UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 6, 2003
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number
0-1790
RUSSELL CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
ALABAMA 63-0180720
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3330 CUMBERLAND BLVD., SUITE 800, ATLANTA, GEORGIA 30339
(Address of Principal Executive Offices) (Zip Code)
(678) 742-8000
(Registrant's Telephone Number, Including Area Code)
Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report: NONE
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
As of August 15, 2003, there were 32,454,346 shares of Common Stock, $.01 par
value outstanding (excluding treasury shares).
RUSSELL CORPORATION
INDEX
Page No.
--------
Part I. Financial Information:
Item 1. Financial Statements
Condensed Consolidated Balance Sheets --
July 6, 2003, January 4, 2003 and June 30, 2002 2
Condensed Consolidated Statements of Operations --
Thirteen Weeks Ended July 6, 2003 and June 30, 2002 3
Twenty-six Weeks Ended July 6, 2003 and June 30, 2002 4
Condensed Consolidated Statements of Cash Flows --
Twenty-six Weeks Ended July 6, 2003 and June 30, 2002 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and 18
Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 26
Item 4. Controls and Procedures 26
Part II. Other Information:
Item 1. Legal Proceedings 26
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 27
1
PART I - FINANCIAL INFORMATION
RUSSELL CORPORATION
Condensed Consolidated Balance Sheets
(In Thousands Except Share and Per Share Amounts)
July 6, January 4, June 30,
2003 2003 2002
----------- ----------- -----------
ASSETS (Unaudited) (Note 1) (Unaudited)
Current assets:
Cash $ 7,945 $ 68,619 $ 6,791
Accounts receivable, net 217,522 148,915 188,480
Inventories - Note 2 403,225 306,658 386,690
Prepaid expenses & other current assets 16,028 26,653 43,975
----------- ----------- -----------
Total current assets 644,720 550,845 625,936
Property, plant & equipment, net 315,731 332,009 339,125
Other assets 137,041 80,261 76,068
----------- ----------- -----------
Total assets $ 1,097,492 $ 963,115 $ 1,041,129
=========== =========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 86,148 $ 71,291 $ 74,352
Accrued expenses 72,704 82,183 73,269
Short-term debt 6,289 7,253 6,940
Current maturities of long-term debt 5,000 5,000 5,000
----------- ----------- -----------
Total current liabilities 170,141 165,727 159,561
Long-term debt, less current maturities 380,747 265,000 373,793
Deferred liabilities 66,142 65,135 58,520
Stockholders' equity:
Common stock, par value $.01 per share; authorized
150,000,000 shares, issued 41,419,958 shares 414 414 414
Paid-in capital 40,979 42,877 43,733
Retained earnings 682,816 675,448 640,202
Treasury stock, at cost (9,011,787 shares at
7/6/03; 9,233,545 shares at 1/4/03 and
9,279,117 shares at 6/30/02) (212,298) (218,113) (219,714)
Accumulated other comprehensive loss (31,449) (33,373) (15,380)
----------- ----------- -----------
Total stockholders' equity 480,462 467,253 449,255
----------- ----------- -----------
Total liabilities & stockholders' equity $ 1,097,492 $ 963,115 $ 1,041,129
=========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
2
RUSSELL CORPORATION
Condensed Consolidated Statements of Operations
(In Thousands Except Share and Per Share Amounts)
(Unaudited)
13 Weeks Ended
----------------------------------
July 6, June 30,
2003 2002
------------ ------------
Net sales $ 267,925 $ 253,070
Cost of goods sold 190,539 186,974
------------ ------------
Gross profit 77,386 66,096
Selling, general & administrative expenses 58,499 50,792
Other expense (income) - net 704 (2,747)
------------ ------------
Operating income 18,183 18,051
Interest expense 7,443 7,734
Debt retirement charge - Note 1 -- 20,097
------------ ------------
Income (loss) before income taxes 10,740 (9,780)
Provision (benefit) for income taxes 4,081 (3,638)
------------ ------------
Net income (loss) $ 6,659 $ (6,142)
============ ============
Weighted-average common shares outstanding:
Basic 32,345,952 32,094,798
Diluted 32,826,939 32,094,798
Net income (loss) per common share:
Basic $ 0.21 $ (0.19)
Diluted $ 0.20 $ (0.19)
Cash dividends per common share $ 0.04 $ 0.04
See accompanying notes to condensed consolidated financial statements.
3
RUSSELL CORPORATION
Condensed Consolidated Statements of Operations
(In Thousands Except Share and Per Share Amounts)
(Unaudited)
26 Weeks Ended
----------------------------------
July 6, June 30,
2003 2002
------------ ------------
Net sales $ 495,908 $ 468,895
Cost of goods sold 355,700 342,963
------------ ------------
Gross profit 140,208 125,932
Selling, general & administrative expenses 107,877 99,760
Other expense (income) - net 1,419 (2,758)
------------ ------------
Operating income 30,912 28,930
Interest expense 14,610 14,428
Debt retirement charge - Note 1 -- 20,097
------------ ------------
Income (loss) before income taxes 16,302 (5,595)
Provision (benefit) for income taxes 6,195 (2,081)
------------ ------------
Net income (loss) $ 10,107 $ (3,514)
============ ============
Weighted-average common shares outstanding:
Basic 32,281,964 32,061,037
Diluted 32,635,809 32,061,037
Net income (loss) per common share:
Basic $ 0.31 $ (0.11)
Diluted $ 0.31 $ (0.11)
Cash dividends per common share $ 0.08 $ 0.08
See accompanying notes to condensed consolidated financial statements.
4
RUSSELL CORPORATION
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
26 Weeks Ended
-----------------------------
July 6, June 30,
2003 2002
--------- ---------
Operating Activities:
Net income (loss) $ 10,107 $ (3,514)
Adjustments to reconcile net income (loss) to
cash (used in) provided by operating activities:
Depreciation 22,132 23,192
Amortization 242 114
Loss (gain) on sale of property, plant & equipment 381 (3,254)
Debt retirement charge -- 20,097
Other (213) (747)
Changes in operating assets & liabilities:
Accounts receivable (60,098) (21,817)
Inventories (77,316) (25,371)
Prepaid expenses & other current assets 11,873 2,035
Other assets (1,255) 2,788
Accounts payable & accrued expenses 2,109 18,739
Other deferred liabilities 1,008 (5,531)
--------- ---------
Net cash (used in) provided by operating activities (91,030) 6,731
Investing Activities:
Purchases of property, plant & equipment (14,468) (7,653)
Proceeds from the sale of property, plant & equipment 9,363 7,053
Cash paid for acquisitions, joint ventures and other (80,137) --
Other 378 450
--------- ---------
Net cash used in investing activities (84,864) (150)
Financing Activities:
Borrowings on credit facility - net 115,747 33,993
(Payments) borrowings on short-term debt (1,302) 424
Payments on notes payable, including prepayment penalties -- (270,371)
Proceeds from issuance of bonds -- 250,000
Debt issuance & amendment costs paid (468) (18,001)
Dividends on common stock (2,578) (2,564)
Treasury stock reissued 2,844 1,799
--------- ---------
Net cash provided by (used in) financing activities 114,243 (4,720)
Effect of exchange rate changes on cash 977 (952)
--------- ---------
Net (decrease) increase in cash (60,674) 909
Cash balance at beginning of period 68,619 5,882
--------- ---------
Cash balance at end of period $ 7,945 $ 6,791
========= =========
See accompanying notes to condensed consolidated financial statements.
5
RUSSELL CORPORATION
Notes to Condensed Consolidated Financial Statements
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally
accepted in the United States for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United
States for complete financial statements. In our opinion, the
accompanying interim condensed consolidated financial statements
contain all adjustments (consisting only of normal recurring accruals)
necessary to present fairly our financial position as of July 6, 2003
and June 30, 2002, and the results of our operations for the thirteen
and twenty-six weeks ended July 6, 2003 and June 30, 2002, and our cash
flows for the twenty-six weeks ended July 6, 2003 and June 30, 2002.
