulted
in a reduction of inventories by nearly $53.7 million and contributed to the net
reduction of total debt by $79.1 million during fiscal 2002. In addition, our
total debt, less cash, at the end of fiscal 2002 was $208.6 million, which is a
reduction of $141.9 million, or 40.5%, from $350.5 million at the end of fiscal
2001 and the lowest net debt level in 10 years. Our current ratio of 3.3 to 1.0
at January 4, 2003 is consistent with 2001.
EBITDA, defined as net income before interest, taxes, extraordinary charges,
depreciation and amortization, for fiscal 2002 was $150.0 million versus a loss
of $4.9 million in fiscal 2001. Excluding 2001 special charges and the bad debt
reserves for Kmart in each fiscal year, our EBITDA in fiscal 2002 would have
been $155.0 million versus $145.4 million in fiscal 2001.
CASH FROM OPERATING ACTIVITIES
Our operations provided approximately $204.1 million of our cash requirements
during fiscal 2002 versus $123.9 million during fiscal 2001. At the end of
fiscal 2002, our inventory was $53.7 million lower than a year ago. We have
reduced our inventory levels by focusing on increasing our inventory turns and
improving our production planning.
CASH FROM INVESTING ACTIVITIES
Net cash used in investing activities was $23.6 million in fiscal 2002 versus
$40.9 million in fiscal 2001. Our investing activities consisted of capital
expenditures and the acquisition of the Moving Comfort(R) business, less
proceeds from the sale of non-operating assets. In 2002, capital expenditures
and acquisitions required $33.0 million. In 2001, there were no acquisitions,
while capital expenditures and investments in joint ventures required $55.5
million. For fiscal 2003, we are forecasting capital expenditures to be
approximately $40 million to $45 million. The majority of planned fiscal 2003
capital expenditures are to further enhance our manufacturing and distribution
capabilities and our information systems.
CASH FROM FINANCING ACTIVITIES
We paid $5.1 million in dividends during fiscal 2002. We also made a scheduled
$5.0 million debt service payment on our Term Loan (see description below),
reducing the outstanding balance to $20.0 million.
On April 18, 2002, we completed our debt refinancing. The new financial
structure includes:
- - $325.0 million in Senior Secured Credit Facilities (the "Facilities"). The
Facilities include a five year $300.0 million Senior Secured Revolving
Credit Facility (the "Revolver") and a five year $25.0 million Senior
Secured Term Loan (the "Term Loan") of which $20.0 million is currently
outstanding; and
- - $250.0 million in 9.25% Senior Unsecured Notes (the "Senior Notes") due
2010.
We used the net proceeds of the Senior Notes offering, together with $132.4
million of the initial borrowings under the Facilities, to repay the outstanding
balances, accrued interest, prepayment penalties and expenses under our existing
revolving credit facility and long-term notes, and to pay issuance costs. During
the second quarter 2002, we incurred extraordinary, pre-tax charges of
approximately $20.1 million ($12.6 million after tax) associated with the early
retirement of debt. The charge consisted of $15.0 million related to prepayment
penalties, fees and expenses associated with the early termination of our
existing notes payable and the write-off of $5.1 million of previously
capitalized loan costs associated with the extinguished debt.
We refinanced our indebtedness in order to (1) improve our borrowing capacity by
better matching availability to the value of our assets and cash flow, which can
increase our borrowing capacity upon our acquisition of assets and internal
growth; (2) reduce the amortization of our indebtedness by eliminating
approximately $34 million to $37 million in annual long-term debt repayments for
each of the next five years; (3) eliminate fees and additional interest rate
increases as a result of the amendments to our old debt agreements; and (4)
extend the maturity on our bank facilities from 2004 to 2007. In addition, while
our new credit facility imposes certain restrictions on us and requires us to
meet a fixed charge coverage ratio and a maximum leverage ratio, our new credit
facility increases our operating flexibility with less restrictive financial
covenants and restrictions on capital distributions and investments.
Furthermore, the refinancing eliminated a recurring quarterly fee of .25% on the
total old credit facilities and the then current balances of our long-term
notes, if we had not consummated an offering of debt securities by April 30,
2002.
33
RUSSELL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS [CONTINUED]
The Senior Notes initially were not registered under the Securities Act and
could not be offered or sold in the United States absent registration or an
applicable exemption from the registration requirements. On July 26, 2002, we
filed an S-4 registration statement with the SEC relating to an offer to
exchange the Senior Notes for an issue of SEC registered notes with terms
identical to the Senior Notes (the exchange notes) (except that the exchange
notes are not subject to restrictions on transfer or to any increase in annual
interest rate relating to a failure to complete the exchange of the Senior
Notes). This exchange offer was completed in November 2002.
Borrowings under our Facilities are subject to mandatory prepayment equal to (1)
100% of the net proceeds received by us from the issuance of debt securities
(excluding the issuance of the Senior Notes); and (2) 50% of the net proceeds
received from the sale of certain assets.
The Facilities and the indenture governing the Senior Notes impose certain
restrictions on us, including restrictions on our ability to: incur debt; grant
liens; provide guarantees in respect of obligations of any other person; pay
dividends; make loans and investments; sell our assets; issue redeemable
preferred stock and non-guarantor subsidiary preferred stock; make redemptions
and repurchases of capital stock; make capital expenditures; prepay, redeem or
repurchase debt; engage in mergers or consolidation; engage in sale/leaseback
transactions and affiliate transactions; change our business; amend certain debt
and other material agreements, including the indenture governing the Senior
Notes and other documents governing any subordinated debt that we may issue in
the future; issue and sell capital stock of subsidiaries; and restrict
distributions from subsidiaries. The new Facilities require us to achieve a
fixed charge coverage ratio, which is 1.15 to 1.0 through the next-to-last day
of fiscal year 2003, and 1.2 to 1.0 through the next-to-last day of fiscal year
2004 and 1.25 to 1.0 thereafter. We also must maintain a maximum leverage ratio,
which is 4.0 to 1.0 through the next-to-last day of fiscal year 2002, 3.75 to
1.0 through the next-to-last day of fiscal year 2003 and 3.5 to 1.0 thereafter.
We were in compliance with these covenants at the end of fiscal year 2002, and
we expect to remain in compliance with them in the foreseeable future.
The Facilities provide for variable interest on the Revolver through January 4,
2003 at LIBOR plus 2.50% (3.92% at January 4, 2003) and on the Term Loan at
LIBOR plus 3.00% (4.32% at January 4, 2003), with an annual commitment fee on
the unused portion of the Facilities of 0.50%. After this initial period,
pricing is adjusted quarterly based on our consolidated fixed charge coverage
ratio. As a result of improvements in our consolidated fixed charge coverage
ratio, the rate on the Revolver has dropped to LIBOR plus 1.75%, the rate on
the Term Loan has dropped to LIBOR plus 2.25% and the annual commitment fee on
the unused portion of the Facilities has dropped to 0.375% for the first quarter
of fiscal year 2003.
If we violate these covenants and are unable to obtain waivers from our lenders,
our debt under these agreements would be in default and could be accelerated by
our lenders. If our indebtedness is accelerated, we may not be able to repay or
refinance it. Even if we are able to obtain new financing, it may not be on
commercially reasonable terms, or terms that are acceptable to us. Cross default
provisions exist in the indenture governing our Senior Notes whereby a default
on our Senior Notes would occur if we default on any covenant of any other debt
agreement (which has an outstanding balance in excess of $25 million) and such
default causes an acceleration of the maturity date of the other indebtedness.
Also, under cross-default provisions in our Facilities, a default would occur if
we default on any covenant of any other debt agreement (which has an outstanding
balance in excess of $5 million) and such default causes an acceleration of the
maturity date of the other indebtedness.
PENSION FUNDING CONSIDERATION
As a result of significant declines in the U.S. securities markets during the
past three years, the value of our pension plan assets has also decreased. In
2002, we recognized an additional pension liability in our year-end balance
sheet and a charge to stockholders' equity of approximately $17.9 million after
tax. Although this non-cash charge did not impact our operating results or
liquidity in 2002, we are required to fund $7.2 million to the plan prior to
September 15, 2003 in order to comply with requirements in our principle debt
agreement.
ADEQUACY OF BORROWING CAPACITY
The availability under our Revolver is subject to a borrowing base limitation
that is determined on the basis of eligible accounts receivable and inventory.
As of January 4, 2003, we had no outstanding borrowings under the Revolver, and
we could have borrowed approximately $189.6 million under our Revolver. We also
had $68.6 million in cash available to fund ongoing operations. Although there
can be no assurances, we believe that cash flow available from operations, along
with the availability under our Revolver and cash on hand, will be sufficient to
operate our business, satisfy our working capital and capital expenditure
requirements and meet our foreseeable liquidity requirements, including debt
service on our Senior Notes and the Facilities, until the maturity of our
Facilities in 2007.
CONTINGENCIES
For information concerning our ongoing litigation, see Note 8 to the
consolidated financial statements.
34
COMMITMENTS
The following table summarizes information about our contractual cash
obligations as of January 4, 2003:
Contractual Cash Obligations (in millions)
- ----------------------------------------------------------------------------------------------------------
Long-term Short-term Operating Unconditional
Fiscal Years debt debt leases purchase obligations(1) Total(1)
- ----------------------------------------------------------------------------------------------------------
2003 $ 5.0 $ 7.3 $ 7.4 $ 0.7 $ 20.4
2004 5.0 -- 5.6 0.7 11.3
2005 5.0 -- 5.0 0.7 10.7
2006 5.0 -- 4.1 0.7 9.8
2007 -- -- 3.8 0.7 4.5
Thereafter 250.0 -- 11.4 7.1 268.5
- ---------------------------------------------------------------------------------------------------------
$ 270.0 $ 7.3 $ 37.3 $ 10.6 $ 325.2
- ---------------------------------------------------------------------------------------------------------
(1) Excluding the yarn purchase commitment described below.
We are required to purchase certain minimum quantities of yarn on an annual
basis from Frontier Yarns pursuant to a supply agreement. The agreement also
provides for pricing to be calculated on a conversion cost basis plus actual
cost of raw materials. We estimate our total purchases will be in the range of
$105 million to $135 million per year. We can terminate the agreement under
certain circumstances related to a fundamental decrease in our demand for yarn
or the cost of yarn becoming uncompetitive. In addition, beginning in 2006, the
agreement may be terminated for any reason upon two years' notice, but not
prior to 2008. Other than our purchase requirements under the supply agreement,
we have no other required purchases or financial commitments to Frontier Yarns.
Frontier Yarns now supplies most of our yarn needs.
The following table summarizes information about other commercial commitments
as of January 4, 2003:
Other Commercial Commitments (in millions)
- ----------------------------------------------------------------
Expiring in Standby letters
Fiscal Year: of credit
- ----------------------------------------------------------------
2003 $ 19.2
2004 2.2
2005 2.2
- ----------------------------------------------------------------
$ 23.6
- ----------------------------------------------------------------
We had $13.4 million outstanding under letters of credit for the purchase of
inventories at January 4, 2003. We had $6.6 million outstanding under letters of
credit at January 4, 2003 for the guarantee of debt of a non-affiliated foreign
contractor that expires ratably over the period of 2003-2005. In addition, we
had $3.6 million outstanding under letters of credit at January 4, 2003 related
to self-insurance of workers' compensation programs.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
We are exposed to market risks relating to fluctuations in interest rates,
currency exchange rates and commodity prices. Our financial risk management
objectives are to minimize the potential impact of interest rate, foreign
exchange rate and commodity price fluctuations on our earnings, cash flows and
equity. To manage these risks, we may use various financial instruments,
including interest rate swap agreements, commodity futures contracts and forward
currency exchange contracts. We only use traded instruments with major financial
institutions as the counterparties to minimize the risk of credit loss. Refer to
Notes 1 and 4 of the consolidated financial statements for a more complete
description of our accounting policies and the extent of our use of such
instruments.
The following analyses present the sensitivity of the market value, earnings and
cash flows of our significant financial instruments to hypothetical changes in
interest rates, exchange rates and commodity prices as if these changes had
occurred at January 4, 2003. The range of changes chosen for these analyses
reflects our view of changes that are reasonably possible over a one-year
period. Market values are the present values of projected future cash flows
based on the interest rate assumptions or quoted market prices, where available.
These forward-looking disclosures are selective in nature and only address the
potential impacts from financial instruments. They do not include other
potential effects which could impact our business as a result of changes in
interest rates, exchange rates or commodity prices.
35
RUSSELL CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS [CONTINUED]
INTEREST RATE AND DEBT SENSITIVITY ANALYSIS
At January 4, 2003, our outstanding debt totaled $277.3 million, which consisted
of fixed-rate debt of $250 million and variable-rate debt of $27.3 million.
Based on our 2002 average outstanding borrowings under our variable-rate debt, a
one-percentage point increase in interest rates would have negatively impacted
our annual pre-tax earnings and cash flows by approximately $1.7 million. A
one-percentage point increase in market interest rates would decrease the fair
market value of our fixed-rate debt at January 4, 2003 by approximately $7.7
million. Changes in the fair value of our fixed-rate debt will not have any
impact on us unless we repurchase the debt in the open market.
CURRENCY EXCHANGE RATE SENSITIVITY
We have foreign currency exposures related to buying, selling and financing in
currencies other than our functional currencies. We also have foreign currency
exposure related to foreign denominated revenues and costs translated into U.S.
dollars. These exposures are primarily concentrated in the euro, British pound
sterling and Mexican peso. We enter into foreign currency forward contracts to
manage the risk associated with doing business in foreign currencies. Our policy
is to hedge 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. A ten-percentage point
adverse change in the foreign currency spot rates would decrease the fair market
value of our foreign currency forward contracts held at January 4, 2003 by $2.2
million. Changes in the fair value of our foreign currency forward contracts
will not have any impact on our results of operations unless these contracts are
deemed to be ineffective at hedging currency exposures of anticipated
transactions. We generally view our net investments in foreign subsidiaries that
have a functional currency other than the U.S. dollar as long-term. As a result,
we generally do not hedge these net investments.
