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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended July 5, 1998 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.)
755 Lee Street, Alexander City, Alabama 35011
(Address of principal executive offices) (Zip Code)
(256) 500-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
The number of shares outstanding of each of the issuer's classes of common
stock.
Class Outstanding at August 18, 1998
Common Stock, Par Value $.01 Per Share 36,217,558 shares
(Excludes Treasury)
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RUSSELL CORPORATION
INDEX
Page No.
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Part I. Financial Information:
Consolidated Condensed Balance Sheets
July 5, 1998 and January 3, 1998 2
Consolidated Condensed Statements of Income --
Thirteen Weeks Ended July 5, 1998 and July 6, 1997 3
Twenty-six Weeks Ended July 5, 1998 and July 6, 1997 4
Consolidated Condensed Statements of Cash Flows --
Twenty-six Weeks Ended July 5, 1998 and July 6, 1997 5
Notes to Consolidated Condensed Financial Statements 6
Management's Discussion and Analysis of Results of Operations
and Financial Condition 7
Part II. Other Information 10
Exhibit 10.1 Retirement agreement between John C. Adams and the
Company dated as of April 1, 1998 11
Exhibit 11 - Computation of Earnings Per Share 17
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PART I - FINANCIAL INFORMATION
RUSSELL CORPORATION
Consolidated Condensed Balance Sheets
(Dollars in Thousands)
July 5 January 3
1998 1998
----------- -----------
(Unaudited) (Audited)
ASSETS
------
Current Assets:
Cash $ 5,663 $ 8,609
Accounts receivable, net 222,987 242,988
Inventories:
Finished goods 357,790 286,254
In process 56,865 52,498
Raw materials and supplies 60,300 65,476
----------- -----------
474,955 404,228
LIFO reserve (32,837) (34,305)
----------- -----------
442,118 369,923
Prepaid expenses and other current assets 31,571 25,523
----------- -----------
Total current assets 702,339 647,043
Property, Plant & Equipment, net 532,139 526,113
Other Assets 71,704 74,806
----------- -----------
Total assets $ 1,306,182 $ 1,247,962
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Short-term debt $ 103,210 $ 39,256
Accounts payable and accrued expenses 78,851 84,878
Current maturities of long-term debt 26,787 21,478
----------- -----------
Total current liabilities 208,848 145,612
Long-term debt, less current maturities 355,257 360,607
Deferred Liabilities 84,245 76,141
Shareholders' Equity:
Common Stock, at par value 414 414
Paid-in capital 48,646 48,654
Retained earnings 759,645 761,428
Accumulated other comprehensive income (4,072) (4,724)
----------- -----------
804,633 805,772
Treasury Stock, at cost (146,801) (140,170)
----------- -----------
Total shareholders' equity 657,832 665,602
----------- -----------
Total liabilities & shareholders' equity $ 1,306,182 $ 1,247,962
=========== ===========
See accompanying notes to consolidated condensed financial statements.
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RUSSELL CORPORATION
Consolidated Condensed Statements of Income
(Dollars in Thousands Except Per Share Amounts)
(Unaudited)
13 Weeks Ended
---------------------------------
July 5 July 6
1998 1997
------------ ------------
Net sales $ 271,824 $ 270,273
Costs and expenses:
Cost of goods sold 198,588 192,206
Selling, general and
administrative expenses 55,415 58,927
Interest expense 7,352 7,212
Other - net (income) (464) (1,291)
------------ ------------
260,891 257,054
------------ ------------
Income before income taxes 10,933 13,219
Provision for income taxes 4,373 5,106
------------ ------------
Net income $ 6,560 $ 8,113
============ ============
Average Shares Outstanding
Basic 36,279,681 36,776,846
Diluted 36,333,324 36,964,589
Net Income per common share
Basic $ 0.18 $ 0.22
Diluted 0.18 0.22
Cash dividends per common share $ 0.14 $ 0.13
See accompanying notes to consolidated condensed financial statements.