The condensed consolidated balance sheet at January 4, 2003 has been
derived from the audited financial statements at that date but does not
include all of the information and footnotes required by accounting
principles generally accepted in the United States for complete
financial statements.
For further information about our significant accounting policies,
refer to the consolidated financial statements and footnotes thereto
included in our Annual Report on Form 10-K for the year ended January
4, 2003. See also Notes 7 and 11 for further information on changes in
our accounting policies during 2003 and pending changes in accounting
policies.
Our revenues and income are subject to seasonal variations.
Consequently, the results of operations for the thirteen and twenty-six
weeks ended July 6, 2003, are not necessarily indicative of the results
to be expected for the full year.
On January 5, 2003, we adopted FASB Statement of Financial Accounting
Standards (SFAS) No. 145, Recission of FASB Statements No. 4, 44 and
64, Amendment of FASB Statement No. 13, and Technical Corrections. Upon
adoption, we reclassified the $20.1 million 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.
2. INVENTORIES
The components of inventories consist of the following: (in thousands)
7/6/03 1/4/03 6/30/02
--------- --------- ---------
Finished goods $ 343,879 $ 240,964 $ 316,648
Work in process 47,664 48,272 50,470
Raw materials and supplies 18,196 19,143 20,965
--------- --------- ---------
409,739 308,379 388,083
LIFO and lower-of-cost or
market adjustments, net (6,514) (1,721) (1,393)
--------- --------- ---------
$ 403,225 $ 306,658 $ 386,690
========= ========= =========
3. PROPERTY, PLANT AND EQUIPMENT, NET
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 10 to 37 years for buildings and
improvements and from 3 to 11 years for machinery and equipment. When
events
6
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.
Property, plant and equipment, net are summarized as follows: (in
thousands)
7/6/03 1/4/03 6/30/02
---------- ---------- ----------
Land and improvements $ 17,413 $ 20,389 $ 15,835
Buildings and improvements 243,503 251,875 250,206
Machinery and equipment 578,015 758,827 756,687
Construction-in-progress 21,476 3,619 16,109
---------- ---------- ----------
860,407 1,034,710 1,038,837
Accumulated depreciation (544,676) (702,701) (699,712)
---------- ---------- ----------
Property, plant and equipment, net $ 315,731 $ 332,009 $ 339,125
========== ========== ==========
With the completion of the restructuring and reorganization program
described in Note 5 and the implementation of our new fixed asset
system, in the 2003-second quarter we retired approximately $160
million of assets (primarily machinery and equipment) that were fully
depreciated and no longer in use. There was no impact on net income
related to the retirement of these assets.
4. ACQUISITION
On May 16, 2003, we completed the acquisition of the brands, inventory,
contracts, and related assets of the sporting goods business of
Spalding Sports Worldwide, Inc. for approximately $65 million. Spalding
is a leading producer and marketer of basketballs, footballs, soccer
balls and volleyballs under the SPALDING brand name, softballs under
the DUDLEY brand name and Australian Rules football equipment under the
SHERRIN brand name. Furthermore, SPALDING is the official basketball
supplier for the NBA and the WNBA, the official volleyball for the NCAA
and American Volleyball Association, and the official soccer ball of
the Major Indoor Soccer League. Spalding's research and development
efforts led to the introduction of its INFUSION line of inflatable
sports balls that feature built-in MICRO-PUMP technology that allows
users to inflate the product anytime, anywhere. The acquisition of
Spalding is another milestone in our expansion strategy that includes a
stronger focus on the athletic and outdoor markets.
The results of Spalding's operations have been included in our
consolidated financial statements since the acquisition date. At July
6, 2003, our consolidated balance sheet reflects the initial purchase
price allocation of the assets acquired and liabilities assumed. We are
currently in the process of obtaining third-party valuations of our
intangible assets. In addition, we are in the process of resolving
pre-acquisition contingencies that could result in an adjustment to the
ultimate purchase price. Thus, the initial allocation of the purchase
price is subject to change.
5. RESTRUCTURING, ASSET IMPAIRMENT AND OTHER UNUSUAL CHARGES (SPECIAL
CHARGES)
In July 1998, we adopted a restructuring and reorganization program
with the objectives 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 worldwide 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 saving activities. The plan also called for the
establishment of a dual headquarters in Atlanta, Georgia, in addition
to Alexander City, Alabama. In July 2001, we announced an extension of
this program to align
7
the organization by distribution channels to provide stronger customer
service, supply chain management and more cost-effective operations.
We substantially completed our multi-year restructuring and
reorganization program in 2001. There were no additional special
charges incurred during the thirteen and twenty-six weeks ended July 6,
2003 and June 30, 2002.
A summary of activity in the restructuring liability accounts follows:
(in thousands)
26 Weeks Ended
---------------------------
7/6/03 6/30/02
-------- --------
Restructuring liabilities at beginning of period $ 2,333 $ 16,139
Payments charged to the liability accounts (1,745) (5,841)
-------- --------
Restructuring liabilities at end of period $ 588 $ 10,298
======== ========
The remaining restructuring liabilities are made up of the following:
(in thousands)
7/6/03
-------
Employee terminations $ 212
Termination of licenses and contracts 271
Exit costs related to facilities 105
-------
$ 588
=======
At July 6, 2003, we held for sale certain closed facilities with an
adjusted carrying value of approximately $11.1 million, which have been
included in property, plant and equipment as part of the Domestic
segment.
6. COMMITMENTS AND CONTINGENCIES
Commitments
During fiscal 2001, we entered into a supply agreement with Frontier
Yarns to purchase certain minimum quantities of yarn. Refer to Note 8
to our consolidated financial statements in our 2002 Annual Report on
Form 10-K for a description of the agreement.
Contingencies
We are 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 the case, which sought unspecified money damages
for trespass and nuisance. However, ten 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.
We also are a party to various other lawsuits arising out of the normal
conduct of our business. We do not believe that any of these lawsuits,
if adversely determined, would have a material adverse effect upon us.
8
7. STOCK-BASED COMPENSATION
On January 5, 2003, we adopted the prospective transition provisions of
SFAS No. 148, which amended SFAS No. 123, Accounting and Disclosure of
Stock-based Compensation. SFAS No. 148 uses a fair value based method
of accounting for employee stock options and similar equity
instruments. By electing the prospective transition method of SFAS No.
148, our results of operations and our financial position are not
affected by stock compensation awards granted prior to January 5, 2003.
We recognized approximately $0.6 million ($0.4 million after-tax) and
$0.8 million ($0.5 million after-tax) in stock-based employee
compensation during the thirteen and twenty-six weeks ended July 6,
2003, respectively. For stock compensation awards granted prior to
January 5, 2003, we used the intrinsic value approach under Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees. The following table presents a comparison of reported
results versus pro forma results that assumes the fair value based
method of accounting had been applied to all stock compensation awards
granted.