COMMODITY PRICE SENSITIVITY
The availability and price of cotton is subject to wide fluctuations due to
unpredictable factors such as weather conditions, governmental regulations,
economic climate or other unforeseen circumstances. We are purchasing yarn
primarily from Frontier Yarns, Frontier Spinning Mills, Inc. and other third
parties, and our yarn pricing will continue to be directly impacted by the price
of cotton. We do not have any outstanding cotton futures contracts at January 4,
2003.
FORWARD-LOOKING INFORMATION
This annual report, including management's discussion and analysis, contains
"forward-looking statements" (as defined in Section 21E of the Securities
Exchange Act of 1934) that describe our beliefs concerning future conditions,
prospects, growth opportunities, new products lines and the outlook for our
company based on currently available information. Wherever possible, we have
identified these forward-looking statements by words such as "anticipate",
"believe", "intend", "estimate", "expect", "continue", "could", "may", "plan",
"project", "predict", "will" and similar expressions. These forward-looking
statements are based on assumptions that we believe are reasonable.
Such forward-looking statements are subject to risks and uncertainties that
could cause our actual results, performance and achievements to differ
materially from those expressed in, or implied by, such forward-looking
statements, including, but not limited to, risks related to: (a) economic
conditions, including those specific to the retail industry; (b) changes in
weather and the seasonal nature of our business; (c) significant competitive
activity, including, but not limited to, product quality, brand recognition,
price, product differentiation, advertising and customer service; (d) the
integration of the Bike business into our existing business; (e) our acquisition
strategy; (f) the ability to effect our Six Point Profit Growth Plan, including
sales growth through new business with new or existing customers, yarn savings,
textile cost savings, organization savings, distribution efficiencies and
inventory management in line with expected savings; (g) changes in customer
demand for our products; (h) inherent risks in the marketplace associated with
new and expanded products and new product lines; (i) the collectibility of
receivables from our customers; (j) our debt structure and cash management and
requirements; (k) currency exchange rates; (l) our accounting for defined
benefit pension plans; (m) the mix of products sold; (n) plant utilization; (o)
the ability to adjust our pricing structure; (p) our multi-year restructuring
and reorganization program; (q) implementation of new systems; (r) tax planning
strategies; (s) effects of lawsuits and government regulations; (t) dependence
on licenses from third parties; (u) price volatility of raw materials; (v)
reliance on a few customers for a portion of our sales; (w) dependence on
third-parties for production of yarn and manufacture of our products; (x) our
international operations; (y) protection of our intellectual property; and (z)
other factors listed from time to time in our announcements and SEC filings,
including, but not limited to, the matters discussed under the caption
"Forward-Looking Information" in our Annual Report on Form 10-K for the year
ended January 4, 2003. The risks listed above are not exhaustive and other
sections of this annual report may include additional factors that could
adversely affect our business and financial performance. We assume no obligation
to publicly update any forward-looking statements, whether as a result of new
information, future events or otherwise.
36
RUSSELL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 4, 2003 and December 29, 2001
(In thousands, except share data) 2002 2001
- ---------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash $ 68,619 $ 5,882
Trade accounts receivable, less allowances
of $22,954 in 2002 and $15,784 in 2001 148,915 166,105
Inventories 306,658 360,338
Prepaid expenses and other current assets 15,373 17,155
Deferred income tax benefits -- 5,126
Income tax receivable 11,280 18,694
- ---------------------------------------------------------------------------------------------------
Total current assets 550,845 573,300
Property, plant and equipment:
Land and improvements 20,389 20,480
Buildings and improvements 251,875 247,222
Machinery and equipment 758,827 779,157
Construction-in-progress 3,619 4,810
- ---------------------------------------------------------------------------------------------------
1,034,710 1,051,669
Less allowance for depreciation and amortization (702,701) (695,384)
- ---------------------------------------------------------------------------------------------------
332,009 356,285
Other assets 80,261 65,585
- ---------------------------------------------------------------------------------------------------
$ 963,115 $ 995,170
- ---------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 71,291 $ 61,505
Employee compensation 37,978 42,939
Accrued expenses 37,700 21,582
Deferred income taxes 6,505 --
Short-term debt 7,253 6,187
Current maturities of long-term debt 5,000 39,271
- ---------------------------------------------------------------------------------------------------
Total current liabilities 165,727 171,484
Long-term debt, less current maturities 265,000 310,936
Deferred liabilities:
Income taxes 6,760 22,471
Pension and other 58,375 36,048
- ---------------------------------------------------------------------------------------------------
65,135 58,519
Commitments and contingencies -- --
Stockholders' equity:
Common stock, par value $.01 per share; authorized
150,000,000 shares; issued 41,419,958 shares 414 414
Paid-in capital 42,877 45,392
Retained earnings 675,448 646,279
Treasury stock (2002 - 9,233,545 shares
and 2001 - 9,411,462 shares) (218,113) (223,172)
Accumulated other comprehensive loss (33,373) (14,682)
- ---------------------------------------------------------------------------------------------------
467,253 454,231
- ---------------------------------------------------------------------------------------------------
$ 963,115 $ 995,170
- ---------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
37
RUSSELL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended January 4, 2003, December 29, 2001, and December 30, 2000
(In thousands, except share and per share data) 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------
Net sales $ 1,164,328 $ 1,160,925 $ 1,226,328
Costs and expenses:
Cost of goods sold 825,763 894,018 885,476
Selling, general and administrative expenses 235,810 226,458 229,991
Other - net (2,216) 94,718 45,383
Interest expense 30,246 32,324 32,401
- -----------------------------------------------------------------------------------------------------------------------
1,089,603 1,247,518 1,193,251
- -----------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 74,725 (86,593) 33,077
Provision (benefit) for income taxes 27,798 (31,107) 18,562
- -----------------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary item 46,927 (55,486) 14,515
Extraordinary item for early retirement of
debt, net of tax benefit of $7,476 (12,621) -- --
- -----------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 34,306 $ (55,486) $ 14,515
- -----------------------------------------------------------------------------------------------------------------------
Basic per share data:
Income (loss) before extraordinary item $ 1.46 $ (1.74) $ .45
Extraordinary item (.39) -- --
- -----------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 1.07 $ (1.74) $ .45
Diluted per share data:
Income (loss) before extraordinary item $ 1.45 $ (1.74) $ .44
Extraordinary item (.39) -- --
- -----------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 1.06 $ (1.74) $ .44
Weighted-average shares outstanding:
Basic 32,127,579 31,950,658 32,405,926
Diluted 32,269,813 31,950,658 32,686,006
See Notes to Consolidated Financial Statements.
38
RUSSELL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended January 4, 2003, December 29, 2001, and December 30, 2000
(In thousands) 2002 2001 2000
- --------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income (loss) $ 34,306 $ (55,486) $ 14,515
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 44,775 47,713 53,428
Amortization 286 1,695 1,217
Extraordinary item, net of tax (Note 2) 12,621 -- --
Deferred income taxes 6,360 (28,244) 19,589
Provision for doubtful accounts 7,486 5,777 4,858
Loss (gain) on sale of property, plant and equipment (3,182) (3,875) 574
Non-cash restructuring, asset impairment
and other unusual charges 60 95,698 37,209
Foreign currency transaction (gain) loss (303) (1,315) 2,276
Changes in operating assets and liabilities:
Trade accounts receivable 12,230 25,750 (4,955)
Inventories 56,407 32,059 (13,699)
Prepaid expenses and other current assets 2,110 3,580 (2,970)
Other assets 1,267 1,911 14,200
Accounts payable and accrued expenses 18,871 1,245 (11,585)
Income taxes 14,890 (6,353) (13,951)
Pension and other deferred liabilities (4,043) 3,791 (3,535)
- --------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 204,141 123,946 97,171
INVESTING ACTIVITIES
Purchase of property, plant and equipment (28,343) (48,975) (59,457)
Cash paid for acquisitions, joint ventures and other (4,670) (6,494) (39,972)
Proceeds from sale of property, plant and equipment 9,450 14,602 6,450
- --------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (23,563) (40,867) (92,979)
FINANCING ACTIVITIES
Borrowings (payments) on credit facility - net (74,800) (31,400) 52,303
Borrowings on short-term debt 458 6,128 --
Payments on notes payable, including prepayments penalties (270,371) (41,072) (26,564)
Proceeds from issuance of Senior Notes 250,000 -- --
Debt issuance and amendment costs paid (18,910) (3,434) --
Dividends on common stock (5,137) (14,695) (18,166)
Treasury stock re-issued 2,574 1,706 952
Cost of common stock for treasury (30) (120) (15,151)
- --------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (116,216) (82,887) (6,626)
Effect of exchange rate changes on cash (1,625) 1,497 (2,496)
- --------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 62,737 1,689 (4,930)
Cash balance at beginning of year 5,882 4,193 9,123
- --------------------------------------------------------------------------------------------------------------
Cash balance at end of year $ 68,619 $ 5,882 $ 4,193
- --------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Interest paid $ 28,054 $ 32,533 $ 32,162
Income taxes paid, net of refunds 6,547 2,952 12,677
See Notes to Consolidated Financial Statements.
39
RUSSELL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended January 4, 2003, December 29, 2001, and December 30, 2000
Accumulated
Other
Common Paid-in Retained Treasury Comprehensive
(In thousands, except share data) Stock Capital Earnings Stock Loss Total
- -------------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 2000 $ 414 $ 48,294 $ 720,111 $(213,461) $ (6,016) $ 549,342
Comprehensive income:
Net income -- -- 14,515 -- -- 14,515
Foreign currency translation adjustments -- -- -- -- (5,552) (5,552)
---------
Comprehensive income 8,963
---------
Treasury stock acquired (994,649 shares) -- -- -- (15,151) -- (15,151)
Treasury stock re-issued (76,150 shares) -- (1,190) -- 2,142 -- 952
Cash dividends ($.56 per share) -- -- (18,166) -- -- (18,166)
- -------------------------------------------------------------------------------------------------------------------------------
Balance at December 30, 2000 414 47,104 716,460 (226,470) (11,568) 525,940
Comprehensive loss:
Net loss -- -- (55,486) -- -- (55,486)
Foreign currency translation adjustments -- -- -- -- (1,057) (1,057)
Cumulative effect adjustment (SFAS 133),
net of tax -- -- -- -- (578) (578)
Losses on derivatives reclassified to
earnings, net of tax of $2,850 -- -- -- -- 4,529 4,529
Change in unrealized value of derivatives,
net of tax of $3,241 -- -- -- -- (5,288) (5,288)
Minimum pension liability, net of tax of $442 -- -- -- -- (720) (720)
---------
Comprehensive loss (58,600)
---------
Treasury stock acquired (8,580 shares) -- -- -- (120) -- (120)
Treasury stock re-issued (121,542 shares) -- (1,712) -- 3,418 -- 1,706
Cash dividends ($.46 per share) -- -- (14,695) -- -- (14,695)
- -------------------------------------------------------------------------------------------------------------------------------
Balance at December 29, 2001 414 45,392 646,279 (223,172) (14,682) 454,231
Comprehensive income:
Net income -- -- 34,306 -- -- 34,306
Foreign currency translation adjustments -- -- -- -- (997) (997)
Losses on derivatives reclassified to
earnings, net of tax of $797 -- -- -- -- 1,346 1,346
Change in unrealized value of derivatives,
net of tax of $696 -- -- -- -- (1,175) (1,175)
Minimum pension liability,
net of tax of $10,583 -- -- -- -- (17,865) (17,865)
---------
Comprehensive income 15,615
---------
Treasury stock acquired (2,763 shares) -- -- -- (30) -- (30)
Treasury stock re-issued (180,680 shares) -- (2,515) -- 5,089 -- 2,574
Cash dividends ($.16 per share) -- -- (5,137) -- -- (5,137)
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 4, 2003 $ 414 $ 42,877 $ 675,448 $(218,113) $ (33,373) $ 467,253
- -------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
40
RUSSELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
We are a branded athletic, activewear and outdoor company with over a century of
success in marketing, athletic uniforms, apparel and accessories for a wide
variety of sports, outdoor and fitness activities. Our brands include: Russell
Athletic(R), JERZEES(R), Mossy Oak(R), Cross Creek(R), Discus(R) and Moving
Comfort(R).
We design, market and manufacture or source a variety of apparel products
including fleece, t-shirts, casual shirts, jackets, athletic shorts, socks and
camouflage attire for men, women, boys and girls. We are a supplier of team
uniforms and related apparel to college, high school and organized sports teams.
We are also the official uniform supplier of 15 Major League Baseball(R) teams,
including the Atlanta Braves, New York Yankees, San Francisco Giants, and
Seattle Mariners. In addition, we are the official uniform supplier to the U.S.
Olympic baseball team and Little League Baseball(R) and an official uniform
supplier to Minor League Baseball. The Russell name has been associated with
high-quality apparel for 100 years, and with team uniforms since 1932.
REVENUE RECOGNITION
We recognize revenues, net of estimated sales returns, discounts and allowances,
when goods are shipped, title has passed, the sales price is fixed and
collectibility is reasonably assured. Substantially all of our sales reflect FOB
("free-on-board") shipping point terms.
TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable consists of amounts due from our normal business
activities. We maintain an allowance for doubtful accounts to reflect expected
credit losses. We provide for bad debts based on collection history and specific
risks identified on a customer-by-customer basis. A considerable amount of
judgment is required to assess the ultimate realization of accounts receivable
and the credit-worthiness of each customer. Furthermore, these judgments must be
continuously evaluated and updated. Finance charges on past due receivables are
recognized on a cash basis.