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RUSSELL CORPORATION
Consolidated Condensed Statements of Income
(Dollars in Thousands Except Per Share Amounts)
(Unaudited)
26 Weeks Ended
---------------------------------
July 5 July 6
1998 1997
------------ ------------
Net sales $ 528,053 $ 528,432
Costs and expenses:
Cost of goods sold 382,387 368,354
Selling, general and
administrative expenses 117,804 116,254
Interest expense 14,001 13,084
Other - net (income) (369) (810)
------------ ------------
513,823 496,882
------------ ------------
Income before income taxes 14,230 31,550
Provision for income taxes 5,821 12,134
------------ ------------
Net income $ 8,409 $ 19,416
============ ============
Average Shares Outstanding
Basic 36,341,613 37,232,656
Diluted 36,383,469 37,477,032
Net Income per common share
Basic $ 0.23 $ 0.52
Diluted 0.23 0.52
Cash dividends per common share $ 0.28 $ 0.26
See accompanying notes to consolidated condensed financial statements.
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RUSSELL CORPORATION
Consolidated Statements of Cash Flows
(Dollars in Thousands)
(Unaudited)
26 Weeks Ended
-------------------------
July 5 July 6
1998 1997
--------- ---------
Cash Flows from Operating Activities:
Net Income $ 8,409 $ 19,416
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization 37,135 38,100
Deferred income taxes (4,385) 1,918
Loss (gain) on sale of equipment 10 (237)
Changes in assets and liabilities:
Accounts receivable 19,691 (20,227)
Inventories (72,485) (75,341)
Prepaid expenses and other current assets (8,715) (12,104)
Other assets 1,331 396
Accounts payable and accrued expenses (5,242) 974
Income taxes payable 6,577 (16,214)
Pension and other deferred liabilities 8,712 3,072
--------- ---------
Net cash used in operating activities (8,962) (60,247)
Cash Flows from Investing Activities:
Purchases of property, plant & equipment (41,355) (29,170)
Proceeds from the sale of property, plant & equipment 156 1,288
--------- ---------
Net cash used in investing activities (41,199) (27,882)
Cash Flows from Financing Activities:
Short-term borrowings 63,851 154,866
Payments on long-term debt (41) (9,339)
Dividends on Common Stock (10,192) (9,663)
Cost of Common Stock for treasury (6,673) (49,576)
Distribution of treasury shares 34 3,918
--------- ---------
Net cash provided by financing activities 46,979 90,206
Effect of exchange rate changes on cash 236 120
--------- ---------
Net (decrease) increase in cash (2,946) 2,197
Cash balance at beginning of period 8,609 7,355
--------- ---------
Cash balance at end of period $ 5,663 $ 9,552
========= =========
See accompanying notes to consolidated condensed financial statements.
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RUSSELL CORPORATION
Notes to Consolidated Condensed Financial Statements
1. In the opinion of Management, the accompanying audited and unaudited
consolidated condensed financial statements contain all adjustments
(consisting of only normal recurring accruals) necessary to present
fairly the financial position as of July 5, 1998, and January 3, 1998,
and the results of operations and cash flows for the thirteen and
twenty-six week periods ended July 5, 1998, and July 6, 1997.
The accounting policies followed by the Company are set forth in Note
One to the Company's consolidated financial statements in Form 10-K for
the year ended January 3, 1998.
2. The results of operations for the thirteen and twenty-six weeks ended
July 5, 1998, are not necessarily indicative of the results to be
expected for the full year. The financial statements for the six months
ended July 5, 1998 are inclusive of a non-recurring charge, recorded in
the first quarter, of approximately $8 million related to the
retirement, and subsequent replacement of, the Chairman, President and
Chief Executive Officer of the Company.
3. In February, 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per
Share," effective for periods ending after December 15, 1997. The
statement is intended to simplify the earnings per share calculation by
excluding common stock equivalents from the calculation. The Company
adopted SFAS 128 in 1997, consequently, prior periods presented have
been restated.
4. Subsequent to July 5, 1998, the company entered into an agreement to
terminate one of its license agreements. The effect of this transaction
will be to record a charge to pre-tax income of approximately $3.5
million in the third quarter of 1998.
5. Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" establishes new rules for reporting comprehensive
income and its components. SFAS 130 is effective for periods beginning
after December 15, 1997, and was adopted by the Company for the fiscal
year beginning January 4, 1998. There was no impact on net income or
shareholders' equity from the adoption of the statement.