For purposes of calculating the pro forma amounts below, the estimated
fair value of the options is determined using the Black-Scholes option
valuation model and is amortized to expense over the options' vesting
period. (in thousands)
13 Weeks Ended 26 Weeks Ended
------------------------- -------------------------
7/6/03 6/30/02 7/6/03 6/30/02
-------- --------- --------- ---------
Reported net income (loss) $ 6,659 $ (6,142) $ 10,107 $ (3,514)
Stock-based employee compensation, net of tax,
assuming SFAS No. 148 was applied retroactively (270) (636) (540) (1,271)
-------- --------- --------- ---------
Pro forma net income (loss) $ 6,389 $ (6,778) $ 9,567 $ (4,785)
Reported net income (loss) per share-basic $ .21 $ (.19) $ .31 $ (.11)
Pro forma net income (loss) per share-basic $ .20 $ (.21) $ .30 $ (.15)
Reported net income (loss) per share-diluted $ .20 $ (.19) $ .31 $ (.11)
Pro forma net income (loss) per share-diluted $ .19 $ (.21) $ .29 $ (.15)
8. DILUTED WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING
Our diluted weighted-average common shares outstanding are calculated
as follows:
13 Weeks Ended 26 Weeks Ended
-------------------------- ---------------------------
7/6/03 6/30/02 7/6/03 6/30/02
---------- ---------- ---------- ----------
Basic weighted-average common shares outstanding 32,345,952 32,094,798 32,281,964 32,061,037
Net common shares on unissued restricted stock and
issuable on exercise of dilutive stock options 480,987 -- 353,845 --
---------- ---------- ---------- ----------
Diluted weighted-average common shares outstanding 32,826,939 32,094,798 32,635,809 32,061,037
---------- ---------- ---------- ----------
Net incremental shares issuable on the exercise of employee stock
options calculated using the treasury stock method amounted to 287,944
and 154,217 for the thirteen and twenty-six weeks ended June 30, 2002,
respectively. Options to purchase 1.5 million and 1.9 million shares of
our common stock were excluded from the computation of diluted
weighted-average common shares outstanding for the thirteen and
twenty-six weeks ended July 6, 2003, respectively, because the exercise
prices of these options exceeded the average market price.
9
9. COMPREHENSIVE INCOME (LOSS)
At July 6, 2003, accumulated other comprehensive income (loss) as shown
in the condensed consolidated balance sheet was comprised of foreign
currency translation adjustments, minimum pension liabilities and gains
and losses on foreign currency forward contracts. The components of
comprehensive income (loss), net of tax, for the periods indicated
below are as follows: (in thousands)
13 Weeks Ended 26 Weeks Ended
----------------- ------------------
7/6/03 6/30/02 7/6/03 6/30/02
------ ------- ------- -------
Net income (loss) $6,659 $(6,142) $10,107 $(3,514)
Foreign currency translation gain (loss) 1,460 (60) 2,458 (958)
(Loss) gain on derivative instruments (447) (453) (770) 260
Other -- -- 236 --
------ ------- ------- -------
Comprehensive income (loss) $7,672 $(6,655) $12,031 $(4,212)
====== ======= ======= =======
10. SEGMENT INFORMATION
We operate our business in two segments: Domestic and International.
The Domestic segment is further aligned by distribution channel:
Athletic, Mass Retail and Artwear/Careerwear. Athletic, Mass Retail and
Artwear/Careerwear have been aggregated into the Domestic reportable
segment because these business lines are similar in economic
characteristics, products, production processes, type of customer,
distribution method, and regulatory environment. The International
business distributes our products in approximately 40 countries.
Our management evaluates performance and allocates resources based on
profit or loss from operations before interest, income taxes and
special charges (Segment Operating Income). Segment operating income as
presented by us may not be comparable to similarly titled measures used
by other companies. The accounting policies of the reportable segments
are the same as those described in Note 1 to the consolidated financial
statements in our Annual Report on Form 10-K for the year ended January
4, 2003. Intersegment transfers are primarily recorded at cost.
13 Weeks Ended July 6, 2003
(in thousands)
-------------------------------------------------------
Domestic International Total
---------- ------------- ----------
Net sales $ 241,085 $ 26,840 $ 267,925
Depreciation & amortization
expense 10,167 223 10,390
Segment operating income 20,777 690 21,467
Total assets 1,041,785 55,707 1,097,492
10
13 Weeks Ended June 30, 2002
(in thousands)
-------------------------------------------------------
Domestic International Total
---------- ------------- ----------
Net sales $ 232,649 $ 20,421 $ 253,070
Depreciation & amortization
expense 11,304 203 11,507
Segment operating income 20,985 (636) 20,349
Total assets 984,405 56,724 1,041,129
26 Weeks Ended July 6, 2003
(in thousands)
-------------------------------------------------------
Domestic International Total
---------- ------------- ----------
Net sales $ 445,820 $ 50,088 $ 495,908
Depreciation & amortization
expense 21,973 401 22,374
Segment operating income 36,261 295 36,556
Total assets 1,041,785 55,707 1,097,492
26 Weeks Ended June 30, 2002
(in thousands)
-------------------------------------------------------
Domestic International Total
---------- ------------- ----------
Net sales $ 427,783 $ 41,112 $ 468,895
Depreciation & amortization
expense 22,943 363 23,306
Segment operating income 35,175 (516) 34,659
Total assets 984,405 56,724 1,041,129
A reconciliation of combined segment operating income to consolidated
income before income taxes is as follows: (in thousands)
13 Weeks Ended 26 Weeks Ended
-------------------------- --------------------------
7/6/03 6/30/02 7/6/03 6/30/02
--------- --------- --------- ---------
Total segment operating income $ 21,467 $ 20,349 $ 36,556 $ 34,659
Unallocated amounts:
Corporate expenses (3,284) (2,298) (5,644) (5,729)
Interest expense (7,443) (7,734) (14,610) (14,428)
Debt retirement charge -- (20,097) -- (20,097)
--------- --------- --------- ---------
Consolidated income (loss) before income taxes $ 10,740 $ (9,780) $ 16,302 $ (5,595)
========= ========= ========= =========
11
NET SALES BY DISTRIBUTION CHANNEL
(in thousands)
13 Weeks Ended 26 Weeks Ended
------------------------- -------------------------
7/6/03 6/30/02 7/6/03 6/30/02
--------- --------- --------- ---------
Domestic Athletic $ 79,152 $ 60,596 $ 156,696 $ 119,653
Domestic Mass Retail 62,235 58,867 110,768 101,230
Domestic Artwear/Careerwear 99,698 113,186 178,356 206,900
International 26,840 20,421 50,088 41,112
--------- --------- --------- ---------
Consolidated Total $ 267,925 $ 253,070 $ 495,908 $ 468,895
========= ========= ========= =========
11. NEW ACCOUNTING PRONOUNCEMENT
In January 2003, the FASB issued Financial Interpretation No. 46,
Consolidation of Variable Interest Entities (FIN 46). FIN 46 addresses
whether business enterprises must consolidate the financial statements
of entities known as "variable interest entities". A variable interest
entity is defined by FIN 46 to be a business entity which has one or
both of the following characteristics: (1) the equity investment at
risk is not sufficient to permit the entity to finance its activities
without additional support from other parties, which is provided
through other interests that will absorb some or all of the expected
losses of the entity; and (2) the equity investors lack one or more of
the following essential characteristics of a controlling financial
interest: (a) direct or indirect ability to make decisions about the
entity's activities through voting rights or similar rights, (b) the
obligation to absorb the expected losses of the entity if they occur,
which makes it possible for the entity to finance its activities, or
(c) the right to receive the expected residual returns of the entity if
they occur, which is the compensation for risk of absorbing expected
losses. FIN46 does not require consolidation by transferors to
qualifying special purpose entities. FIN 46 applies to the first
interim period beginning after June 15, 2003, to variable interest
entities in which an enterprise holds a variable interest that it
acquired before February 1, 2003. We have not yet completed our
analysis of whether any of our equity investees meet the definition of
a variable interest entity or whether we will be required to
consolidate any of them.
12. 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.
12
The Parent is comprised of Alabama manufacturing operations and certain
corporate management, information services and finance functions.
