1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended October 3, 1999 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 November 10, 1999
Common Stock, Par Value $.01 Per Share 33,058,107 shares
(Excludes Treasury)
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RUSSELL CORPORATION
INDEX
Page No.
--------
Part I. Financial Information:
Item 1. Financial Statements
Consolidated Condensed Balance Sheets --
October 3, 1999 and January 2, 1999 2
Consolidated Condensed Statements of Operations --
Thirteen Weeks Ended October 3, 1999 and October 4, 1998 3
Thirty-nine Weeks Ended October 3, 1999 and October 4, 1998 4
Consolidated Condensed Statements of Cash Flows --
Thirty-nine Weeks Ended October 3, 1999 and October 4, 1998 5
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition 11
Item 3. Quantitative and Qualitative Disclosure of Market Risk 16
Part II. Other Information
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 18
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PART I - FINANCIAL INFORMATION
RUSSELL CORPORATION
Consolidated Condensed Balance Sheets
(Dollars in Thousands Except Shares and Per Share Amounts)
October 3 January 2
1999 1999
----------- -----------
(Unaudited) (Audited)
ASSETS
Current assets:
Cash $ 10,753 $ 13,852
Accounts receivable, net 275,539 179,307
Inventories - Note 2 384,631 371,579
Prepaid expenses and other current assets 26,763 19,976
----------- -----------
Total current assets 697,686 584,714
Property, plant & equipment 1,228,366 1,224,242
Less accumulated depreciation (749,512) (704,255)
----------- -----------
478,854 519,987
Other assets 60,926 48,863
----------- -----------
Total assets $ 1,237,466 $ 1,153,564
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 176,101 $ 12,908
Accounts payable and accrued expenses 104,078 101,784
Federal and state income taxes 3,094 1,989
Current maturities of long-term debt 21,414 32,214
----------- -----------
Total current liabilities 304,687 148,895
Long-term debt, less current maturities 306,979 323,043
Deferred liabilities 67,973 66,855
Commitments and contingencies -- --
Shareholders' equity:
Common Stock, par value $.01 per share; authorized
150,000,000 shares, issued 41,419,958 shares 414 414
Paid-in capital 48,294 48,294
Retained earnings 723,386 730,723
Treasury stock, at cost (8,361,851 shares at
10/3/99 and 5,900,564 shares at 1/2/99) (210,036) (160,093)
Accumulated other comprehensive loss (4,231) (4,567)
----------- -----------
Total shareholders' equity 557,827 614,771
----------- -----------
Total liabilities & shareholders' equity $ 1,237,466 $ 1,153,564
=========== ===========
See accompanying notes to consolidated condensed financial statements.
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RUSSELL CORPORATION
Consolidated Condensed Statements of Operations
(Dollars in Thousands Except Shares and Per Share Amounts)
(Unaudited)
13 Weeks Ended
-----------------------------
October 3 October 4
1999 1998
----------- -----------
Net sales $ 344,915 $ 377,208
Costs and expenses:
Cost of goods sold 241,486 280,857
Selling, general and administrative expenses 58,674 76,743
Other - net 5,042 33,765
Interest expense 7,463 7,589
----------- -----------
312,665 398,954
----------- -----------
Income (loss) before income taxes 32,250 (21,746)
Provision (benefit) for income taxes 12,313 (7,590)
----------- -----------
Net income (loss) $ 19,937 $ (14,156)
=========== ===========
Average shares outstanding:
Basic 33,301,647 36,206,064
Diluted 33,301,647 36,206,064
Net income (loss) per common share:
Basic $ 0.60 $ (0.39)
Diluted $ 0.60 $ (0.39)
Cash dividends per common share $ 0.14 $ 0.14
See accompanying notes to consolidated condensed financial statements.
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RUSSELL CORPORATION
Consolidated Condensed Statements of Operations
(Dollars in Thousands Except Shares and Per Share Amounts)
(Unaudited)
39 Weeks Ended
-----------------------------
October 3 October 4
1999 1998
----------- -----------
Net sales $ 838,541 $ 905,261
Costs and expenses:
Cost of goods sold 618,057 663,244
Selling, general and administrative expenses 159,599 194,547
Other - net 28,674 33,396
Interest expense 20,844 21,590
----------- -----------
827,174 912,777
----------- -----------
Income (loss) before income taxes 11,367 (7,516)
Provision (benefit) for income taxes 4,338 (1,769)
----------- -----------
Net income (loss) $ 7,029 $ (5,747)
=========== ===========
Average shares outstanding:
Basic 34,108,029 36,300,029
Diluted 34,139,696 36,300,029
Net income (loss) per common share:
Basic $ 0.21 $ (0.16)
Diluted $ 0.21 $ (0.16)
Cash dividends per common share $ 0.42 $ 0.42
See accompanying notes to consolidated condensed financial statements.