For the periods ending July 5, 1998, and July 6, 1997, accumulated
other comprehensive income as shown in the consolidated balance sheets
was comprised of foreign currency translation adjustments which prior
to adoption was reported separately in shareholders' equity. The
components of comprehensive income, net of tax, for these periods were
as follows:
13 Weeks Ended 26 Weeks Ended
------------------------- -------------------------
7/5/98 7/6/97 7/5/98 7/6/97
------ ------- ------ -------
(In thousands)
Net income $6,560 $ 8,113 $8,409 $19,416
Translation adjustment (41) 2,482 652 83
------ ------- ------ -------
Comprehensive income $6,517 $10,595 $9,061 $19,499
====== ======= ====== =======
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RUSSELL CORPORATION
Management's Discussion and Analysis of
Results of Operations and Financial Condition
RESULTS OF OPERATIONS
The following is Management's Discussion and Analysis of certain
significant factors which have affected the Company's earnings during the
periods included in the accompanying consolidated condensed statements of
income.
A summary of the period to period changes in the principal items
included in the consolidated statements of income is shown below:
Comparison of
----------------------------------------------------------------------------------
13 Weeks 26 Weeks 13 Weeks
Ended 7/5/98 Ended 7/5/98 Ended 7/5/98
and 7/6/97 and 7/6/97 and 4/5/98
----------------------- ---------------------------- -----------------------
Increase (Decrease)
(Dollars in Thousands)
Net sales $ 1,551 0.6% $ (379) (0.1)% $ 15,595 6.1%
Cost of goods sold 6,382 3.3 14,033 3.8 14,789 8.0
Selling, general and
administrative expenses (3,512) (6.0) 1,550 1.3 (6,974) (11.2)
Interest expense 140 1.9 917 7.0 703 10.6
Other - net (827) (64.1) (441) (54.4) 559 n/a
Income before income taxes (2,286) (17.3) (17,320) (54.9) 7,636 231.6
Provision for income taxes (733) (14.4) (6,313) (52.0) 2,925 202.0
Net Income (1,553) (19.1) (11,007) (56.7) 4,711 254.8
Sales were up slightly, less than 1%, for the second quarter of 1998
versus the same period in 1997. For the first half of the year, sales were
essentially flat, down 0.1%.
Sales levels benefited from increases at Cross Creek (placket shirts)
and DeSoto Mills (socks). These increases were generally offset by sales
declines in Jerzees, where slightly improved industry conditions allowed the
company to eliminate pull-forward programs to ship planned fall fleece orders in
the second quarter. The demise of these early shipments was the primary cause of
the decline of Jerzees sales in the second quarter.
Margins continued to remain under pressure (26.9% vs 28.9% for the
quarter; 27.6% vs 30.3% for the half) due to the current pricing environment and
the previously mentioned lower fleece shipments in the quarter.
Selling, general and administrative expenses were down for the quarter,
both in dollars and as a percent of sales (20.4% vs 21.8%). Expenses for the six
months are inclusive of an approximately $8 million non-recurring charge related
to the retirement, and subsequent replacement of, the Chairman, President and
Chief Executive Officer of the Company.
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Net income for the quarter was down 19.1% and represented 2.4% of
sales. On a year-to-date basis, net income was down 56.7% to 1.6% of sales for
the half.
Financial Condition
Required cash for inventories, purchases of property, plant and
equipment, dividends, prepaid expenses, and treasury stock was provided from net
income plus non-cash charges, accounts receivable and short-term borrowings. The
Company maintained $286 million of informal lines of credit at the end of the
quarter.
Subsequent to July 5, 1998, the Company entered into an agreement to
terminate its obligations under a licensing contract to which it was a party.
The result of this termination will cause the Company to record a pre-tax charge
of approximately $3.5 million in the third quarter of 1998. The Company remains
a party to other licensing contracts that include minimum royalty payment
agreements. The Company believes that it will be able to achieve the sales
necessary to cover the minimum royalty requirements under these contracts.
In a press release dated July 22, 1998, the Company announced its
intent to restructure and record related charges of between $100 -$125 million
after tax. This restructuring is intended to increase shareholder returns
through improved asset utilization, cost reductions and increased marketing
efforts. The Company expects to record these charges over a three year period
beginning with the third quarter of 1998.
The Company believes, that as a result of recording the charges
associated with its restructuring, it may be in non-compliance with certain
covenants under certain of its lending agreements. The Company is engaging in
discussions with certain of its lenders and, at this time, believes that the
resolution will not have a material adverse affect on its financial condition.