RUSSELL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JULY 6, 2003
(In thousands) Subsidiary Non-Guarantor
(unaudited) Parent Guarantors Subsidiaries Eliminations Consolidated
---------- ---------- ------------- ------------ ------------
ASSETS
Current assets:
Cash $ 321 $ 3,290 $ 4,334 $ -- $ 7,945
Accounts receivables, net 18,978 172,375 26,169 -- 217,522
Inventories 320,419 47,048 35,758 -- 403,225
Prepaid expenses & other current
assets 11,445 1,295 3,288 -- 16,028
---------- --------- --------- ----------- ----------
Total current assets 351,163 224,008 69,549 -- 644,720
Property, plant & equipment, net 221,586 69,180 24,965 -- 315,731
Investment in subsidiaries 873,343 195 -- (873,538) --
Intercompany balances (517,104) 539,692 (22,588) -- --
Other assets 110,581 25,964 496 -- 137,041
---------- --------- --------- ----------- ----------
$1,039,569 $ 859,039 $ 72,422 $ (873,538) $1,097,492
========== ========= ========= =========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 70,588 $ 9,042 $ 6,518 $ -- $ 86,148
Accrued expenses 45,614 17,977 9,113 -- 72,704
Short-term debt -- -- 6,289 -- 6,289
Current maturities of long-term debt 5,000 -- -- -- 5,000
---------- --------- --------- ----------- ----------
Total current liabilities 121,202 27,019 21,920
-- 170,141
Long-term debt, less current maturities 380,747 -- -- -- 380,747
Deferred liabilities 57,158 5,634 3,350 -- 66,142
Stockholders' equity 480,462 826,386 47,152 (873,538) 480,462
---------- --------- --------- ----------- ----------
$1,039,569 $ 859,039 $ 72,422 $ (873,538) $1,097,492
========== ========= ========= =========== ==========
13
RUSSELL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE 13 WEEKS ENDED JUNE 30, 2002
(In thousands) Subsidiary Non-Guarantor
(unaudited) Parent Guarantors Subsidiaries Eliminations Consolidated
--------- ---------- ------------- ------------ ------------
Net sales $ 173,803 $ 59,466 $ 32,605 $ (12,804) $ 253,070
Cost of goods sold 133,217 38,649 26,950 (11,842) 186,974
========= ========= ========= ========== =========
Gross profit 40,586 20,817 5,655 (962) 66,096
Selling, general & administrative
expenses 31,159 14,539 6,188 (1,094) 50,792
Other expense (income) - net 28,905 (31,339) (445) 132 (2,747)
========= ========= ========= ========== =========
Operating (loss) income (19,478) 37,617 (88) -- 18,051
Interest expense (income) - net 16,400 (8,731) 65 -- 7,734
Debt retirement charge 20,097 -- -- -- 20,097
--------- --------- --------- ---------- ---------
(Loss) income before income taxes
and equity in earnings of
consolidated subsidiaries (55,975) 46,348 (153) -- (9,780)
(Benefit) provision for income taxes (20,291) 16,626 27 -- (3,638)
Equity in earnings of consolidated
subsidiaries, net of income taxes 29,542 -- -- (29,542) --
--------- --------- --------- ---------- ---------
Net (loss) income $ (6,142) $ 29,722 $ (180) $ (29,542) $ (6,142)
========= ========= ========= ========== =========
RUSSELL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE 13 WEEKS ENDED JULY 6, 2003
(In thousands) Subsidiary Non-Guarantor
(unaudited) Parent Guarantors Subsidiaries Eliminations Consolidated
--------- ---------- ------------- ------------ ------------
Net sales $ 204,514 $ 38,995 $ 40,006 $ (15,590) $ 267,925
Cost of goods sold 143,049 30,092 32,807 (15,409) 190,539
--------- --------- --------- ---------- ---------
Gross profit 61,465 8,903 7,199 (181) 77,386
Selling, general & administrative
expenses 37,573 14,819 6,107 -- 58,499
Other expense (income) - net 19,003 (18,625) 507 (181) 704
--------- --------- --------- ---------- ---------
Operating income (loss) 4,889 12,709 585 -- 18,183
Interest expense (income) - net 14,509 (7,086) 20 -- 7,443
Debt retirement charge -- -- -- -- --
--------- --------- --------- ---------- ---------
(Loss) income before income taxes
and equity in earnings of
consolidated subsidiaries (9,620) 19,795 565 -- 10,740
(Benefit) provision for income taxes (5,141) 9,032 190 -- 4,081
Equity in earnings of consolidated
subsidiaries, net of income taxes 11,138 -- -- (11,138) --
--------- --------- --------- ---------- ---------
Net income (loss) $ 6,659 $ 10,763 $ 375 $ (11,138) $ 6,659
========= ========= ========= ========== =========
14
RUSSELL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE 26 WEEKS ENDED JUNE 30, 2002
(In thousands) Subsidiary Non-Guarantor
(unaudited) Parent Guarantors Subsidiaries Eliminations Consolidated
--------- ---------- ------------- ------------ ------------
Net sales $ 320,278 $ 108,135 $ 64,317 $ (23,835) $ 468,895
Cost of goods sold 238,461 74,687 51,405 (21,590) 342,963
--------- --------- --------- ---------- ---------
Gross profit 81,817 33,448 12,912 (2,245) 125,932
Selling, general & administrative
expenses 60,622 29,212 12,128 (2,202) 99,760
Other expense (income) - net 56,210 (58,623) (302) (43) (2,758)
--------- --------- --------- ---------- ---------
Operating (loss) income (35,015) 62,859 1,086 -- 28,930
Interest expense (income) - net 31,070 (16.676) 34 -- 14,428
Debt retirement charge 20,097 -- -- -- 20,097
--------- --------- --------- ---------- ---------
(Loss) income before income taxes
and equity in earnings of
consolidated subsidiaries (86,182) 79,535 1,052 -- (5,595)
(Benefit) provision for income taxes (30,982) 28,323 578 -- (2,081)
Equity in earnings of consolidated
subsidiaries, net of income taxes 51,686 -- -- (51,686) --
--------- --------- --------- ---------- ---------
Net (loss) income $ (3,514) $ 51,212 $ 474 $ (51,686) $ (3,514)
========= ========= ========= ========== =========
RUSSELL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE 26 WEEKS ENDED JULY 6, 2003
(In thousands) Subsidiary Non-Guarantor
(unaudited) Parent Guarantors Subsidiaries Eliminations Consolidated
--------- ---------- ------------- ------------ ------------
Net sales $ 380,216 $ 68,356 $ 74,975 $ (27,639) $ 495,908
Cost of goods sold 270,058 51,625 61,373 (27,356) 355,700
--------- --------- --------- ---------- ---------
Gross profit 110,158 16,731 13,602 (283) 140,208
Selling, general & administrative
expenses 67,821 28,126 11,930 -- 107,877
Other expense (income) - net 47,196 (46,054) 560 (283) 1,419
--------- --------- --------- ---------- ---------
Operating (loss) income (4,859) 34,659 1,112 -- 30,912
Interest expense (income) - net 28,262 (13,636) (16) -- 14,610
Debt retirement charge -- -- -- -- --
--------- --------- --------- ---------- ---------
(Loss) income before income taxes
and equity in earnings of
consolidated subsidiaries (33,121) 48,295 1,128 -- 16,302
(Benefit) provision for income taxes (14,472) 20,299 368 -- 6,195
Equity in earnings of consolidated
subsidiaries, net of income taxes 28,756 -- -- (28,756) --
--------- --------- --------- ---------- ---------
Net income (loss) $ 10,107 $ 27,996 $ 760 $ (28,756) $ 10,107
========= ========= ========= ========== =========
15
RUSSELL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE 26 WEEKS ENDED JUNE 30, 2002
(In thousands) Subsidiary Non-Guarantor
(unaudited) Parent Guarantors Subsidiaries Eliminations Consolidated
--------- ---------- ------------- ------------ ------------
OPERATING ACTIVITIES
Net cash provided by (used in)
operating activities $ 4,204 $ 1,849 $ 678 $ -- $ 6,731
INVESTING ACTIVITIES
Purchases of property, plant & equipment (6,793) (558) (302) -- (7,653)