PROMOTIONAL PROGRAMS
We offer various types of promotional programs to our customers, including the
following:
COOPERATIVE ADVERTISING. Under cooperative advertising arrangements, we agree to
reimburse our customers for all or a portion of the costs incurred by the
customer to advertise and promote our products. Cooperative advertising costs
are charged to selling, general and administrative expense in the year incurred.
GROWTH INCENTIVE REBATES. We offer rebates to customers in certain distribution
channels. Under incentive programs of this nature, we estimate the anticipated
rebate to be paid and allocate a portion of the estimated costs of the rebate to
each underlying sales transaction. These rebates are recorded as a reduction of
net sales.
SEASONAL MARKDOWNS, DISCOUNTS AND ALLOWANCES. The cost of these incentives is
recognized when the related sale is recorded or, for retroactive credits, on the
date the incentive is offered. The cost of these incentives is recorded as a
reduction of net sales.
SHIPPING AND HANDLING COSTS
Shipping and handling revenues and costs are included as a component of net
sales and cost of goods sold, respectively.
COST OF GOODS SOLD AND SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The significant components of the line item "Cost of goods sold" are raw
materials (including inbound freight and handling costs), energy expenses,
production and supervisory labor, internal transfer costs, depreciation and
other indirect costs associated with the manufacturing and procurement
processes. The significant components of the line item "Selling, general and
administrative expenses" are costs for warehousing and distribution of finished
goods, marketing, advertising, selling expenses (including payroll and related
payroll benefits for sales persons), royalties and other corporate general and
administrative expenses.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Russell
Corporation and all of our majority-owned subsidiaries, after the elimination of
intercompany accounts and transactions.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires us to
make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Actual results could
materially differ from those estimates.
INVENTORIES
Inventories of finished goods, work-in-process and raw materials are carried at
the lower of cost or market, with cost for a substantial portion of inventories
determined under the Last-In, First-Out (LIFO) method. Certain inventories are
carried under the First-In, First-Out (FIFO) method, or the average cost method,
and were valued at
41
RUSSELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [CONTINUED]
approximately $57.9 million in 2002 and $53.5 million in 2001. Inventories are
summarized as follows:
(In thousands) 2002 2001
- ---------------------------------------------------------
Finished goods $240,964 $297,571
Work-in-process 48,272 42,136
Raw materials and supplies 19,143 23,424
- ---------------------------------------------------------
308,379 363,131
LIFO and lower-of-cost or market
adjustments, net (1,721) (2,793)
- ---------------------------------------------------------
$306,658 $360,338
=========================================================
In 2002, we lowered inventory levels and our per unit manufacturing costs. These
reductions resulted in a liquidation of LIFO inventory quantities carried at
higher costs prevailing in prior years as compared with our current
manufacturing costs. The effect of this liquidation was to decrease net income
by $6.0 million, or $.12 per share.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, net of accumulated
depreciation and impairment write downs. The provision for depreciation of
property, plant and equipment has been computed generally on the straight-line
method based upon their estimated useful lives. Initial estimated useful lives
range from 25 to 37 years for buildings and from 3 to 12 years for machinery and
equipment. When events and circumstances indicate that the useful lives or
salvage values may have changed, we adjust the related useful life and record
depreciation over the shortened useful life after giving consideration to the
revised salvage values. Revisions to the remaining estimated useful lives and
salvage values of plants scheduled for closing resulted in an increase in
depreciation expense of $995,000 in 2000. (See Note 9.)
OTHER ASSETS
Other assets are summarized as follows:
(In thousands) 2002 2001
- ---------------------------------------------------------
Goodwill $ 19,673 $ 17,176
Other intangibles 19,230 18,752
Debt issuance costs 16,188 3,242
- ---------------------------------------------------------
55,091 39,170
Less accumulated amortization (6,749) (5,341)
- ---------------------------------------------------------
48,342 33,829
Investments (trading portfolio) 8,048 8,601
Investments in and advances
to unconsolidated entities 21,509 18,445
Other 2,362 4,710
- ---------------------------------------------------------
$ 80,261 $ 65,585
=========================================================
On December 30, 2001, we adopted FASB Statement of Financial Accounting
Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, which eliminates
amortization of goodwill and requires an annual impairment test. SFAS No. 142
requires that impairment be tested at the reporting unit level, using a two-step
approach. 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 value.
Purchased intangibles with indefinite economic lives are tested for impairment
annually using a lower of cost or fair value approach. Other intangibles
continue to be amortized over their useful lives, ranging from 15 to 40 years,
and reviewed for impairment when indicators exist.
The following table presents the impact of SFAS No. 142 on net income (loss) and
net income (loss) per share had the standard been in effect throughout each
fiscal year presented.
(In thousands, except per share amounts) 2001 2000
- --------------------------------------------------------------------
Reported net income (loss) $(55,486) $ 14,515
SG&A adjustments:
Amortization of goodwill 1,136 632
Amortization of licenses 317 79
- --------------------------------------------------------------------
Total SG&A adjustments 1,453 711
Income tax effect (391) (119)
- --------------------------------------------------------------------
Net adjustments 1,062 592
- --------------------------------------------------------------------
Adjusted net income (loss) $(54,424) $ 15,107
====================================================================
Reported net income (loss) per share - basic $ (1.74) $ 0.45
Adjusted net income (loss) per share - basic $ (1.70) $ 0.47
Reported net income (loss) per share - diluted $ (1.74) $ 0.44
Adjusted net income (loss) per share - diluted $ (1.70) $ 0.46
We have completed the transitional and annual impairment tests of goodwill and
other intangible assets as required by SFAS No. 142 and concluded that our
goodwill and indefinite-lived intangible assets, which had carrying values of
$13.2 million and $12.1 million, respectively, at January 4, 2003, were not
impaired.
Debt issuance costs are deferred and amortized over the term of the debt to
which they relate using the straight-line method.
INVESTMENTS (TRADING PORTFOLIO)
We hold a portfolio of marketable debt and equity securities in various trusts
and segregated accounts in connection with employee benefit and deferred
compensation plans. We mark those securities to market through income. Realized
and unrealized gains and losses on our trading portfolio have not been
significant in any of the last three years.
42
INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED ENTITIES
Investments in companies in which we have the ability to influence the
operations are accounted for by the equity method. Investments in and advances
to unconsolidated entities accounted for under the equity method were $16.4
million and $13.5 million at January 4, 2003 and December 29, 2001,
respectively; while, our equity in earnings were $3.1 million in 2002 and $(.1)
million in both 2001 and 2000. Investments in companies in which we do not exert
such influence are accounted for at cost.
LONG-LIVED ASSETS
On December 30, 2001, we adopted the provisions of SFAS No. 144, Accounting for
the Impairment or Disposal of Long- Lived Assets, which superseded SFAS No. 121,
Accounting for the Impairment of Long-lived Assets and for Long-Lived Assets to
Be Disposed Of. Similar to the provisions of SFAS No. 121, SFAS No. 144 requires
that when events and circumstances indicate that assets may be impaired, and the
undiscounted cash flows estimated to be generated from those assets are less
than their carrying values, we record an impairment loss equal to the excess of
the carrying value over fair value. Asset impairment charges are described more
fully in Note 9.
INCOME TAXES
We account for income taxes under the provisions of SFAS No. 109, Accounting for
Income Taxes. Under SFAS No. 109, deferred tax assets and liabilities are
determined based upon differences between the financial reporting and tax bases
of assets and liabilities and are measured at the enacted tax rates that will be
in effect when the taxes are expected to be paid.
ADVERTISING, MARKETING AND PROMOTIONS EXPENSE
The cost of advertising, marketing and promotions is expensed as incurred. We
incurred $36.0 million, $45.7 million and $48.9 million in such costs during
2002, 2001 and 2000, respectively.
STOCK-BASED COMPENSATION
We issue awards under incentive compensation plans as described in Note 7. These
stock options and awards are accounted for in accordance with Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees.
On January 5, 2003, we plan to adopt SFAS No. 123, Accounting and Disclosure of
Stock-based Compensation, as amended by SFAS No. 148. We plan to adopt the
prospective transition provisions of SFAS No. 148. Therefore, the adoption of
SFAS No. 123 will have no effect on our historical results of operations or on
our financial position as of January 4, 2003. However in future years, we will
recognize compensation expense based on the fair value of all forms of stock
compensation. Because we will only apply this new method to future grants and
awards, we cannot predict at this time what the impact will be on our future
results of operations.
CONCENTRATIONS OF CREDIT RISK AND FINANCIAL INSTRUMENTS
Except for Wal-Mart, we do not have significant concentrations of credit risk.
Our trade accounts receivable are comprised of balances due from a large number
and diversity of customers. We believe that risk of loss associated with our
trade accounts receivable is adequately provided for in the allowance for
doubtful accounts.
Wal-Mart represented 13.0% and 14.9% of our net accounts receivable at January
4, 2003 and December 29, 2001, respectively.
ACCOUNTING FOR DERIVATIVES
We account for derivatives under the provisions of SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities.
We use derivatives, including forward contracts and swap contracts, to manage
exposure to movements in foreign exchange rates and interest rates. Prior to the
formation of Frontier Yarns, our primary raw material was cotton. We purchased
futures contracts to manage exposure to movements in commodity prices. On the
date we enter into a derivative contract, we designate derivatives as either a
hedge of a recognized asset or liability or an unrecognized firm commitment
(fair value hedge) or 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 changes in fair value of a derivative that is designated as
a cash flow hedge is recorded in accumulated other comprehensive income or loss.
When the hedged item is realized, the gain or loss included in accumulated other
comprehensive income or 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 statements of operations.
We document hedge relationships, including identification of the hedging
instruments and the hedged items, as well as our risk management objectives and
strategies for undertaking the hedge transaction, at the inception of each
hedge transaction. Derivatives are recorded in the consolidated balance sheet at
fair value. We formally assess, 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.
43
RUSSELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [CONTINUED]
EARNINGS PER COMMON SHARE
We report earnings per common share in accordance with SFAS No. 128, Earnings
Per Share. Basic earnings per common share is computed using the
weighted-average number of common shares outstanding during the period without
consideration of common stock equivalents. Diluted earnings per common share is
computed using the weighted-average number of common shares outstanding plus
common stock equivalents (employee stock options) unless such stock options are
anti-dilutive. (See Note 11).
FISCAL YEAR
The Company's fiscal year ends on the Saturday nearest to January 1, which
periodically results in a fiscal year of 53 weeks. Fiscal year 2002 ended on
January 4, 2003 and contained 53 weeks; while fiscal years 2001 and 2000 ended
on December 29, 2001, and December 30, 2000, respectively, and each contained 52
weeks.
NEW ACCOUNTING PRONOUNCEMENTS
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
SFAS No. 145 clarifies guidance related to the reporting of gains and losses
from extinguishment of debt and resolves inconsistencies related to the required
accounting treatment of certain lease modifications. We plan to adopt SFAS No.
145 in the first quarter of 2003. Upon adoption of this standard, we will
reclassify the pre-tax effect of the extraordinary item for the early retirement
of debt that we recognized in the second quarter of fiscal 2002 to income from
continuing operations, and the related tax effect will be reported in income
taxes. Such reclassification will have no effect on our net income for 2002 or
on stockholders' equity.
In June 2001, the FASB issued SFAS No.143, Accounting for Asset Retirement
Obligations, which we plan to adopt in the first quarter of 2003. SFAS No. 143
requires legal obligations associated with the retirement of long-lived assets
to be recognized at fair value at the time that the obligations are incurred.
Upon initial recognition of a liability, that cost should be capitalized as part
of the related long-lived asset and allocated to expense over the useful life of
the asset. We are not aware of any legal obligations, as defined in SFAS No.
143, that would be required to be recognized upon adoption.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the fiscal 2002
presentation. These changes had no impact on previously reported results of
operations or stockholders' equity.
FOREIGN CURRENCIES
Assets and liabilities recorded in foreign currencies on the books of foreign
subsidiaries are translated at the exchange rate in effect on the balance sheet
date. Revenues, costs and expenses are translated at average rates of exchange
prevailing during the year. Translation adjustments resulting from this process
are charged or credited to accumulated other comprehensive income or loss. The
cumulative translation adjustments included in accumulated other comprehensive
loss in the consolidated balance sheets were $13.6 million and $12.6 million at
January 4, 2003 and December 29, 2001, respectively. Transaction gains or losses
result from a change in exchange rates between the functional currency and the
currency in which a foreign currency transaction is denominated. Transaction
gains and losses are included in other expenses for the period in which the
exchange rate changes.
NOTE 2: LONG-TERM DEBT
Long-term debt includes the following:
(In thousands) 2002 2001
- -------------------------------------------------------------------------
Senior secured credit facilities (due April 2007):
$300 million revolving credit facility $ -- $ --
Term Loan 20,000 --
Revolving credit facility (retired April 2002) -- 94,800
Senior Notes 9.25% (due 2010) 250,000 --
Notes payable to financial institutions:
6.72% notes (retired April 2002) -- 10,714
6.65% notes (retired April 2002) -- 107,143
6.78% notes (retired April 2002) -- 100,000
Variable rate (5.09% at December 29, 2001)
note (retired April 2002) -- 37,550
- -------------------------------------------------------------------------
270,000 350,207
Less current maturities (5,000) (39,271)
- -------------------------------------------------------------------------
$265,000 $310,936
=========================================================================
On April 18, 2002, we entered into two new financing agreements to replace our
existing revolving credit facility due October 14, 2004, which bore a
weighted-average interest rate of 4.03% at December 29, 2001; and other
long-term indebtedness including: 6.72% notes due annually through 2002 (which
bore interest at the rate of 6.97% per annum at April 18, 2002); 6.65% notes due
annually 2001 through 2007 (which bore interest at the rate of
44
7.65% per annum at April 18, 2002); 6.78% notes due annually 2003 through 2008
(which bore interest at the rate of 7.78% per annum at April 18, 2002); and a
variable rate note due semiannually through 2005 (which bore interest at the
rate of 5.09% at December 29, 2001). As a result of amendments to our old debt
agreements, we would have incurred fees and additional interest rate increases
if we had not refinanced our indebtedness.