The Company has conducted an extensive review of its computer systems,
manufacturing equipment and electronic links with third parties to determine the
extent of modifications required to prevent system date problems associated with
the year 2000. While the company is dependent on certain suppliers and customers
to modify their computer systems, the necessary internal modifications are well
underway and it is anticipated that all of them will be complete in ample time
to avoid any problems. The cost of these modifications is considered to be
immaterial to the financial statements.
In June, 1997, the Financial Accounting Standards Board issued FAS 131,
Disclosures about Segments of an Enterprise and Related Information. FAS 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. FAS 131 is
effective for annual financial statements for fiscal years beginning after
December 15, 1997. Management has not completed its review of FAS 131.
In June, 1998, the FASB issued Statement No. 133, Accounting for
Derivative Instruments and for Hedging Activities. Statement No. 133 provides a
comprehensive standard for the recognition and measurement of derivatives and
hedging activities. Statement No. 133 requires all derivatives to be recorded on
the balance sheet at fair value and establishes "special accounting" for the
different types of hedges. Though the accounting treatment and criteria for each
type of hedge is unique, they all result in recognizing the offsetting changes
in value or cash flows of both the hedge and the hedged item in earnings in the
same period. Changes in the fair value of derivatives that do not meet the hedge
criteria are included in earnings in the period of the change. The Company plans
to adopt Statement No. 133 in 2000, but has not yet completed its analysis of
the impact, if any, that Statement No. 133 may have on its financial statements.
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The Company utilizes two interest rate swap agreements in the
management of its interest rate exposure. These agreements effectively convert a
portion of the Company's interest rate exposure from a fixed to a floating rate
basis and from a floating rate to a fixed rate basis. The effect of these
agreements was to effectively lower interest expense on the Company's long-term
debt in the first half.
The Company periodically enters into futures contracts as hedges for
its purchases of cotton inventories. Gains and losses on these hedges are
deferred and reflected in cost of sales as such inventory is sold. Purchasing
futures contracts not only limits the risk of price increases, but also limits
the Company's ability to benefit from future price decreases. At July 5, 1998,
the Company had outstanding futures contracts that, when combined with other
contracts and inventory, exceeded the Company's anticipated remaining 1998
cotton requirements.
Forward Looking Information
This quarterly report on Form 10-Q contains certain statements which
describe the Company's beliefs concerning future business conditions and the
outlook for the Company based upon currently available information. Wherever
possible, the Company has identified these "forward looking" statements (as
defined in Section 21E of the Securities and Exchange Act of 1934) by words such
as "anticipates," "believes," "estimates," "expects," and similar phrases. These
forward looking statements are based upon assumptions the Company believes are
reasonable; however, such statements are subject to risks and uncertainties
which could cause the Company's actual results, performance and achievements to
differ materially from those expressed in, or implied by, these statements. Some
forward looking statements in this report concern anticipated sales levels, cost
estimates and resulting earnings that are not necessarily indicative of
subsequent periods due to the mix of future orders, at once orders and product
mix changes, which may vary significantly from quarter to quarter. The company
assumes no obligation to update publicly any forward looking statements whether
as a result of new information, future events or otherwise.
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PART II - OTHER INFORMATION
Item 5. Other Information
Pursuant to Rule 14a-4 of the Proxy Rules under the Securities Exchange
Act of 1934, if a stockholder fails to notify the Company on or before February
2, 1999 of a proposal which such stockholder intends to present at the Company's
April, 1999 Annual Meeting by a means other than inclusion of such proposal in
the Company's proxy materials for that meeting, then if the proposal is
presented at such annual meeting, the holders of the Board of Director's proxies
at such meeting may use their discretionary voting authority with respect to
such proposal, regardless of whether the proposal was discussed in the Company's
proxy statement for such meeting.
On August 11, 1998, the Board of Directors elected Eric N. Hoyle to the
position of Executive Vice President and Chief Financial Officer. Mr. Hoyle was
also elected to serve on the Board of Directors, filling the vacancy created by
the resignation of James D. Nabors.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits -
10.1 Retirement agreement between John C. Adams and the Company
dated as of April 1, 1998.
11 Computation of Earnings Per Share
27 Financial Data Schedule (For SEC use only)
b) Reports on Form 8-K - July 22, 1998 - Announcement of Plan to
Restructure.
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 18, 1998 /s/ Eric N. Hoyle
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Eric N. Hoyle, Executive Vice President
and Chief Financial Officer
(For the Registrant and as
Principal Financial Officer)
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