Investment in and advances to
subsidiaries (172) 3,760 (3,588) -- --
Proceeds from the sale of property,
plant & equipment 7,053 -- -- -- 7,053
Cash paid for acquisitions, joint
ventures and other -- -- -- -- --
Other 450 -- -- -- 450
--------- --------- --------- --------- ---------
Net cash provided by (used in)
investing activities 538 3,202 (3,890) -- (150)
FINANCING ACTIVITIES
Borrowings (payments) on credit
facility - net 33,993 -- -- -- 33,993
(Payments) borrowings on short-term debt -- -- 424 -- 424
Payments on notes payable, including
prepayment penalties (270,371) -- -- -- (270,371)
Proceeds from issuance of bonds 250,000 -- -- -- 250,000
Debt issuance & amendment costs paid (18,001) -- -- -- (18,001)
Dividends on common stock (2,564) -- -- -- (2,564)
Treasury stock reissued 1,799 -- -- -- 1,799
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing
activities (5,144) -- 424 -- (4,720)
Effect of exchange rate changes on cash -- -- (952) -- (952)
--------- --------- --------- --------- ---------
Net (decrease) increase in cash (402) 5,051 (3,740) -- 909
Cash balance at beginning of period 3,277 (1,583) 4,188 -- 5,882
--------- --------- --------- --------- ---------
Cash balance at end of period $ 2,875 $ 3,468 $ 448 $ -- $ 6,791
========= ========= ========= ========= =========
16
RUSSELL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE 26 WEEKS ENDED JULY 6, 2003
(In thousands) Subsidiary Non-Guarantor
(unaudited) Parent Guarantors Subsidiaries Eliminations Consolidated
--------- ---------- ------------- ------------ ------------
OPERATING ACTIVITIES
Net cash (used in) provided by operating
activities $ (83,922) $ (542) $ (6,566) $ -- $ (91,030)
INVESTING ACTIVITIES
Purchases of property, plant and equipment (9,694) (4,095) (679) -- (14,468)
Investment in and advances to subsidiaries (134) (2,178) 2,312 -- --
Proceeds from sales of property, plant and
equipment 7,330 2,003 30 -- 9,363
Cash paid for acquisitions, joint ventures and other (80,137) -- -- -- (80,137)
Other 378 -- -- -- 378
--------- --------- --------- ------ ---------
Net cash provided by (used in) investing
activities (82,257) (4,270) 1,663 -- (84,864)
FINANCING ACTIVITIES
Borrowings (payments) on credit facility - net 115,747 -- -- -- 115,747
(Payments) borrowings on short-term debt -- -- (1,302) -- (1,302)
Payments on notes payable, including prepayment
penalties -- -- -- -- --
Proceeds from issuance of bonds -- -- -- -- --
Debt issuance & amendment costs paid (468) -- -- -- (468)
Dividends on common stock (2,578) -- -- -- (2,578)
Treasury stock reissued 2,844 -- -- -- 2,844
--------- --------- --------- ------ ---------
Net cash provided by (used in) financing
activities 115,545 -- (1,302) -- 114,243
Effect of exchange rate changes on cash -- -- 977 -- 977
--------- --------- --------- ------ ---------
Net (decrease) increase in cash (50,634) (4,812) (5,228) -- (60,674)
Cash balance at beginning of period 50,955 8,102 9,562 -- 68,619
--------- --------- --------- ------ ---------
Cash balance at end of period $ 321 $ 3,290 $ 4,334 $ -- $ 7,945
========= ========= ========= ====== =========
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 and polyester
are significant components 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 raw material purchases when
necessary to minimize the impact of these market forces.
The following statements of operations are for the thirteen and twenty-six weeks
ended July 6, 2003 and June 30, 2002.
13 Weeks Ended 26 Weeks Ended
----------------------------------------- ----------------------------------------
July 6, June 30, July 6, June 30,
2003 2002 2003 2002
----------------- ----------------- ----------------- -----------------
(In millions)
Net sales $ 267.9 100.0% $ 253.1 100.0% $ 495.9 100.0% $ 468.9 100.0%
Cost of goods sold 190.5 71.1% 187.0 73.9% 355.7 71.7% 343.0 73.1%
------- ----- ------- ----- ------- ----- ------- -----
Gross profit 77.4 28.9% 66.1 26.1% 140.2 28.3% 125.9 26.9%
Selling, general and administrative
expense (SG&A) 58.5 21.8% 50.8 20.1% 107.9 21.8% 99.8 21.3%
Other expense (income)-net 0.7 0.3% (2.8) (1.1)% 1.4 .3% (2.8) (0.6)%
------- ----- ------- ----- ------- ----- ------- -----
Operating income 18.2 6.8% 18.1 7.1% 30.9 6.2% 28.9 6.2%
Interest expense 7.4 2.8% 7.7 3.0% 14.6 2.9% 14.4 3.1%
Debt retirement charge -- --% 20.1 7.9% -- --% 20.1 4.3%
------- ----- ------- ----- ------- ----- ------- -----
Income (loss) before taxes 10.8 4.0% (9.7) (3.8)% 16.3 3.3% (5.6) (1.2)%
Provision (benefit) for income taxes 4.1 1.5% (3.6) (1.4)% 6.2 1.3% (2.1) (0.4)%
------- ----- ------- ----- ------- ----- ------- -----
Net income (loss) $ 6.7 2.5% $ (6.1) (2.4)% $ 10.1 2.0% $ (3.5) (0.8)%
======= ===== ======= ===== ======= ===== ======= =====
Thirteen Weeks Ended July 6, 2003 Compared To June 30, 2002.
NET SALES. Net sales for the 2003-second quarter were $267.9 million, an
increase of $14.8 million, or 5.9%, from last year's second quarter sales of
$253.1 million.
18
The breakdown of net sales follows: (in thousands)
7/6/03 6/30/02
--------- ---------
NET SALES BY DISTRIBUTION CHANNEL
Domestic Athletic (1) $ 79,152 $ 60,596
Domestic Mass Retail 62,235 58,867
Domestic Artwear/Careerwear 99,698 113,186
International 26,840 20,421
--------- ---------
Consolidated total $ 267,925 $ 253,070
========= =========
(1) This distribution channel includes Russell Athletic, Spalding, Bike and
Moving Comfort.
For the 2003-second quarter, net sales in our Domestic segment totaled $241.1
million, an increase of $8.4 million, or 3.6%, from the comparable period last
year. This increase was driven by our acquisitions of Spalding, Bike and Moving
Comfort plus higher retail sales of our RUSSELL ATHLETIC, MOSSY OAK and JERZEES
branded products. These increases were partially offset by lower net sales in
the Artwear/Careerwear channel, reflecting continued industry-wide lower prices,
primarily in the promotional T-shirt market, and reduced corporate purchasing of
higher priced products, such as sports shirts, denims and wovens.
Our Domestic segment is further aligned by distribution channels: Athletic, Mass
Retail and Artwear/Careerwear.
- - Net sales in our Athletic channel increased $18.5 million, or 30.6%, to
$79.2 million. The increase in net sales was driven by both new sales
from our acquisitions of Spalding, Bike and Moving Comfort plus higher
retail sales of our RUSSELL ATHLETIC branded products in the department
stores, sports-specialty stores and college bookstores. Of the total
$18.5 million increase in net sales, approximately 20.5%, or $3.8
million, was attributable to the higher retail sales of our RUSSELL
ATHLETIC branded products and 79.5%, or $14.7 million, of the increase
was attributable to our acquisitions of Spalding, Bike and Moving
Comfort.
Net sales from our acquisitions include athletic equipment, team
uniforms and apparel products. Purchased on May 16, 2003, Spalding is a
leading producer and marketer of basketballs, footballs, soccer balls
and volleyballs under the SPALDING brand name, softballs under the
DUDLEY brand name and Australian Rules football equipment under the
SHERRIN brand name. Bike was acquired in the first quarter of fiscal
2003 and its products include athletic supporters, knee and elbow pads,
braces, protective equipment, team uniforms, and performance apparel.