We issued $250 million in principal amount of 9.25% Senior Notes (the "Senior
Notes") that will mature in 2010. We sold these notes for 100% of their face
amount. The Senior Notes were issued pursuant to an Indenture, dated as of April
18, 2002, between us and Wachovia Bank, National Association and are fully and
unconditionally guaranteed, jointly and severally, by most of our domestic
subsidiaries. The Senior Notes (i) have interest payment dates of May 1 and
November 1 of each year; (ii) are redeemable after the dates and at the prices
(expressed in percentages of principal amount on the redemption date) as set
forth below:
Year Percentage
- -------------------------------------------------
May 1, 2006 104.6250%
May 1, 2007 102.3125%
May 1, 2008 and thereafter 100.0000%
and (iii) are senior unsecured obligations and are senior in right of payment to
any of our future subordinated obligations.
We also entered into new senior secured credit facilities (the "Facilities")
concurrently with the closing of the Senior Notes offering. The new Facilities
provide for a $300 million senior secured revolving credit facility (the
"Revolver"), which is dependent on the levels of our eligible accounts
receivable and inventory and a $25 million senior secured term loan (the "Term
Loan") of which $20.0 million is outstanding. The new facilities mature on April
18, 2007. The Facilities provide for variable interest on the Revolver through
January 4, 2003 at LIBOR plus 2.50% (3.92% at January 4, 2003) and on the Term
Loan at LIBOR plus 3.00% (4.42% at January 4, 2003), with an annual commitment
fee on the unused portion of the Facilities of 0.50%. After this initial period,
pricing is adjusted quarterly based on our consolidated fixed charge coverage
ratio and ranges from LIBOR plus 1.75% to LIBOR plus 2.75% or Fleet National
Bank's base rate plus 0.25% to the base rate plus 1.25% for the Revolver, and
LIBOR plus 2.25% to LIBOR plus 3.25% or Fleet National Bank's base rate plus
0.75% to base rate plus 1.75% for the Term Loan. The commitment fee on the
unused portion of the Revolver ranges from 0.375% to 0.500%. We may choose LIBOR
or base rate pricing and may elect interest periods of one, two, three or six
months for LIBOR borrowings, except that all swing line loans managed by the
Administrative Agent, under the Revolver will have base rate pricing. The Term
Loan has a scheduled 5-year amortization period with payments of $2.5 million
each September 30 and December 31 until maturity, which began on September 30,
2002.
We used the proceeds from the offering of the Senior Notes, together with $132.4
million of the initial borrowings under our new Facilities to pay fees and
expenses associated with the new Facilities, and the Senior Notes, to repay the
outstanding debt balances, prepayment penalties, fees, and expenses related to
our old debt.
During the second quarter of fiscal 2002, we recognized an extraordinary item of
approximately $20.1 million ($12.6 million after-tax) associated with the
termination of our then existing revolving credit facility and the early
retirement of other long-term indebtedness. The charge consisted of $15.0
million related to prepayment penalties, fees and expenses associated with the
early termination of our existing notes payable and the write-off of $5.1
million of previously capitalized loan costs associated with the extinguished
debt.
The Facilities and the indenture governing the Senior Notes impose certain
restrictions on us, including restrictions on our ability to: incur debts; grant
liens; provide guarantees in respect of obligations of any other person; pay
dividends; make loans and investments; sell our assets; issue redeemable
preferred stock and non-guarantor subsidiary preferred stock; make redemptions
and repurchases of capital stock; make capital expenditures; prepay, redeem or
repurchase debt; engage in mergers or consolidation; engage in sale/leaseback
transactions and affiliate transactions; change our business; amend certain debt
and other material agreements, including the indenture governing the Senior
Notes and other documents governing any subordinated debt that we may issue in
the future; issue and sell capital stock of subsidiaries; and restrict
distributions from subsidiaries. The new Facilities require us to achieve a
fixed charge coverage ratio which is 1.15 to 1.0 through the next to last day of
fiscal year 2003 and 1.2 to 1.0 through the next to last day of fiscal year 2004
and 1.25 to 1.0 thereafter. We also must maintain a maximum leverage ratio,
which is 4.0 to 1.0 through the next to last day of fiscal year 2002, and 3.75
to 1.0 through the next to last day of fiscal year 2003 and 3.5 to 1.0
thereafter. We were in compliance with these covenants at the end of fiscal year
2002.
As of January 4, 2003, we had $20.0 million in outstanding borrowings (no
outstanding borrowings under the Revolver and $20 million under the Term Loan)
and $16.7 million in outstanding letters of credit under the Facilities. As of
January 4, 2003, we could have borrowed approximately $189.6 million under our
Revolver.
45
RUSSELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [CONTINUED]
Aggregate maturities of long-term debt at January 4, 2003, are as follows for
fiscal years:
(In millions)
- --------------------------------
2003 $ 5.0
2004 5.0
2005 5.0
2006 5.0
Thereafter (2010) 250.0
- --------------------------------
$270.0
================================
NOTE 3: SHORT-TERM DEBT
As of January 4, 2003 and December 29, 2001, we had a line of credit agreement
with the Bank of Scotland with outstanding borrowings of $7.3 million and $6.2
million, respectively. At January 4, 2003, we had availability under this line
of credit of about $4.6 million. The weighted-average interest rate on the line
of credit during 2002 and 2001 was 5.9% and was 7.8% in 2000.
In order to fund our seasonal cash needs during the summer of 2001, we obtained
incremental seasonal working capital borrowings under a secured $75 million
short-term loan. This loan was fully drawn on August 10, 2001 and repaid before
its October 31, 2001 scheduled maturity.
NOTE 4: DERIVATIVE AND OTHER FINANCIAL INSTRUMENTS
As of December 31, 2000, we adopted SFAS No. 133. In accordance with the
provisions of SFAS No. 133, we recorded a transition adjustment in the first
quarter of 2001. The transition adjustment increased accumulated other
comprehensive loss and decreased net assets by $578,000 (net of taxes).
INTEREST RATE SWAP AGREEMENTS - To manage interest rate risk, we had an interest
rate swap (through April 18, 2002) that effectively fixed the interest rate on
the outstanding balance of a floating rate debt instrument. The interest rate
swap agreement was accounted for as a cash flow hedge and qualified for use of
the "short cut" method under SFAS No. 133, because 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 2001 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 were no amounts reclassified from accumulated other
comprehensive loss to interest expense during 2001. The fair value of the swap
decreased $1,639,000 ($1,017,000 net of tax) in 2001 as interest rates declined
resulting in a charge to accumulated other comprehensive loss, decreasing that
component of equity to $1,362,000 (net of taxes). Through April 18, 2002, the
fair value of the swap increased $672,000 ($422,000 net of tax) resulting in a
decrease in accumulated other comprehensive loss. On April 18, 2002, the
interest rate swap was terminated and the related hedged debt was repaid (Note
2) resulting in a $957,000, net of tax, loss reclassified from accumulated other
comprehensive loss to the extraordinary item line in the consolidated statements
of operations.
On October 10, 2000, we terminated a fixed to floating rate swap agreement and
recorded a deferred loss of approximately $600,000 ($210,000 at December 29,
2001), which was amortized through April 18, 2002 (the date in which the related
hedged debt was repaid). On April 18, 2002, we recognized the remaining deferred
loss ($73,000 net of tax) in the consolidated statements of operations as part
of the extraordinary item associated with the debt restructuring (Note 2).
These interest rate swap agreements, when combined, changed the weighted-average
interest rate on long-term debt from 6.96% to 7.07% and 6.66% to 6.57% in 2001
and 2000, respectively.
FOREIGN CURRENCY FORWARD CONTRACTS - We earn revenues and incur expenses in
various parts of the world and, as a result, we are exposed to movement in
foreign currency exchange rates. As of January 4, 2003, we have foreign exchange
forward contracts expiring through the end of fiscal 2003 that are intended to
reduce the effect of fluctuating foreign currencies on anticipated purchases of
inventory and sales of goods denominated in currencies other than the functional
currencies of our 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
include the U.S. dollar, European euro, Mexican peso and British pound sterling.
There was no transition adjustment recorded upon adoption of SFAS No. 133 in
2001, as there were no significant foreign currency forward contracts impacted
by the statement upon adoption. The change in fair value of the forward
contracts increased net assets and decreased accumulated other comprehensive
loss by $233,000 ($145,000 net of taxes) during 2001, while realized gains
reclassified to other-net in the consolidated statements of operations in 2001
amounted to $193,000 ($120,000 net of taxes). During 2002, the change in fair
value of the forward contracts decreased net assets and increased accumulated
other comprehensive loss by $2,543,000
46
($1,597,000 net of taxes), while realized losses reclassified to other-net in
the consolidated statements of operations amounted to $619,000 ($389,000 net of
taxes).
We were also a party to foreign exchange forward contracts during 2001 that did
not qualify for hedge accounting under SFAS No. 133. We recorded those 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 other-net in the 2001
consolidated statements of operations.
FUTURES CONTRACTS - A substantial portion of the raw materials we use in our
integrated manufacturing process are subject to price volatility caused by
weather, supply conditions and other unpredictable factors. Prior to the
formation of Frontier Yarns in which our primary raw material was cotton, we
purchased futures contracts to hedge commodity price risk on anticipated
purchases. Upon adoption of SFAS No. 133, we accounted for these futures
contracts as cash flow hedges. The transition adjustment to record the fair
value of cotton futures contracts at the beginning of 2001 was a loss of
$376,000 ($233,000 net of taxes), which was charged to accumulated other
comprehensive loss. Gains and losses on futures contracts designated as cash
flow hedges are reclassified from accumulated other comprehensive loss to cost
of goods sold in the period the hedged item (i.e., the purchase of raw cotton)
affects earnings. The change in fair value of the commodity futures contracts
decreased net assets and increased accumulated other comprehensive loss by
$4,416,000 (net of taxes) in 2001. Losses reclassified to earnings during 2001
amounted to $7,499,000 ($4,649,000 net of taxes), including $6,387,000
($3,959,000 net of taxes), that were recognized in earnings due to hedge
ineffectiveness. These contracts were determined to be ineffective as hedges at
the end of 2001 as we planned to no longer purchase raw cotton but instead
purchase yarn from Frontier Yarns beginning in 2002 (See Note 8). At December
29, 2001, we maintained cotton futures contracts covering approximately 6.2
million pounds. These cotton futures contracts did not qualify for hedge
accounting treatment under SFAS No. 133. At January 4, 2003, we were not a party
to any cotton futures contracts.
OTHER FINANCIAL INSTRUMENTS - At January 4, 2003 and December 29, 2001, the
carrying value of financial instruments such as cash, trade accounts receivable
and payables approximated their fair values, based on the short-term maturities
of these instruments. The fair value of long-term debt is estimated using
discounted cash flow analyses, based upon our incremental borrowing rates for
similar types of borrowing arrangements.
The following table summarizes fair value information for derivative and other
financial instruments:
2002 2001
- ------------------------------------------------------------------------------
ASSETS (LIABILITY) carrying fair carrying fair
(in thousands) value value value value
- ------------------------------------------------------------------------------
Short-term debt $ (7,253) $ (7,253) $ (6,187) $ (6,187)
Long-term debt
(including current
portion) (270,000) (289,000) (350,207) (371,838)
Interest-rate swap
agreement
terminated on
October 10, 2000 -- -- 210 --
Interest-rate swap
agreement
terminating
April 18, 2002 -- -- (2,196) (2,196)
Forward currency
exchange contracts (1,841) (1,841) 40 40
Cotton futures contracts - - (500) (500)
Investments
(trading portfolio) 8,048 8,048 8,601 8,601
NOTE 5: EMPLOYEE RETIREMENT BENEFITS
We have a qualified, noncontributory, defined benefit pension plan (Retirement
Plan) that covers substantially all of our United States employees, and a
savings plan that is qualified under Section 401(k) of the Internal Revenue Code
(Savings Plan).
47
RUSSELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [CONTINUED]
Benefits for the Retirement Plan are based upon years of service and the
employee's highest consecutive five years of compensation during the last 10
years of employment. We fund the Retirement Plan by contributing annually the
maximum amount that can be deducted for federal income tax purposes.
Contributions are intended to provide not only for benefits attributed to
service to date, but also for those expected to be earned in the future. The
following table sets forth changes in the benefit obligation, plan assets and
funded status:
(In thousands) 2002 2001
- ---------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $140,098 $142,429
Service cost 3,480 4,109
Interest cost 10,047 10,137
Actuarial loss (gain) 7,700 (2,483)
Benefits paid (9,496) (9,089)
Plan amendments 155 (468)
Curtailment benefit -- (4,537)
- ---------------------------------------------------------------------
Benefit obligation at end of year $151,984 $140,098
=====================================================================
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $106,782 $122,559
Actual return on plan assets (7,380) (6,688)
Company contributions 4,842 --
Benefits paid (9,496) (9,089)
- ---------------------------------------------------------------------
Fair value of plan assets at end of year $ 94,748 $106,782
=====================================================================
RECONCILIATION OF FUNDED STATUS
TO ACCRUED BENEFIT COST
Unfunded status of the plan $(57,236) $(33,316)
Unrecognized prior service cost 661 619
Unrecognized net actuarial loss 44,493 17,061
Unrecognized transition asset (986) (1,665)
- ---------------------------------------------------------------------
Accrued benefit cost $(13,068) $(17,301)
=====================================================================
AMOUNTS RECOGNIZED IN THE
CONSOLIDATED BALANCE SHEETS
Accrued benefit cost $(13,068) $(17,301)
Additional minimum liability (30,271) (1,781)
Intangible asset 661 619
Accumulated other comprehensive loss 29,610 1,162
- ---------------------------------------------------------------------
Net amount recognized $(13,068) $(17,301)
=====================================================================
A summary of the components of net periodic pension cost is as follows.