We purchased Moving Comfort in the third quarter of fiscal 2002 and
their products include performance sports underwear, shorts, pants,
tops, and outerwear that support the slogan, "A FIT WOMAN IS A POWERFUL
WOMAN".
- - Net sales in our Mass Retail channel increased $3.4 million, or 5.7%,
to $62.2 million, while overall dozens shipped were up 8.3% from last
year's second quarter. The increases in sales and dozens shipped were
due to increased sales of our MOSSY OAK and JERZEES branded products.
The increases in sales and dozens shipped were somewhat offset by lower
pricing and, to a lesser extent, by lower sales to Kmart.
- - Net sales in our Artwear/Careerwear channel decreased $13.5 million, or
11.9%, to $99.7 million, while dozens shipped to the distributor market
were up 1.1% from last year's second quarter. The decrease in sales and
the increase in dozens shipped reflect a shift in sales mix toward
lower-priced promotional products such as t-shirts, coupled with
industry-wide lower prices, primarily in the promotional categories,
and reduced corporate purchasing of our higher priced products, such as
sports shirts, denims and wovens.
Our International segment net sales for the 2003-second quarter were $26.8
million, an increase of 31.4%, or $6.4 million, while overall dozens shipped
increased 9.1% from the prior period. The increase in net sales and dozens
shipped for the segment primarily reflects higher sales in Canada and Europe
coupled with the positive effects of foreign currency translation due to the
strengthening of European currencies versus the U.S. dollar.
19
GROSS PROFIT AND GROSS MARGIN. Our gross profit was $77.4 million, or a 28.9%
gross margin, for the 2003-second quarter versus a gross profit of $66.1
million, or a 26.1% gross margin, in the prior year. Gross profit improved in
the 2003-second quarter versus the year-ago quarter. In the 2002-second quarter,
we recognized additional inventory reserves associated with the reconfiguration
of the Russell Athletic distribution center. In addition, the 2003-second
quarter was favorably impacted by the acquisitions of Spalding, Bike and Moving
Comfort along with on-going cost savings initiatives. These positive impacts in
2003 versus 2002 were partially offset by pricing pressures primarily in the
Artwear/Careerwear channel, higher raw material costs for cotton and polyester,
higher insurance costs, higher natural gas prices, and additional costs for new
product features.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A"). Our SG&A expenses were
$58.5 million, or 21.8% of net sales, versus $50.8 million, or 20.1% of net
sales in the comparable period last year. SG&A expenses in the 2003-second
quarter increased $7.7 million over the year-ago quarter principally as a result
of the incremental expenses from our acquisitions (Spalding, Bike and Moving
Comfort) and to a lesser extent, higher marketing expenses. In addition, the
adoption of SFAS No. 148, which amended SFAS No. 123 resulted in stock
compensation expense of approximately $0.6 million during the 2003-second
quarter.
OTHER-NET. Other-net was an expense of ($0.7) million in the 2003-second quarter
versus income of $2.8 million in the 2002-second quarter. The increase in other
income during 2002-second quarter was primarily due to $2.5 million of gains on
the sale of non-core assets.
OPERATING INCOME. Our consolidated operating income in the 2003-second quarter
was $18.2 million, or 6.8% of net sales, versus $18.1 million, or 7.1% of net
sales, in the 2002-second quarter, which included a gain of $2.5 million
associated with the sale of non-core assets. Higher sales volumes and improved
gross margins offset the additional SG&A expenses incurred to support the higher
level of net sales and the incremental expenses associated with our
acquisitions.
In the 2003 second quarter, our Domestic segment operating income was $20.8
million, or 8.6% of the segment's net sales, versus $21.0 million or 9.0% of the
segment's net sales, in the 2002-second quarter, which included a gain of $2.5
million associated with the sale of non-core assets. The decrease of ($0.2)
million in operating income for the segment was primarily attributable to the
SG&A factors described above partially offset by the benefits from higher sales
volumes in our Athletic and Mass Retail channels, our acquisitions, and the
other factors described above in the gross profit section of this quarterly
report.
In the 2003-second quarter, our International segment operating income was a
profit of $0.7 million versus a loss of ($0.6) million in the prior year. The
increase of $1.3 million in operating income for the segment primarily reflects
higher sales in Canada and Europe coupled with the positive effects of foreign
currency translation.
Twenty-six weeks ended July 6, 2003 compared to June 30, 2002.
NET SALES. Net sales for the twenty-six weeks ended July 6, 2003 were $495.9
million, an increase of $27.0 million, or 5.8%, from $468.9 million in the
comparable prior year period.
20
The breakdown of net sales follows: (in thousands)
26 WEEKS ENDED
7/6/03 6/30/02
--------- ---------
NET SALES BY DISTRIBUTION CHANNEL
Domestic Athletic (2) $ 156,696 $ 119,653
Domestic Mass Retail 110,768 101,230
Domestic Artwear/Careerwear 178,356 206,900
International 50,088 41,112
--------- ---------
Consolidated total $ 495,908 $ 468,895
========= =========
(2) This distribution channel includes Russell Athletic, Spalding,
Bike and Moving Comfort.
For the twenty-six weeks ended July 6, 2003, net sales in our Domestic segment
totaled $445.8 million, an increase of 4.2%, or $18.0 million, over the 2002
comparable period. This increase was driven by higher retail sales of RUSSELL
ATHLETIC, JERZEES, MOSSY OAK, and DISCUS branded products and the additional
sales from our acquisitions of Spalding, Bike and Moving Comfort. These
increases were partially offset by lower net sales in the Artwear/Careerwear
channel, reflecting continued industry-wide lower prices, primarily in the
promotional T-shirt market, and reduced corporate purchasing of higher priced
products, such as sports shirts, denims and wovens.
Within our Domestic segment for the twenty-six weeks ended July 6, 2003:
- - Net sales in our Athletic channel increased $37.0 million, or 31.0%, to
$156.7 million. The increase in net sales was driven by both new sales
from our acquisitions of Spalding, Bike and Moving Comfort plus higher
retail sales of our RUSSELL ATHLETIC branded products in the department
stores, sports-specialty stores and college bookstores. Of the total
$37.0 million increase in net sales, approximately 40.0%, or $14.8
million, was attributable to the higher retail sales of our RUSSELL
ATHLETIC branded products and 60.0%, or $22.2 million, of the increase
was attributable to our acquisitions of Spalding, Bike and Moving
Comfort.
- - Net sales in our Mass Retail channel increased $9.5 million, or 9.4%,
to $110.8 million, while overall dozens shipped were up 6.6% from the
comparable year-ago period. The increases in sales and dozens shipped
were due to a better product mix and increased sales of our JERZEES and
MOSSY OAK branded products. The increases in sales and dozens shipped
were somewhat offset by lower pricing and, to a lesser extent, by lower
sales to Kmart.
- - Net sales in our Artwear/Careerwear channel decreased $28.5 million, or
13.8%, to $178.4 million, while dozens shipped to the distributor
market were up 1.6% from the comparable year-ago period. The decrease
in sales and the increase in dozens shipped reflect a shift in sales
mix toward lower-priced promotional products such as t-shirts, coupled
with industry-wide lower prices, primarily in the promotional
categories, and reduced corporate purchasing of our higher priced
products, such as sports shirts, denims and wovens.
In our International segment, net sales for the twenty-six weeks ended July 6,
2003 were $50.1 million, an increase of 21.8%, or $9.0 million, while overall
dozens shipped increased 3.6% from the comparable year-ago period. The increase
in net sales and dozens shipped for the segment primarily reflects higher sales
in Canada and Europe coupled with the positive effects of foreign currency
translation.