(In thousands) 2002 2001 2000
- ----------------------------------------------------------------------------
COMPONENTS OF NET
PERIODIC PENSION COST
Service cost $ 3,480 $ 4,109 $ 4,120
Interest cost 10,047 10,137 10,331
Expected return on plan assets (12,351) (12,501) (11,816)
Net amortization and deferral (565) (724) (462)
Effect of curtailment -- 186 187
- ----------------------------------------------------------------------------
Net periodic pension cost $ 611 $ 1,207 $ 2,360
============================================================================
The weighted-average assumptions used to compute pension amounts were as
follows:
2002 2001
- -----------------------------------------------------
Discount rate 6.75% 7.25%
Expected return on plan assets 9.50% 9.50%
Rate of compensation increase 3.50% 4.00%
The expected return on plan assets represents the rate used at the beginning of
the year measurement date. We plan to decrease this rate from 9.50% to 8.50% at
the 2003 measurement date.
Plan assets at January 4, 2003 and December 29, 2001, include 600,960 shares of
the Company's common stock having a market value of $10.1 million and $9.0
million, respectively. Dividends paid to the plan by the Company were $.1
million in 2002 and $.3 million in 2001 and 2000.
Our Savings Plan allows substantially all United States employees to defer
portions of their annual compensation and to participate in Company matching and
discretionary contributions. Compensation expense associated with these plans
was $.8 million in 2002 and $1.0 million in 2001 and 2000.
NOTE 6: INCOME TAXES
Foreign operations contributed $.9 million, $3.2 million and $(34.0) million to
the Company's income (loss) before income taxes in 2002, 2001 and 2000,
respectively.
Significant components of the provision for (benefit from) income taxes are as
follows:
2002 2001 2000
- ---------------------------------------------------------------------------------------
CURRENTLY Currently Currently
(In thousands) PAYABLE DEFERRED Payable Deferred Payable Deferred
- ---------------------------------------------------------------------------------------
Federal $16,025 $ 9,330 $(4,832) $(22,276) $(6,695) $ 16,627
State 2,133 (191) 683 (6,208) 1,554 4,028
Foreign 3,280 (2,779) 1,286 240 4,114 (1,066)
- ---------------------------------------------------------------------------------------
Totals $21,438 $ 6,360 $(2,863) $(28,244) $(1,027) $ 19,589
- ---------------------------------------------------------------------------------------
48
Following are reconciliations of income tax expense or benefit to the expected
amount computed by applying the statutory federal income tax rate of 35% to
income before income taxes:
(In thousands) 2002 2001 2000
- ---------------------------------------------------------------------------------
Taxes (benefit) at statutory rate on income
before income taxes $26,154 $(30,308) $ 11,577
State income taxes, net of federal income
tax benefit 1,144 (5,281) 1,028
Goodwill -- -- 2,972
Charitable contribution of appreciated property -- -- (2,188)
Tax effects of foreign operations - net (2,006) 141 2,119
Change in valuation allowance on
foreign/state NOLs 2,606 2,756 4,000
Other - net (100) 1,585 (946)
- ---------------------------------------------------------------------------------
$27,798 $(31,107) $ 18,562
=================================================================================
Deferred income taxes reflect the tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of deferred
tax liabilities and assets as of January 4, 2003 and December 29, 2001, are as
follows:
(In thousands) 2002 2001
- -----------------------------------------------------------------
Deferred tax liabilities:
Property, plant and equipment $ 29,639 $ 33,450
Inventories 10,232 11,762
Other 15,912 6,445
- -----------------------------------------------------------------
Total deferred tax liabilities 55,783 51,657
- -----------------------------------------------------------------
Deferred tax assets:
Pension and post-employment obligations 16,587 10,034
Accounts receivable 9,032 6,131
Foreign and state net operating
loss carryforwards 20,191 17,843
Employee benefits 9,567 9,983
Other 684 1,258
- -----------------------------------------------------------------
Total deferred tax assets 56,061 45,249
Valuation allowance for deferred tax assets (13,543) (10,937)
- -----------------------------------------------------------------
Net deferred tax assets 42,518 34,312
- -----------------------------------------------------------------
Net deferred tax liabilities $ 13,265 $ 17,345
=================================================================
Net operating loss carryforwards (NOLs) are available to offset future earnings
within the time periods specified by law. At January 4, 2003, the Company had
U.S. state NOLs of approximately $350 million expiring in 2013 through 2017.
International NOLs total approximately $29 million. The International NOLs
pertain primarily to the Company's United Kingdom and Australian operations.
NOLs can be carried forward indefinitely in the United Kingdom and Australia.
In 2000, as we continued to execute our restructuring plan (see Note 9) and
implemented certain tax strategies, we generated additional U.S. state NOL
carryforwards in states where realization of the carryforward benefits was not
assured. Accordingly, we increased our valuation allowance by an additional $4.0
million in 2000. During 2001 we continued to incur tax deductible restructuring
charges which resulted in additional U.S. state NOL carry-forwards. We further
increased the valuation allowance by $2.8 million in 2001 related to state NOL
carryforwards. In 2002, we increased our valuation allowance by $2.6 million for
additional NOLs primarily generated in our International operations.
We do not provide for federal income taxes on the undistributed earnings of
international subsidiaries because earnings are reinvested and it is our
intention to reinvest them indefinitely. At January 4, 2003, we had not provided
federal income taxes on earnings of international subsidiaries of approximately
$19 million. If these earnings are distributed in the form of dividends or
otherwise, we would be subject to both U.S. income taxes and withholding taxes
in the various international jurisdictions. It is not practical for us to
determine the amount of unrecognized deferred U.S. income tax liability because
of the complexities associated with the hypothetical calculation. Withholding of
approximately $.9 million would be payable if all previously unremitted earnings
as of January 4, 2003, were remitted to the U.S. parent company.
NOTE 7: STOCK RIGHTS PLAN AND STOCK OPTION PLANS
On September 15, 1999, the Board of Directors declared a dividend, which was
issued on October 25, 1999, of one Right for each share of common stock
outstanding. Each Right, when exercisable, entitles the holder to purchase a
unit of one one-hundredth share of Series A Junior Participating Preferred
Stock, par value $.01, at a purchase price of $85. Upon certain events relating
to the acquisition of, or right to acquire, beneficial ownership of 15% or more
of the Company's outstanding common stock by a third party, or a change in
control of the Company, the Rights entitle the holder to acquire, after the
Rights are no longer redeemable by the Company, shares of common stock for each
Right held at a significant discount to market. The Rights will expire on
October 25, 2009, unless redeemed earlier by the Company at $.01 per Right under
certain circumstances.
49
RUSSELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [CONTINUED]
Our Executive Incentive Plan permits us to issue equity-based compensation
awards in several forms to all officers and key employees of the Company and its
subsidiaries. Under the plan, we may issue restricted stock, incentive stock
options, non-qualified stock options, reload stock options, bonus shares,
deferred shares, stock appreciation rights and performance shares and
performance unit awards.
Most of our salaried employees are eligible to participate in the Russell
Corporation 2000 Stock Option Plan (2000 Option Plan). Awards under the 2000
Option Plan also may be made to consultants. The 2000 Option Plan allows us to
grant awards in a variety of forms, including incentive stock options,
non-qualified stock options, reload stock options, restricted shares, bonus
shares, deferred shares, freestanding stock appreciation rights, tandem stock
appreciation rights, performance units and performance shares.
Under the Executive Incentive Plan, the 2000 Option Plan and predecessor stock
option plans, a total of 2,616,252 shares of common stock were reserved for
issuance at January 4, 2003. The options are granted at a price equal to the
stock's fair market value at the date of grant. All options granted prior to
1999, are exercisable two years after the date of grant and expire 10 years
after the date of grant. The stock options that were granted in 1999 and later
are exercisable equally over periods of either two or four years and expire 10
years after the date of grant. The following table summarizes the status of
options under the Executive Incentive Plan, 2000 Option Plan and predecessor
plans:
2002 2001 2000
- -----------------------------------------------------------------------------------
weighted weighted weighted
average average average
exercise exercise exercise
shares price shares price shares price
- ----------------------------------------------------------------------------------
Outstanding
at beginning
of year 4,630,808 $20.11 5,102,766 $20.50 2,979,266 $25.06
Granted at
fair value 63,658 $16.41 334,830 $17.59 2,644,605 $15.25
Exercised 119,047 $15.06 49,268 $15.09 -- --
Expired -- -- 272,050 $26.38 -- --
Forfeited 207,626 $18.03 485,470 $19.56 521,105 $19.87
- ----------------------------------------------------------------------------------
Outstanding
at end of year 4,367,793 $19.92 4,630,808 $20.11 5,102,766 $20.50
- ----------------------------------------------------------------------------------
Exercisable
at end of year 2,982,005 $21.58 2,550,845 $23.21 2,134,704 $27.33
==================================================================================
The range of exercise prices of the outstanding options and exercisable options
are as follows:
Weighted
Number of Number of Average
Weighted Average Exercisable Outstanding Remaining
exercise Price Shares Shares Life
- -----------------------------------------------------------
$11.75 - $15.00 18,899 65,300 8.5
$15.01 - $18.25 1,029,982 2,073,596 7.1
$18.26 - $21.50 489,772 743,460 6.5
$21.51 - $24.75 332,035 342,870 5.4
$24.76 - $28.00 827,617 858,867 4.1
$28.01 - $31.35 283,700 283,700 3.2
------------------------
2,982,005 4,367,793
------------------------
SFAS No. 123, Accounting for Stock-Based Compensation, provides an alternative
to APB Opinion No. 25 in accounting for stock-based compensation issued to
employees. The statement encourages, but does not require, a fair value based
method of accounting for employee stock options and similar equity instruments.
Companies that continue to follow the intrinsic value approach to accounting
under APB Opinion No. 25 must disclose the pro forma effect on net income and
earnings per share as if the fair value method prescribed by SFAS No. 123 had
been used. For the purposes of this disclosure, we estimate the fair value of
employee stock options at the date of grant using the Black-Scholes option
valuation model. The fair values derived for options granted during fiscal years
2002, 2001 and 2000 and key assumptions used to determine these values were as
follows:
2002 2001 2000
- --------------------------------------------------------------------
Risk-free interest rate 4.5% 4.9% 6.1%
Dividend yield 1.0% 1.0% 3.6%
Volatility factor .361 .397 .323
Weighted-average expected life
of options 7.4 years 7.8 years 10 years
Estimated fair value per option $6.98 $7.10 $6.50
For purposes of calculating the pro forma disclosures below, the estimated fair
value of the options is amortized to expense over the options' vesting period.
(In thousands, except per share data) 2002 2001 2000
- -----------------------------------------------------------------------------------
Reported net income (loss) $34,306 $(55,486) $14,515
Stock-based employee compensation, net of tax,
assuming SFAS No. 123 was applied (2,542) (4,698) (7,391)
- -----------------------------------------------------------------------------------
Pro forma net income (loss) $31,764 $(60,184) $ 7,124
===================================================================================
Reported net income (loss) per share - basic $ 1.07 $ (1.74) $ .45
Pro forma net income (loss) per share - basic $ .99 $ (1.88) $ .22
Reported net income (loss) per share - diluted $ 1.06 $ (1.74) $ .44
Pro forma net income (loss) per share - diluted $ .99 $ (1.88) $ .22
50
On July 26, 2000, the Board of Directors adopted the Russell Corporation 2000
Non-Employee Directors' Compensation Plan (the "Directors' Plan") as a
replacement for the Russell Corporation 1997 Non-Employee Directors' Stock
Grant, Stock Option and Deferred Compensation Plan (the "Prior Plan"). Under the
Directors' Plan, each nonemployee director ("Eligible Director") receives
annually (i) a fee of $35,000, to be paid in quarterly installments of $8,750,
and (ii) an option to purchase a number of shares of common stock equal to
$25,000 multiplied by four (or the number of full and partial quarters remaining
until the next annual meeting), and divided by the fair market value of the
shares of common stock as of the grant date. Eligible Directors also may elect
to receive all or a portion of their annual fee in shares, stock options or
deferred shares. Options granted under the Directors' Plan vest over one year
and expire 10 years after the date of grant; whereas, options granted under the
Prior Plan vest over three years and expire 10 years after the date of grant.
Options to purchase an aggregate of 55,287 shares of common stock at a price of
$18.81 were granted in 2002. In 2001, we granted 67,238 shares at a price of
$17.75. Options to purchase an aggregate of 169,890 shares at prices ranging
from $16.28 to $27.50 are outstanding under the Directors' Plan and the Prior
Plan at January 4, 2003.
NOTE 8: COMMITMENTS AND CONTINGENCIES
PURCHASE AND LEASE COMMITMENTS - At January 4, 2003, we have commitments to
spend approximately $7.6 million for capital improvements. Our remaining
commitments under noncancelable operating leases with initial or remaining terms
of one year or more are as follows:
(In thousands) Third Parties Related Party Total
- ---------------------------------------------------------
2003 $ 4,963 $ 2,460 $ 7,423
2004 3,095 2,494 5,589
2005 2,426 2,527 4,953
2006 1,584 2,561 4,145
2007 1,208 2,596 3,804
Thereafter 3,356 8,001 11,357
- ---------------------------------------------------------
$16,632 $20,639 $37,271
=========================================================
Lease and rental expense for fiscal years 2002, 2001 and 2000 was $7.3 million,
$9.4 million and $11.3 million, respectively.