GROSS PROFIT AND GROSS MARGIN. Our gross profit was $140.2 million, or a 28.3%
gross margin, for the twenty-six weeks ended July 6, 2003 versus a gross profit
of $125.9 million, or a 26.9% gross margin, in the comparable year-ago period.
During the twenty-six weeks ended July 6, 2003, gross profit improved over the
comparable year-ago period. In the twenty-six weeks ended June 30, 2002, we
recognized additional inventory reserves associated with the reconfiguration of
our Russell Athletic distribution center. In addition, the 2003-second quarter
was favorably impacted by the acquisitions of Spalding, Bike and Moving Comfort
along with on-going cost savings initiatives. However, these positive impacts
were partially offset by pricing
21
pressures in the Artwear/Careerwear channel, higher raw material costs for
cotton and polyester, higher insurance costs, higher natural gas prices, and
additional costs for new product features.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A"). Our SG&A expenses were
$107.9 million, or 21.8% of net sales, versus $99.8 million, or 21.3% of net
sales in the comparable period last year. SG&A expenses in the twenty-six weeks
ended July 6, 2003 increased $8.1 million over the year-ago period principally
as a result of the incremental expenses from our acquisitions (Spalding, Bike
and Moving Comfort) and to a lesser extent, higher marketing expenses. In
addition, the adoption of SFAS No. 148, which amended SFAS No. 123, resulted in
stock compensation expense of approximately $0.8 million. These increases were
partially offset by lower general and administrative costs mainly in our
Artwear/Careerwear business.
OTHER-NET. Other-net was an expense of ($1.4) million in the twenty-six weeks
ended July 6, 2003 versus income of $2.8 million in the comparable period last
year. The increase in other income during the twenty-six week period of fiscal
2002 was primarily due to $2.5 million of gains on the sale of non-core assets.
OPERATING INCOME. Our consolidated operating income in the twenty-six weeks
ended July 6, 2003 was $30.9 million, or 6.2% of net sales, versus $28.9
million, or 6.2% of net sales, in the twenty-six week period of fiscal 2002,
which included a gain of $2.5 million associated with the sale of non-core
assets. The increase of $2.0 million reflects the benefits of our higher sales
volumes and improved gross margins which more than offset the higher SG&A
expenses incurred to support the higher level of net sales and the incremental
expenses associated with our acquisitions.
In the twenty-six weeks ended July 6, 2003, our Domestic segment operating
income was $36.3 million, or 8.1% of the segment's net sales, versus $35.2
million or 8.2% of the segment's net sales, in the twenty-six week period of
fiscal 2002, which included a gain of $2.5 million associated with the sale of
non-core assets. The increase of $1.1 million in operating income for the
segment was primarily attributable to the benefits from higher sales volumes in
our Athletic and Mass Retail channels, our acquisitions, and the other factors
described above in the gross profit and SG&A sections of this quarterly report.
In the twenty-six weeks ended July 6, 2003, our International segment operating
income was a profit of $0.3 million versus a loss of $0.5 million in the
twenty-six week period of fiscal 2002. The increase of $0.8 million in operating
income for the segment primarily reflects higher sales in Canada and Europe
coupled with the positive effects of foreign currency translation.
LIQUIDITY AND CAPITAL RESOURCES
Our total debt to capitalization ratio improved 1.3 percentage points, declining
to 44.9% at July 6, 2003, versus 46.2% at June 30, 2002. The improvement was
primarily attributable to our strategic initiative to reduce our investment in
working capital. Our debt is only $6.3 million higher at July 6, 2003 versus
June 30, 2002, despite an investment of $80.1 million in acquisitions in 2003.
Excluding inventories from acquisitions, inventories were $379.0 million at July
6, 2003, a decrease of 2.0%, or $7.7 million from June 30, 2002.
We believe that adjusted EBITDA, which we define as net income before interest,
income taxes, depreciation, amortization, and debt retirement charge is a useful
measure of a company's ability to service its debt. Adjusted EBITDA for the
twenty-six weeks ended July 6, 2003 was $53.3 million versus $52.2 million in
the comparable period last year. Adjusted EBITDA is a non-GAAP financial measure
that does not represent net income, as defined by accounting principles
generally accepted in the United States. Adjusted EBITDA should not be
considered as a substitute for net income, or as an indicator of operating
performance or whether cash flows will be sufficient to fund cash needs.
22
Below is a reconciliation of Adjusted EBITDA to net income:
26 Weeks Ended
(in thousands)
----------------------------
7/6/03 6/30/02
--------- --------
Adjusted EBITDA $ 53,286 $ 52,236
Depreciation and amortization (22,374) (23,306)
Taxes (6,195) 2,081
Interest (14,610) (14,428)
Debt retirement charge -- (20,097)
--------- --------
Net income (loss) $ 10,107 $ (3,514)
========= ========
Cash From Operating Activities
Our operations used $91.0 million of cash during the first half of 2003, versus
providing $6.7 million during the same period in 2002. Due to the seasonality of
our business, we build inventory levels in the first half of the year. Our
inventory build was greater in the first half of 2003 than in 2002 primarily due
to higher inventory levels in December 2001 versus December 2002. Excluding
inventories from acquisitions, from June 30, 2002 to July 6, 2003, inventories
decreased 2.0%, or $7.7 million, to $379.0 million.
The increase in accounts receivable from January 4, 2003 to July 6, 2003, was
greater than the increase in accounts receivable from December 29, 2001 to June
30, 2002, as a result of incremental sales from our acquisitions; slower
customer pay due to the economic environment; and our higher accounts receivable
levels in December 2001.
The decrease in accounts payable and accrued expenses was greater in the first
half of 2003 versus 2002 as a result of the payout of year-end employee
performance and customer incentive accruals that were substantially higher at
December 2002 than at December 2001.
Our business is seasonal and our cash flows from operations are ordinarily
higher in the second half of the year.
Cash From Investing Activities
Net cash used in investing activities was $84.9 million in the first half of
2003 versus $0.2 million in the prior year period. Our investing activities in
the 2003 first half consisted primarily of capital expenditures of $14.5 million
and the acquisitions of Spalding and Bike for $80.1 million, less $9.4 million
of proceeds from the sale of non-core assets. In the first half of 2002, our
investing activities primarily consisted of capital expenditures of $7.7
million, less $7.1 million of proceeds from the sale of property, plant and
equipment.
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 $2.6 million in dividends ($.08 per share) during the first half of
2003.
On April 18, 2002, we completed our debt refinancing. Refer to Note 2 of the
consolidated financial statements in our Annual Report on Form 10-K for the year
ended January 4, 2003 for more information.
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On July 6, 2003, our debt facilities and outstanding debt obligations included:
- - $320 million in Senior Secured Credit Facilities (the "Facilities").
The Facilities include a $300 million Senior Secured Revolving Credit
Facility (the "Revolver") due April 2007, of which $115.7 million was
outstanding, and $20 million outstanding under our Senior Secured Term
Loan (the "Term Loan") due ratably through April 2007; and
- - $250 million in 9.25% Senior Unsecured Notes (the "Senior Notes") due
2010.
On March 11, 2003, we amended the Facilities to, among other things, provide for
an additional lower pricing tier. The amendment also: (1) lessens some of the
restrictions on our ability to make acquisitions, (2) permits us to make
additional investments and guarantees, and (3) allows us to repurchase a portion
of our Senior Notes and capital stock, subject to annual limitations.
Under the Facilities, variable interest on the Revolver from January 5, 2003 to
March 10, 2003 was either LIBOR plus 1.75% or Base Rate plus 0.25% and on the
Term Loan was either LIBOR plus 2.25% or Base Rate plus 0.75%, with an annual
commitment fee on the unused portion of the Facilities of 0.375%. On March 11,
2003 through the end of the first quarter, variable interest on the Revolver was
either LIBOR plus 1.5% or Base Rate and on the Term Loan was either LIBOR plus
2.0% or Base Rate plus 0.5%.