We had $13.4 million outstanding under letters of credit for the purchase of
inventories at January 4, 2003. We had $6.6 million outstanding under letters of
credit at January 4, 2003 for the guarantee of debt of a non-affiliated foreign
contractor that expires ratably over the period of 2003-2005. In addition, we
had $3.6 million outstanding under letters of credit at January 4, 2003 related
to self-insurance of workers' compensation programs.
On December 28, 2001, we entered into a joint venture agreement with Frontier
Spinning Mills, Inc. to establish Frontier Yarns, LLC ("Frontier Yarns"), a
joint venture limited liability company in which we hold 45.3% of the
outstanding membership units. Our voting interest is equal to our proportion of
total outstanding membership units. Profits of Frontier Yarns are distributed to
its members in proportion to the number of membership units held by each
member. As part of this transaction, we agreed to sell or lease to Frontier
Yarns most of our remaining yarn spinning assets, including facilities in
Lafayette and Wetumpka, AL. Simultaneously we entered into a supply agreement
with Frontier Yarns to purchase certain minimum quantities of yarn based upon
the production capacity of Frontier Yarns. The agreement also provides for
pricing to be calculated on a conversion cost basis plus actual cost of raw
materials. Total purchases from Frontier Yarns were $99 million in 2002, and at
January 4, 2003, we had a net outstanding payable of $5.9 million due to
Frontier Yarns. We can terminate the supply agreement under certain
circumstances related to a fundamental decrease in our demand for yarn or the
cost of yarn becoming uncompetitive. In addition, beginning in 2006, the
agreement may be terminated for any reason upon two years notice but not prior
to 2008. Since Frontier Spinning Mills, Inc. is not an affiliate of ours, the
agreement, in our opinion, was negotiated on an arm's length basis.
LITIGATION
Russell is a co-defendant in Locke, et al. v. Russell Corporation, et al., in
Jefferson County, Alabama. Fifteen families who own property on Lake Martin in
the Raintree Subdivision in Alexander City, Alabama, were the original
plaintiffs in this case, which sought unspecified money damages for trespass and
nuisance. However, 10 families dropped out of the case and there are five
remaining plaintiff families. In May 2002, the trial court entered summary
judgment in our favor on all but one of the plaintiffs' claims. The remaining
claim, which involves a private right of action for public nuisance, is set for
trial on October 20, 2003. A complaint substantially identical to the one filed
in the Locke case was filed on November 20, 2001, in the Circuit Court of
Jefferson County, Alabama, by two residents of the Raintree Subdivision (Gould
v. Russell Corporation, et al.). The trial court has entered summary judgment in
our favor on all claims in that case, and the plaintiffs in the case have filed
a motion to alter that determination, which remains pending. The allegations in
the Locke and Gould cases are similar to those contained in a case styled
Sullivan, et al. v. Russell Corporation, et al., which was resolved in our favor
by a ruling by the Alabama Supreme Court in 2001. We plan to vigorously defend
the Locke and Gould suits.
51
RUSSELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [CONTINUED]
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 us 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. On March 5, 2002, Russell and two other parties, with no admission of
liability, entered into a Consent Decree with the DOJ whereby we and the other
parties agreed (i) to pay a civil penalty of $30,000, of which we have paid
$10,000 and (ii) to participate in a Supplemental Environmental Project, the
cost of which will be approximately $197,000, of which we have paid
approximately $112,000. We are not required to undertake any corrective or
remedial action under the terms of the Consent Decree. The Consent Decree was
approved by the Federal District Court for the Middle District of Alabama on
July 25, 2002. The Supplemental Environmental Project will be undertaken in
connection with the settlement of a civil enforcement action taken by the DOJ
for violations of the Clean Water Act. We specifically denied the allegations of
the DOJ and specifically denied any liability based upon those allegations, and
we do not believe the settlement of this matter will have a material adverse
effect upon us.
We are a party to various other lawsuits arising out of the conduct of our
business. We do not believe that any of these matters, if adversely determined,
would have a material adverse effect upon us.
NOTE 9: RESTRUCTURING, ASSET IMPAIRMENT AND OTHER UNUSUAL CHARGES (SPECIAL
CHARGES)
In July 1998, we adopted a restructuring and reorganization program with the
objective of (1) transitioning our company from a manufacturing-driven business
to a consumer-focused organization that markets branded apparel products and (2)
creating an efficient, low-cost operating structure with the flexibility to take
advantage of future opportunities to reduce our costs. The plan originally
called for the closing of a number of our world- wide facilities, which included
selected manufacturing plants, distribution centers and offices; expanding
production outside the United States; consolidating and downsizing the licensed
products businesses; disposing of owned shopping center real estate;
reorganizing the corporate structure; and other cost savings activities. The
plan also called for the establishment of a dual headquarters in Atlanta, GA, in
addition to Alexander City, AL. In July 2001, we announced an extension of this
program to align the organization by distribution channel to provide stronger
customer service, supply chain management and more cost-effective operations.
The special charges reflected in the consolidated statements of operations are
as follows:
(In thousands) 2002 2001 2000
- -----------------------------------------------------------------------------------
Asset impairment and accelerated depreciation:
Impairment of facilities used in operations $ -- $ 23,242 $ 1,668
Impairment of facilities and equipment
held for disposal (463) 59,013 23,602
Impairment of intangible assets -- -- 7,735
Accelerated depreciation on facilities and
equipment to be taken out of service -- -- 995
- -----------------------------------------------------------------------------------
Total asset impairment and
accelerated depreciation 463) 82,255 34,000
Employee terminations (371) 23,808 11,834
Inventory losses including shipping
and warehousing costs 403 13,084 3,648
Termination of certain licenses and contracts:
Losses on cotton hedges (reclassified from
accumulated other comprehensive loss) -- 6,387 --
Termination of licenses and contracts (403) -- 3,313
- -----------------------------------------------------------------------------------
Total termination of certain licenses
and contracts (403) 6,387 3,313
Exit costs related to facilities 834 11,577 4,596
Other:
Expenses associated with the
dual headquarters -- 1,207 3,121
Other -- 5,774 4,499
- -----------------------------------------------------------------------------------
Total other -- 6,981 7,620
- -----------------------------------------------------------------------------------
Total before tax $ -- $144,092 $65,011
===================================================================================
Total after tax $ -- $ 91,936 $47,570
===================================================================================
These charges have been classified in the consolidated statements of operations
as follows:
(In thousands) 2002 2001 2000
- -----------------------------------------------------------------------------------
Cost of goods sold $ 32 $ 43,790 $18,187
Selling, general and administrative expenses -- 1,567 3,677
Other - net (32) 98,735 43,147
- -----------------------------------------------------------------------------------
$ -- $144,092 $65,011
===================================================================================
A summary of activity in the restructuring liability accounts follows:
(In thousands) 2002 2001 2000
- ------------------------------------------------------------------------------------
Restructuring liabilities at beginning of year $ 16,139 $ 5,726 $ 6,527
Exit costs accrued -- 11,577 4,596
Employee termination costs accrued -- 21,561 10,534
Other charges -- 13,009 10,377
Reserve revisions and adjustments, net 60 2,247 1,300
Payments charged to the liability accounts (13,866) (37,981) (27,608)
- ------------------------------------------------------------------------------------
Restructuring liabilities at end of year $ 2,333 $ 16,139 $ 5,726
====================================================================================
52
The restructuring liabilities at end of year are made up of the following:
(In thousands) 2002 2001 2000
- ----------------------------------------------------------------------------------
Employee terminations $ 640 $ 11,673 $ 3,320
Termination of certain licenses and contracts 395 1,417 2,406
Exit costs related to facilities 1,298 3,049 -
- ----------------------------------------------------------------------------------
$ 2,333 $ 16,139 $ 5,726
==================================================================================
A substantial portion of the special charges recognized in 2000 through 2002
involved the write-down of assets and did not require cash payments. A summary
of non-cash related components of the special charges follows:
(In thousands) 2002 2001 2000
- -----------------------------------------------------------------------------------
Impairment of facilities $ (463) $ 82,255 $ 26,265
Impairment of intangible assets - - 7,735
Other 403 13,443 4,204
- -----------------------------------------------------------------------------------
$ (60) $ 95,698 $ 38,204
===================================================================================
FISCAL 2002 RESTRUCTURING ACTIVITIES
We substantially completed our multi-year restructuring and reorganization
program in 2001.There were no special charges in 2002 other than to the extent
our estimated restructuring liabilities and the carrying value of idled assets
at 2001 differed from actual results or from changed circumstances.
In 2002, we adjusted our estimate of the accrual for employee terminations and
termination of certain licenses and contracts by $0.4 million each to reflect
our best estimate of the ultimate settlement of these liabilities. In addition,
we disposed of six properties and equipment that were being held for sale at the
beginning of 2002 realizing a net gain of $5.8 million. The $6.6 million of
gains from the adjustment of restructuring accruals and disposal of properties
were completely offset by an additional $0.4 million of inventory write-downs
needed to reduce the carrying value of discontinued inventories to these
estimated net realizable values; $0.8 million for exit costs on facilities that
are being held for sale; and $5.4 million to adjust the carrying values of
assets idled in prior periods to properly reflect the assets at their net
realizable value.
Property and equipment held for disposal at January 4, 2003, are carried at
$15.0 million. These assets have been written down to their fair values (less
cost to sell) as determined by reference to third-party appraisals or internal
analyses based on recent sales prices of comparable facilities. Depreciation has
been suspended since the date these assets were first classified as assets held
for disposal.
FISCAL 2001 RESTRUCTURING ACTIVITIES
The special charges in 2001 relate primarily to the consolidation of the Cross
Creek branded business and the restructuring of our spinning facilities. Revenue
and operating losses related to the Cross Creek branded business, which we do
not expect to retain in future periods, were approximately $16.1 million and
$6.4 million, respectively, in 2001.
In 2001, we continued to move our sewing operations to facilities owned by us
and by third parties located primarily in Central America and Mexico. We
announced the closing of two domestic sewing operations, one textile operation,
four yarn manufacturing facilities and the downsizing of domestic manufacturing
capacity in the Domestic Activewear segment. Due to these closings, we issued
approximately 1,250 termination notices to employees and recorded approximately
$17.4 million in employee severance and related benefits, including $2.2 million
in adjustments to costs for termination in prior years.
In July 2001, we announced plans to discontinue direct marketing of the Cross
Creek brand through the golf pro shops and department stores and our intention
to pursue a third-party licensing strategy for this business channel. We
continue to market the Cross Creek brand through the Artwear/Careerwear business
line, which is the brand's principal channel of distribution. During 2001, we
recorded inventory write-downs of $13.1 million related to the discontinuance of
certain product lines, of which $6.7 million relates to the discontinued Cross
Creek branded business. In addition, we announced the consolidation of the Cross
Creek textile operations into the current dyeing and finishing plant in Mt.
Airy, North Carolina and the consolidation of the Cross Creek artwear business
within the other Domestic Activewear segment business based in Atlanta. As a
result, we terminated approximately 285 employees and recorded employee
severance and related benefits of $6.4 million and $1.5 million of exit costs in
2001.We also recorded asset impairment charges of $11.8 million related to
facilities and equipment that were previously used in the Cross Creek branded
business as well as the consolidation of the Cross Creek placket shirt business
into the domestic activewear segment based in Atlanta.
In the third quarter of 2001, we recognized losses of $30 million on write downs
of spinning assets to their fair market value. Some of these facilities were
later sold to Frontier Yarns. The remainder are no longer in service and are
classified as held for sale. We also recorded impairment losses of $23.2 million
on yarn facilities and equipment leased to Frontier Yarns that will continue to
be classified as held for use. As noted in Note 8, we sold or leased
substantially all of our remaining spinning assets and transferred our remaining
yarn employees to Frontier Yarns. Frontier Yarns now supplies most of our yarn
needs.
53
RUSSELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [CONTINUED]
During the year, we also expensed $8.3 million associated with exit costs on
facilities that are being held for sale as well as $1.7 million related to the
completion of the restructuring in Europe.
We recognized $18.9 million in impairment charges for assets held for sale,
including $8.4 million to adjust the carrying values of assets idled in prior
periods to properly reflect the assets at their net realizable values. Charges
for impairment of assets held for disposal were generally recorded when the
facilities and equipment were removed from operations or when the criteria for
classifying the assets as held for disposal were met. These assets have been
written down to their fair values (less cost to sell) and depreciation has been
suspended since the date they were first classified as assets held for disposal.
Fair values used in recording asset impairment charges were determined by
reference to third-party appraisals or internal analyses based upon recent sales
prices of comparable facilities. Net gains realized during 2001 on sales of
facilities and equipment that were being held for disposal at the beginning of
fiscal year 2001 were approximately $1.7 million.
As noted in Note 4, we recognized a $6.4 million charge related to losses on
cotton futures contracts that were deemed to be ineffective as hedges in the
fourth quarter when we sold or leased our remaining yarn manufacturing
facilities to Frontier Yarns. Prior to the fourth quarter, we accounted for
cotton futures contracts as cash flow hedges of anticipated purchases of cotton
with unrealized gains or losses recorded in accumulated other comprehensive loss
until the related hedged cotton purchases occurred. Beginning in 2002, we began
to purchase yarn from Frontier Yarns. The cotton futures contracts that were
hedging anticipated purchases of cotton in 2002 were deemed to be ineffective
upon formation of Frontier Yarns, because we will no longer be purchasing raw
cotton in the future. Accordingly, the $6.4 million of unrealized losses in
accumulated other comprehensive loss was reclassified to earnings as required by
SFAS No. 133 and are presented in the table above as being directly related to
restructuring our yarn operations.
We also recorded $5.5 million of miscellaneous cost including $4.3 million
related to the consolidation of the Cross Creek branded business and $1.2
million of costs associated with establishing our dual headquarters in Atlanta,
GA.
FISCAL 2000 RESTRUCTURING ACTIVITIES
The special charges in 2000 relate primarily to plant closings, the
restructuring of the Russell Athletic brand and the discontinuance of the
Woodbrook brand in Europe. Revenues and operating losses related to the Russell
Athletic and Woodbrook brands in Europe were approximately $14 million and $4.5
million, respectively in 1999.
In 2000, we closed six domestic apparel operations, one textile research
facility and one yarn-manufacturing facility. During the year, approximately
1,700 employees were terminated. We recorded approximately $11.8 million in
fiscal year 2000 for employee severance benefits, including approximately $1.3
million in reserve adjustments for workers' compensation claims from prior year
employee terminations where the estimated costs were lower than actual costs. We
also incurred approximately $3.8 million in ongoing maintenance cost related to
facilities held for sale.
In 2000, we also announced the restructuring of the Russell Athletic line of
business in Europe, the Cross Creek brand in Australia and the Woodbrook brand
in Europe. In connection with the restructuring of these lines of business, we
recorded $3.3 million in termination costs related to the cancellation of
reseller contracts and $0.8 million related to leased facilities in Europe. We
recognized charges of $3.6 million to reduce the carrying value of discontinued
inventories to their estimated net realizable values.
Asset impairment charges of $23.6 million in fiscal 2000 included $16.5 million
to write-down domestic apparel operations, a textile research facility and one
spinning facility; $7.1 million to write-down building and apparel assembly
assets located in Europe related to the Russell Athletic and Woodbrook
operations; we also recognized a $7.7 million impairment charge to write off the
remaining carrying value of goodwill associated with the European business. We
recognized this charge because our estimated undiscounted cash flows for the
restructured European business were less than the carrying value of the
remaining long-lived assets, including the goodwill.
We also recorded asset impairment charges of $1.7 million in 2000 related to the
reconfiguration of domestic distribution facilities. This reconfiguration is now
complete.
54
We also recorded $4.5 million of miscellaneous other unusual charges, of which
$3.0 million related to restructuring the Russell Athletic line of business in
Europe. We also incurred an additional $3.1 million of cost associated with
establishing our dual headquarters in Atlanta.
NOTE 10: SEGMENT INFORMATION
DESCRIPTION OF THE TYPES OF PRODUCTS FROM WHICH EACH REPORTABLE SEGMENT DERIVES
ITS REVENUES
We operate our business in two segments: Domestic Activewear and International
Activewear. Domestic Activewear is further aligned by distribution channel:
Russell Athletic, Mass Retail and Artwear/Careerwear. Russell Athletic, Mass
Retail and Artwear/Careerwear have been aggregated into the Domestic Activewear
reportable segment because these business lines are similar in economic
characteristics, products, production processes, type of customer, distribution
method and regulatory environment. The International Activewear business
distributes our products in approximately 40 countries with the efforts directed
at the specific in-country markets.
MEASUREMENT OF SEGMENT PROFIT OR LOSS AND SEGMENT ASSETS
Our management evaluates performance and allocates resources based on profit or
loss from operations before interest, income taxes and special charges (Segment
EBIT). Segment EBIT as presented by us may not be comparable to similarly titled
measures used by other companies. In 2002, we began valuing inventories of the
reportable segments on the same basis of accounting as that of the consolidated
financial statements. We have restated Segment EBIT for 2001 and 2000 to conform
with the 2002 presentation. The other accounting policies of the reportable
segments are the same as those described in the summary of significant
accounting policies in the consolidated financial statements. Intersegment
transfers are recorded at cost; there is no intercompany profit or loss on
intersegment transfers.
SEGMENT FINANCIAL INFORMATION FOR THE YEAR ENDED JANUARY 4, 2003
Domestic International
(In thousands) Activewear Activewear Total
- -------------------------------------------------------------------------------------------
Net sales $1,076,326 $ 88,002 $ 1,164,328
Depreciation and amortization expense 44,364 697 45,061
Segment EBIT (loss) 123,990 (753) 123,237
Total assets 896,632 66,483 963,115
2002 purchases of long-lived assets 27,971 372 28,343
SEGMENT FINANCIAL INFORMATION FOR THE YEAR ENDED DECEMBER 29, 2001
Domestic International
(In thousands) Activewear Activewear Total
- -------------------------------------------------------------------------------------------
Net sales $1,080,292 $ 80,633 $ 1,160,925
Depreciation and amortization expense 48,862 546 49,408
Segment EBIT 103,926 2,385 106,311
Special charges not included
in Segment EBIT 144,018 74 144,092
Total assets 930,339 64,831 995,170
2001 purchases of long-lived assets 47,387 1,588 48,975
SEGMENT FINANCIAL INFORMATION FOR THE YEAR ENDED DECEMBER 30, 2000
Domestic International
(In thousands) Activewear Activewear Total
- -------------------------------------------------------------------------------------------
Net sales $1,115,935 $ 110,393 $ 1,226,328
Depreciation and amortization expense 51,382 2,268 53,650
Segment EBIT (loss) 158,581 (7,829) 150,752
Special charges not included in
Segment EBIT (loss) 39,393 25,618 65,011
2000 purchases of long-lived assets 58,036 1,421 59,457
RECONCILIATION OF SEGMENT EBIT TO CONSOLIDATED PRE-TAX (LOSS) INCOME
(In thousands) 2002 2001 2000
- -------------------------------------------------------------------------------------------
Total segment EBIT $ 123,237 $ 106,311 $ 150,752
Special charges - (144,092) (65,011)
Unallocated amounts:
Corporate expenses (18,266) (16,488) (20,263)
Interest expense (30,246) (32,324) (32,401)
- -------------------------------------------------------------------------------------------
Income (loss) before income taxes $ 74,725 $ (86,593) $ 33,077
===========================================================================================
During fiscal 2002 and 2001, we allocated more corporate expenses to our
reportable segments than in fiscal 2000.
ENTERPRISE-WIDE DISCLOSURES:
NET SALES BY COUNTRY
(In thousands) 2002 2001 2000
- -------------------------------------------------------------------------------------------
United States $1,072,042 $1,075,277 $ 1,111,006
Europe 61,522 56,307 85,751
Other foreign countries 30,764 29,341 29,571
- -------------------------------------------------------------------------------------------
Consolidated total $1,164,328 $1,160,925 $ 1,226,328
===========================================================================================
55
RUSSELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [CONTINUED]
NET SALES BY DISTRIBUTION CHANNEL
(In thousands) 2002 2001 2000
- -------------------------------------------------------------------------------------------
Domestic Russell Athletic $ 302,738 $ 280,359 $ 287,213
Domestic Mass Retail 350,224 336,634 330,694
Domestic Artwear/Careerwear 423,364 463,299 498,028
International Activewear 88,002 80,633 110,393
- -------------------------------------------------------------------------------------------
Consolidated total $1,164,328 $1,160,925 $ 1,226,328
===========================================================================================
Revenues are attributed to countries based on the location of customers. Net
sales to Wal-Mart represent approximately 21.4%, 18.7% and 17.9% of our
consolidated net sales for fiscal 2002, 2001, and 2000, respectively.
LONG-LIVED ASSETS BY COUNTRY
(In thousands) 2002 2001
- ---------------------------------------------------------------------------
United States $ 305,733 $ 327,159
Central America 24,422 27,070
Europe 1,396 1,620
Other foreign countries 458 436
- ---------------------------------------------------------------------------
Consolidated total $ 332,009 $ 356,285
===========================================================================
NOTE 11: DILUTED WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING
Our diluted weighted-average common shares outstanding are calculated as
follows:
2002 2001 2000
- -------------------------------------------------------------------------------------------
Basic weighted-average common shares
outstanding 32,127,579 31,950,658 32,405,926
Net common shares issuable on exercise
of dilutive stock options 142,234 - 280,080
- -------------------------------------------------------------------------------------------
Diluted weighted-average common
shares outstanding 32,269,813 31,950,658 32,686,006
===========================================================================================
Net incremental shares issuable on the exercise of employee stock options
calculated using the treasury stock method amounted to 242,007 for the year
ended December 29, 2001.Such incremental shares were not included in the diluted
weighted-average common shares outstanding calculation because the effect of
these shares was anti-dilutive. Options to purchase 2.3 million and 2.8 million
shares of our common stock were excluded from the computation of diluted
weighted-average common shares outstanding for the years ended January 4, 2003
and December 30, 2000, respectively, because the option exercise price exceeded
the average market price.
NOTE 12: SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of unaudited quarterly results of operations (in
thousands, except per share data):
Quarter ended
- -----------------------------------------------------------------------------------
Year ended
January 4, 2003 March 31 June 30 Sept. 29 Jan. 4
- -----------------------------------------------------------------------------------
NET SALES $ 215,825 $ 253,070 $ 386,987 $ 308,446
GROSS PROFIT 59,836 66,096 120,529 92,104
INCOME BEFORE
EXTRAORDINARY ITEM 2,628 6,479 23,363 14,457
EXTRAORDINARY ITEM,
NET OF TAX - (12,621) - -
NET INCOME (LOSS) 2,628 (6,142) 23,363 14,457
INCOME BEFORE
EXTRAORDINARY ITEM PER
COMMON SHARE:
BASIC $ .08 $ .20 $ .73 $ .45
DILUTED $ .08 $ .20 $ .72 $ .45
NET INCOME (LOSS) PER
COMMON SHARE:
BASIC $ .08 $ (.19) $ .73 $ .45
DILUTED $ .08 $ (.19) $ .72 $ .45
Quarter ended
- -----------------------------------------------------------------------------------
Year ended
December 29, 2001 April 1 July 1 Sept. 30 Dec. 29
- -----------------------------------------------------------------------------------
Net sales $ 240,994 $ 253,835 $ 351,324 $ 314,772
Gross profit 65,056 53,682 88,422 59,747
Net income (loss) 2,239 (11,585) (15,383) (30,757)
Net income (loss)
per common share:
Basic and diluted $ .07 $ (.36) $ (.48) $ (.96)
Special charges,
described in Note 9,
on an after-tax basis
that are included
in net
income (loss) $ 1,687 $ 16,478 $ 33,337 $ 40,434
56
NOTE 13: CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The following tables present condensed consolidating financial information for
(a) Russell Corporation (the "Parent") on a stand-alone basis; (b) on a combined
basis, the guarantors of the Senior Notes ("Subsidiary Guarantors"), which
include Jerzees Apparel, LLC; Mossy Oak Apparel Company; Cross Creek Apparel,
LLC; Cross Creek Holdings, Inc., DeSoto Mills, Inc.; Russell Financial Services,
Inc.; Russell Asset Management, Inc.; Russell Apparel LLC; RINTEL Properties,
Inc.; Russell Yarn, LLC; Russell Athletic, Inc.; Russell Athletic West, Inc.;
and Russell Co-Op, LLC (all of which are wholly owned); and (c) on a combined
basis, the non-guarantor subsidiaries, which include Alexander City Flying
Service, Inc.; Russell Corporation - Delaware; Russell Servicing, Co., Inc.;
Russell Europe Limited; Russell Mexico, S.A. de C.V.; Jerzees Campeche, S.A. de
C.V.; Jerzees Yucatan, S.A. de C.V.; Athletic de Camargo, S.A. de C.V.; Cross
Creek de Jimenez, S.A. de C.V. (now known as Jerzees de Jimenez, S.A. de C.V.);
Cross Creek de Honduras, S.A. de C.V.; Russell Corp. Australia Pty Ltd.; Russell
do Brasil, Ltda.; Russell Corp. Far East Limited; Russell Japan KK; Russell
Corp. Canada Limited; Jerzees de Honduras, S.A. de C.V.; Jerzees Buena Vista,
S.A.; Jerzees Choloma, S.A.; Russell del Caribe, Inc.; Russell France SARL;
Russell CZ s.r.o.; Russell Germany GmbH; Russell Spain, S.L.; Russell Italy
S.r.l.; Servicios Russell, S.A. de C.V.; Russell Foreign Sales Ltd.; Russell
Corp. Bangladesh Limited; Russell Holdings Europe B.V.; Ruservicios, S.A.; Eagle
R Holdings Limited; and Citygate Textiles Limited. Separate financial statements
of the Subsidiary Guarantors are not presented because the guarantee by each
100% owned Subsidiary Guarantor is full and unconditional, joint and several,
and we believe separate financial statements and other disclosures regarding the
Subsidiary Guarantors are not material to investors. Furthermore, there are no
significant legal restrictions on the Parent's ability to obtain funds from its
subsidiaries by dividend or loan. While Russell Athletic, Inc. and Russell
Athletic West, Inc. were Subsidiary Guarantors at the time the indenture was
executed, these entities were dissolved prior to June 30, 2002, and the assets
of these entities were distributed to the Parent or other Subsidiary Guarantors.