For the second quarter of 2003, variable interest on the Revolver was either
LIBOR plus 1.75% or Base Rate plus 0.25% and on the Term Loan was either LIBOR
plus 2.25% or Base Rate plus 0.75% with an annual commitment fee on the unused
portion of the Facilities of 0.375%. These terms will continue to be in effect
through the third quarter of 2003.
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 July 6, 2003, we had $105.7 million of availability under our Revolver. We
also had $7.9 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 Facilities.
Contingencies
For information concerning our ongoing litigation, see Note 6 to the Condensed
Consolidated Financial Statements.
Commitments
For information about our contractual cash obligations and other commercial
commitments, refer to Management's Discussion & Analysis of Financial Condition
and Results of Operations in our 2002 Annual Report on Form 10-K.
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 and forward currency exchange contracts.
Refer to Notes 1 and 4 of the consolidated financial statements in our Annual
Report on Form 10-K for
24
the year ended January 4, 2003, 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 or
cash flows, as applicable, of our significant financial instruments to
hypothetical changes in interest rates, exchange rates and commodity prices as
if these changes had occurred at July 6, 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 these
changes in interest rates, exchange rates and commodity prices.
INTEREST RATE AND DEBT SENSITIVITY ANALYSIS. At July 6, 2003, our outstanding
debt totaled $392.0 million, which consisted of fixed-rate debt of $250.0
million and variable-rate debt of $142.0 million. Based on our average
outstanding borrowings under our variable-rate debt for the twenty-six weeks
ended July 6, 2003, a one-percentage point increase in interest rates would have
negatively impacted our first half pre-tax earnings and cash flows by
approximately $0.3 million. A one-percentage point increase in market interest
rates would decrease the fair market value of our fixed-rate debt at July 6,
2003 by approximately $6.3 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. At July 6, 2003, we had a $3.1 million liability
associated with these foreign currency forward contracts. A ten percent adverse
change in the foreign currency spot rates would increase our foreign currency
forward contract liability held at July 6, 2003 by $5.4 million. Changes in the
fair value of our foreign currency forward contract liability 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. In
addition, the price of polyester is subject to fluctuations, due to the economic
climate or other unforeseen circumstances. We are purchasing yarn primarily from
Frontier Yarns, LLC, Frontier Spinning Mills, Inc. and other third parties, and
our yarn pricing will continue to be impacted by the price of cotton and
polyester. We do not have any outstanding commodity futures contracts at July 6,
2003.
Forward Looking Information
With the exception of historical information, this Quarterly Report on Form
10-Q, including management's discussion and analysis, contains certain
forward-looking statements within the meaning of the federal securities laws.
This includes statements concerning plans, objectives, projections and
expectations relating to our operations or economic performance. Wherever
possible, we have identified these forward-looking statements by terms and
phrases such as "anticipate", "believe", "intend", "estimate", "expect",
"continue", "could", "may", "plan", "project", "predict", "will" and similar
expressions. In addition, the Company and its representatives may from time to
time make oral or other written statements that are also forward-looking
statements. All such forward-looking statements are based on assumptions that we
believe are reasonable when made.
Such forward-looking statements are subject to risks and uncertainties that
could cause our actual results and performance to differ materially from those
expressed in, or implied by, such forward-looking statements,
25
including, but not limited to, risks related to: (a) the seasonal nature of our
business; (b) the Moving Comfort, Bike Athletic and Spalding acquisitions and
our overall acquisition strategy; (c) our ability to realize the savings and
efficiencies contemplated by our multi-year restructuring and reorganization
plan; (d) dependence on third parties for production of yarn and manufacture of
our products; (e) the effects of lawsuits; (f) the accounting for stock-based
compensation; (g) significant competitive activity, including, but not limited
to, pricing and the similarity of some of our products with those of our
competitors; (h) introduction of new products and our overall product mix; (i)
our efficient utilization of production facilities; (j) raw material price
volatility; (k) the impact of economic conditions in the markets where we
operate, such as changes in interest rates, currency exchange rates, inflation
rates, and other external factors over which we have no control; (l) the cost of
insuring our business; (m) the collectibility of receivables from our customers;
(n) the ability to effect our cost savings initiatives; (o) our management of
inventory levels and working capital; (p) our debt structure and cash
management; (q) the success of our marketing and advertising programs; (r) our
investments in capital expenditures; (s) our reliance on third party licenses
for a portion of our sales; (t) the team uniform business; and (u) other risk
factors listed from time to time in our SEC reports and announcements . The
risks listed above are not exhaustive and other sections of this Quarterly
Report on Form 10-Q 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks relating to fluctuations in interest rates,
currency exchange rates and commodity prices. Please see our update under the
"Liquidity and Capital Resources" section of Item 2 - Management's Discussion
and Analysis of Financial Condition and Results of Operations.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. Our Chief Executive
Officer and Chief Financial Officer have evaluated the effectiveness of our
disclosure controls and procedures (as such term is defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) as of the end of the fiscal period covered by this quarterly
report. Based on such evaluation, such officers have concluded that our
disclosure controls and procedures are effective in alerting them on a timely
basis to material information relating to us (including our consolidated
subsidiaries) required to be included in our reports filed or submitted under
the Exchange Act.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Contingencies
For information concerning our ongoing litigation, see Note 6 to the Condensed
Consolidated Financial Statements.
ITEM 5. OTHER INFORMATION
As previously disclosed, we hold licenses to sell Major League Baseball ("MLB")
products using certain MLB logos, trademarks, and copyrights, and are one of two
official uniform suppliers to MLB. Earlier this year our MLB licenses were
renewed through December 31, 2004. Subsequently, MLB requested bids on an
exclusive five-year agreement for the 2005-2009 calendar years from us and
several of our competitors. We submitted a bid of more than $125 million as our
minimum guarantees over the five-year period, which
26
included substantial increases in our minimum royalty payments, significant
increases in our marketing and media commitments promoting MLB and the 30 MLB
clubs, and the supply of free product to the 30 MLB clubs.
On August 4, 2003, MLB informed us that they had awarded the licenses for
2005-2009 to another uniform supplier on an exclusive basis. We expect the loss
of our current MLB licenses to have minimal impact on our future earnings since
it represents less than 2.0% of our net sales. Although we are disappointed at
not being awarded the 2005-2009 licenses, we will continue providing MLB
licensed products and uniforms through December 31, 2004.
The MLB licenses are unrelated to our status as the official uniform supplier to
the U.S. Olympic baseball team and Little League Baseball and as an official
uniform supplier to Minor League Baseball. We have every expectation of
continuing our position as a leading supplier of uniforms to organized sports
teams across a multitude of different sports, including baseball.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits (numbered in accordance with Item 601 of Regulation S-K)
Exhibit
Numbers Description
------- -----------
10.1 Amendment Dated May 21, 2003 to Amended and Restated Employment
Agreement Dated April 1, 2001, by and between the Company and John F.
Ward
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32 Certifications of Chief Executive Officer and Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
On July 31, 2003, we filed a Form 8-K relating to the issuance of our
press release announcing our results of operations for the fiscal 2003
first quarter.
On May 16, 2003, we filed a Form 8-K relating to the issuance of a
press release announcing the completion of our acquisition of the
brands, inventory, contracts and related assets of the sporting goods
business of Spalding Sports Worldwide, Inc.
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RUSSELL CORPORATION
(Registrant)
Date: August 19, 2003 /s/ Robert D. Martin
--------------------------------------
Robert D. Martin
Senior Vice President and
Chief Financial Officer
Date: August 19, 2003 /s/ Larry E. Workman
--------------------------------------
Larry E. Workman, Controller
(Principal Accounting Officer)
28