The Parent is comprised of Alabama manufacturing operations and certain
corporate management, information services and finance functions.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended
December 30, 2000 Subsidiary Non-Guarantor
(In thousands) Parent Guarantors Subsidiaries Eliminations Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $ 758,109 $ 361,517 $ 139,568 $ (32,866) $ 1,226,328
Costs and expenses:
Cost of goods sold 513,155 279,731 122,972 (30,382) 885,476
Selling, general and administrative expenses 160,867 43,313 28,233 (2,422) 229,991
Other-net 89,442 (63,855) 19,858 (62) 45,383
Interest expense (income), net 46,747 (15,614) 1,268 - 32,401
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes and equity in earnings
of consolidated subsidiaries (52,102) 117,942 (32,763) - 33,077
Provision (benefit) for income taxes (15,133) 41,236 (7,541) - 18,562
Equity in earnings of consolidated subsidiaries,
net of income taxes 51,484 - - (51,484) -
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 14,515 $ 76,706 $ (25,222) $ (51,484) $ 14,515
===================================================================================================================================
57
RUSSELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [CONTINUED]
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 30, 2000 Subsidiary Non-Guarantor
(In thousands) Parent Guarantors Subsidiaries Eliminations Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Activities
Net cash provided by operating activities $ 89,667 $ 7,436 $ 68 $ - $ 97,171
Investing Activities
Purchase of property, plant and equipment (45,066) (7,032) (7,359) - (59,457)
Cash paid for acquisitions, joint ventures and other (39,972) - - - (39,972)
Investment in and advances to subsidiaries 7,981 (1,075) (6,906) - -
Proceeds from sale of property, plant and equipment 5,931 283 236 - 6,450
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (71,126) (7,824) (14,029) - (92,979)
Financing Activities
Borrowings on credit facility - net 40,755 - 11,548 - 52,303
Payments on notes payable (26,564) - - - (26,564)
Dividends on common stock (18,166) - - - (18,166)
Treasury stock re-issued 952 - - - 952
Cost of common stock for treasury (15,151) - - - (15,151)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (18,174) - 11,548 - (6,626)
Effect of exchange rate changes on cash - - (2,496) - (2,496)
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 367 (388) (4,909) - (4,930)
Cash balance at beginning of year 421 683 8,019 - 9,123
- -----------------------------------------------------------------------------------------------------------------------------------
Cash balance at end of year $ 788 $ 295 $ 3,110 $ - $ 4,193
===================================================================================================================================
CONDENSED CONSOLIDATED BALANCE SHEETS
December 29, 2001 Subsidiary Non-Guarantor
(In thousands) Parent Guarantors Subsidiaries Eliminations Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash $ 3,277 $ (1,583) $ 4,188 $ - $ 5,882
Trade accounts receivables, net 972 146,795 18,338 - 166,105
Inventories 230,580 90,062 39,696 - 360,338
Prepaid expenses and other current assets 26,557 10,511 3,907 - 40,975
- -----------------------------------------------------------------------------------------------------------------------------------
Total current assets 261,386 245,785 66,129 - 573,300
Property, plant and equipment, net 240,039 87,120 29,126 - 356,285
Investment in subsidiaries 757,530 195 - (757,725) -
Intercompany balances (351,525) 384,132 (32,607) - -
Other assets 39,170 23,954 2,461 - 65,585
- -----------------------------------------------------------------------------------------------------------------------------------
$ 946,600 $ 741,186 $ 65,109 $ (757,725) $ 995,170
===================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 98,072 $ 15,574 $ 12,380 $ - $ 126,026
Short-term debt - - 6,187 - 6,187
Current maturities of long-term debt 39,271 - - - 39,271
- -----------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 137,343 15,574 18,567 - 171,484
Long-term debt, less current maturities 310,936 - - - 310,936
Deferred liabilities 44,090 12,041 2,388 - 58,519
Stockholders' equity 454,231 713,571 44,154 (757,725) 454,231
- -----------------------------------------------------------------------------------------------------------------------------------
$ 946,600 $ 741,186 $ 65,109 $ (757,725) $ 995,170
===================================================================================================================================
58
RUSSELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED STATEMENTS [CONTINUED]
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 29, 2001 Subsidiary Non-Guarantor
(In thousands) Parent Guarantors Subsidiaries Eliminations Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $ 762,452 $ 318,131 $ 124,773 $ (44,431) $ 1,160,925
Costs and expenses:
Cost of goods sold 535,274 299,875 98,169 (39,300) 894,018
Selling, general and administrative expenses 144,269 56,474 23,515 2,200 226,458
Other-net 151,121 (46,530) (2,542) (7,331) 94,718
Interest expense (income) - net 57,537 (26,005) 792 - 32,324
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes and equity in earnings
of consolidated subsidiaries (125,749) 34,317 4,839 - (86,593)
Provision (benefit) for income taxes (46,235) 13,001 2,127 - (31,107)
Equity in earnings of consolidated subsidiaries, net of
income taxes 24,028 - - (24,028) -
- -----------------------------------------------------------------------------------------------------------------------------------
Net (loss) income $ (55,486) $ 21,316 $ 2,712 $ (24,028) $ (55,486)
===================================================================================================================================
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 29, 2001 Subsidiary Non-Guarantor
(In thousands) Parent Guarantors Subsidiaries Eliminations Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Activities
Net cash provided by (used in) operating activities $ 271,657 $ (164,284) $ 16,573 $ - $ 123,946
Investing Activities
Purchase of property, plant and equipment (36,596) (3,891) (8,488) - (48,975)
Cash paid for acquisitions, joint ventures and other (6,494) - - - (6,494)
Investment in and advances to subsidiaries (168,354) 166,144 2,210 - -
Proceeds from sale of property, plant and equipment 10,891 153 3,558 - 14,602
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (200,553) 162,406 (2,720) - (40,867)
Financing Activities
Payments on credit facility - net (11,000) - (20,400) - (31,400)
Borrowings on short-term debt - - 6,128 - 6,128
Payments on notes payable (41,072) - - - (41,072)
Dividends on common stock (14,695) - - - (14,695)
Debt issuance and amendment costs paid (3,434) - - - (3,434)
Treasury stock re-issued 1,706 - - - 1,706
Cost of common stock for treasury (120) - - - (120)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (68,615) - (14,272) - (82,887)
Effect of exchange rate changes on cash - - 1,497 - 1,497
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 2,489 (1,878) 1,078 - 1,689
Cash balance at beginning of year 788 295 3,110 - 4,193
- -----------------------------------------------------------------------------------------------------------------------------------
Cash balance at end of year $ 3,277 $ (1,583) $ 4,188 $ - $ 5,882
===================================================================================================================================
59
RUSSELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [CONTINUED]
CONDENSED CONSOLIDATED BALANCE SHEETS
January 4, 2003 Subsidiary Non-Guarantor
(In thousands) Parent Guarantors Subsidiaries Eliminations Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash $ 50,955 $ 8,102 $ 9,562 $ - $ 68,619
Trade accounts receivables, net 634 130,143 18,138 - 148,915
Inventories 227,899 41,350 37,409 - 306,658
Prepaid expenses and other current assets 22,101 1,207 3,345 - 26,653
- -----------------------------------------------------------------------------------------------------------------------------------
Total current assets 301,589 180,802 68,454 - 550,845
Property, plant, and equipment, net 234,242 71,480 26,287 - 332,009
Investment in subsidiaries 845,332 195 - (845,527) -
Intercompany balances (531,623) 554,577 (22,954) - -
Other assets 55,977 23,786 498 - 80,261
- -----------------------------------------------------------------------------------------------------------------------------------
$ 905,517 $ 830,840 $ 72,285 $ (845,527) $ 963,115
===================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 111,586 $ 24,444 $ 17,444 $ - $ 153,474
Short-term debt - - 7,253 - 7,253
Current maturities of long-term debt 5,000 - - - 5,000
- -----------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 116,586 24,444 24,697 - 165,727
Long-term debt, less current maturities 265,000 - - - 265,000
Deferred liabilities 56,678 5,829 2,628 - 65,135
Stockholders' equity 467,253 800,567 44,960 (845,527) 467,253
- -----------------------------------------------------------------------------------------------------------------------------------
$ 905,517 $ 830,840 $ 72,285 $ (845,527) $ 963,115
===================================================================================================================================
60
RUSSELL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED STATEMENTS [CONTINUED]
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended January 4, 2003 Subsidiary Non-Guarantor
(In thousands) Parent Guarantors Subsidiaries Eliminations Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
Net sales $ 823,122 $ 254,114 $ 134,967 $ (47,875) $ 1,164,328
Costs and expenses:
Cost of goods sold 565,732 195,901 111,116 (46,986) 825,763
Selling, general and administrative expenses 154,637 60,952 20,221 - 235,810
Other-net 117,472 (118,883) 84 (889) (2,216)
Interest expense (income) - net 66,941 (36,697) 2 - 30,246
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes,
equity in earnings of consolidated subsidiaries
and extraordinary item (81,660) 152,841 3,544 - 74,725
Provision (benefit) for income taxes (30,924) 57,954 768 - 27,798
Equity in earnings of consolidated subsidiaries,
net of income taxes 97,663 - - (97,663) -
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary item 46,927 94,887 2,776 (97,663) 46,927
Extraordinary item, net of tax benefit (12,621) - - - (12,621)
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 34,406 $ 94,887 $ 2,776 $ (97,663) $ 34,306
===================================================================================================================================
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended January 4, 2003 Subsidiary Non-Guarantor
(In thousands) Parent Guarantors Subsidiaries Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
Operating Activities
Net cash provided by (used in) operating activities $ 273,856 $ 18,340 $ (88,055) $ - $ 204,141
Investing Activities
Purchase of property, plant and equipment (24,545) (2,679) (1,119) - (28,343)
Investment in and advances to subsidiaries (87,802) (7,891) 95,693 - -
Cash paid for acquisitions, joint ventures and other (4,670) - - - (4,670)
Proceeds from sale of property, plant and equipment 7,513 1,915 22 - 9,450
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (109,504) (8,655) 94,596 - (23,563)
Financing Activities
Payments on credit facility - net (74,800) - - - (74,800)
Borrowings on short-term debt - - 458 - 458
Payments on notes payable, including prepayment penalties (270,371) - - - (270,371)
Proceeds from issuance of Senior Notes 250,000 - - - 250,000
Debt issuance and amendment costs paid (18,910) - - - (18,910)
Dividends on common stock (5,137) - - - (5,137)
Treasury stock re-issued 2,574 - - - 2,574
Cost of common stock for treasury (30) - - - (30)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (116,674) - 458 - (116,216)
Effect of exchange rate changes - - (1,625) - (1,625)
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase in cash 47,678 9,685 5,374 - 62,737
Cash balance at beginning of year 3,277 (1,583) 4,188 - 5,882
- ----------------------------------------------------------------------------------------------------------------------------------
Cash balance at end of year $ 50,955 $ 8,102 $ 9,562 $ - $ 68,619
==================================================================================================================================
61
RUSSELL CORPORATION AND SUBSIDIARIES
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND SHAREHOLDERS
RUSSELL CORPORATION
We have audited the accompanying consolidated balance sheets of Russell
Corporation and Subsidiaries as of January 4, 2003, and December 29, 2001, and
the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three fiscal years in the period ended January 4,
2003. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Russell
Corporation and Subsidiaries at January 4, 2003, and December 29, 2001, and the
consolidated results of their operations and their cash flows for each of the
three fiscal years in the period ended January 4, 2003, in conformity with
accounting principles generally accepted in the United States.
As described in Note 1, effective December 30, 2001 the Company changed its
method of accounting for goodwill and indefinite-lived intangible assets.
/s/ Ernst & Young LLP
January 31, 2003
Birmingham, Alabama
62
RUSSELL CORPORATION AND SUBSIDIARIES
CORPORATE INFORMATION
PRINCIPAL OFFICES
3330 Cumberland Blvd., Suite 800
Atlanta, GA 30339
(678) 742-8000
755 Lee Street
P.O. Box 272
Alexander City, AL 35011
(256) 500-4000
OTHER INFORMATION
The Company's press releases, annual report and other information
can be accessed via the Internet at RussellCorp.com
TRANSFER AGENT AND REGISTRAR
SunTrust Bank, Atlanta
P.O. Box 4625
Atlanta, GA 30302
DIVIDEND DISBURSING AGENT
SunTrust Bank, Atlanta
P.O. Box 4625
Atlanta, GA 30302
AUDITORS
Ernst & Young LLP
1900 AmSouth/Harbert Plaza
Birmingham, AL 35203
FORM 10-K
Copies of Form 10-K as filed with the Securities and
Exchange Commission are available without cost to
shareholders of the Company by writing to:
Investor Relations
Russell Corporation
3330 Cumberland Blvd., Suite 800
Atlanta, GA 30339
(678) 742-8000
ANNUAL MEETING
The annual meeting of shareholders of the Corporation will be at
11:00 a.m. Central Time on April 23, 2003, at the offices of the
Company in Alexander City, Alabama. For information contact:
Thomas D. Johnson, Jr.
Director of Investor Relations
(678) 742-8181
DIVIDEND REINVESTMENT PLAN
For information about accounts or issuance of certificates, contact:
SunTrust Bank, Atlanta
P.O. Box 4625
Atlanta, GA 30302
MARKET SHARE INFORMATION
Market share information for the branded retail components of our Russell
Athletic and Mass Retail businesses was obtained from The NPD Group. Market
share information for our Russell Artwear/Careerwear business was taken
from the S.T.A.R.S. reports of ACNielsen Market Decisions.
DIVIDEND AND MARKET INFORMATION
Russell Corporation stock trades on the New York Stock Exchange
and various other regional exchanges under the ticker symbol RML.
The range of high and low prices of the Common Stock and the
dividends per share paid during each calendar quarter of the last
two years are presented below:
2002 Dividend High Low Close
- ---- -------- ---- --- -----
First $0.04 $16.10 $14.50
Second 0.04 19.55 14.30
Third 0.04 19.25 14.37
Fourth 0.04 17.40 13.14
- ------ -------- ----- ----- -----
$0.16 $16.74
2001 Dividend High Low Close
- ---- -------- ---- --- -----
First $0.14 $20.84 $15.13
Second 0.14 20.00 15.18
Third 0.14 18.55 13.40
Fourth 0.04 15.50 11.02
- ------ -------- ----- ----- -----
$0.46 $15.01