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RUSSELL CORPORATION
Consolidated Condensed Statements of Cash Flows
(Dollars in Thousands)
(Unaudited)
39 Weeks Ended
----------------------------
October 3 October 4
1999 1998
---------- ----------
Cash Flows from Operating Activities:
Net income (loss) $ 7,029 $ (5,747)
Adjustments to reconcile net income (loss) to
cash (used in) provided by operating activities:
Depreciation and amortization 50,157 55,772
Deferred income taxes (5,625) (5,354)
Loss (gain) on sale of property, plant & equipment 582 (20)
Non-cash restructuring charges 19,090 49,663
Changes in operating assets and liabilities:
Trade accounts receivable (94,792) (56,360)
Inventories (13,378) (35,093)
Prepaid expenses and other current assets (2,573) (7,273)
Other assets (8,344) 3,923
Accounts payable and accrued expenses 2,887 38,154
Income taxes payable 1,056 (3,466)
Pension and other deferred liabilities 2,483 8,133
---------- ----------
Net cash (used in) provided by operating activities (41,428) 42,332
Cash Flows from Investing Activities:
Purchases of property, plant & equipment (35,044) (55,063)
Proceeds from the sale of property, plant & equipment 904 603
---------- ----------
Net cash used in investing activities (34,140) (54,460)
Cash Flows from Financing Activities:
Short-term borrowings 163,069 58,449
Payments on long-term debt (26,864) (21,478)
Dividends on common stock (14,367) (15,264)
Cost of common stock for treasury (49,943) (9,414)
Distribution of treasury shares -- 799
---------- ----------
Net cash provided by financing activities 71,895 13,092
Effect of exchange rate changes on cash 574 (431)
---------- ----------
Net (decrease) increase in cash (3,099) 533
Cash balance at beginning of period 13,852 8,609
---------- ----------
Cash balance at end of period $ 10,753 $ 9,142
========== ==========
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 October 3, 1999, and January 2, 1999, and the
results of operations and cash flows for the thirteen and thirty-nine week
periods ended October 3, 1999, and October 4, 1998.
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 2, 1999.
2. The components of inventory consist of the following: (In thousands)
10/3/99 1/2/99
--------- ---------
Finished goods $ 300,264 $ 288,465
Work in process 69,423 58,182
Raw materials 42,139 54,943
--------- ---------
411,826 401,590
LIFO reserve (27,195) (30,011)
--------- ---------
$ 384,631 $ 371,579
========= =========
3. The results of operations for the thirty-nine weeks ended October 3, 1999,
are not necessarily indicative of the results to be expected for the full
year. The financial statements for the thirty-nine weeks ended October 3,
1999, include non-recurring charges of approximately $44,124,000 on a
pre-tax basis related primarily to severance expenses, asset impairments,
the relocation of certain personnel to Atlanta, and adjustments to
depreciation expense related to assets involved in the Company's
restructuring plans.
On July 22, 1998, the Company announced its intent to undertake a major
restructuring to improve the Company's global competitiveness. It was
further announced that management expected the Company to incur charges
associated with the restructuring and reorganization in the range of $100
to $125 million after tax which would occur over a three year period. The
financial statements for the thirty-nine weeks ended October 3, 1999
include charges amounting to $36,785,000 pre-tax, equivalent to $.65 on an
after-tax per share basis. The cumulative after-tax restructuring and
reorganization charges incurred, as of October 3, 1999 is approximately
$67,075,000.
For the thirty-nine weeks ended October 3, 1999, $9,509,000 of the pre-tax
charge was reflected in cost of goods sold associated with severance
expenses and the closing of certain operations. The balance of the
charges, $27,276,000, is reflected as a loss in other income and expense
and consists primarily of write-down of assets (machinery, equipment and
facilities) to fair value. Also for the same thirty-nine week period, cost
of sales reflected additional depreciation cost of $4,950,000 arising from
a change in the estimated useful life of certain assets, and selling,
general and administrative expenses reflected charges of $2,389,000
related to expenses associated with the relocation of certain personnel to
Atlanta.
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The following tables reflect restructuring, asset impairment and other
unusual charges recorded in the thirty-nine weeks ended October 3, 1999:
CLASSIFICATION IN STATEMENT OF OPERATIONS (In thousands)
Cost of Other
Goods Sold Expense
---------- ---------
Restructuring charges
Employee termination $ 7,894 $ --
Exit cost related to facilities 1,436 1,247
--------- ---------
9,330 1,247
--------- ---------
Asset impairment
Facilities in operation 179 16,730
Facilities held for disposal -- 7,718
--------- ---------
179 24,448
--------- ---------
Other unusual charges
Other -- 1,581
---------
1,581
--------- ---------
Total $ 9,509 $ 27,276
========= =========
Grand Total $ 36,785
=========
SEGMENTING RESTRUCTURING, ASSET IMPAIRMENTS, AND OTHER CHARGES (In
thousands)
Restructuring Asset
Charges Impairments Other
------------- ----------- -----------
Activewear $ 10,577 $ 24,627 $ 1,581
International
All Other
-------- -------- --------
$ 10,577 $ 24,627 $ 1,581
======== ======== --------
Grand Total $ 36,785
========
ACTIVITY RELATED TO RESTRUCTURING (In thousands)
Liability at Expense Amount Liability at
Cash Related: January 2, 1999 Incurred Paid Oct 3, 1999
---------------- ----------- ------------ ---------------
Exit cost related to facilities $ 534 $ 2,683 $ 2,683 $ 534
Employee termination charges 4,567 7,894 12,112 349
Royalties on licenses 1,223 -- 700 523
Asset impairment charges related to facilities -- 5,537 5,537 --
--------- --------- ---------- --------
$ 6,324 $ 16,114 $ 21,032 $ 1,406
========= ========= ========== ========
Non-cash related:
Asset impairment charges related to facilities $ 19,090
---------
$ 19,090
---------
At October 3, 1999, the Company held for resale certain closed facilities
with an adjusted carrying value of approximately $20 million, which have
been included in property, plant and equipment.
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4. On November 17, 1998, a Jefferson County, Alabama jury returned a verdict
in Sullivan, et al. v. Russell Corporation, et al. Five plaintiff families
were awarded a total of $155,200 in compensatory property damages and
$52,398,000 in punitive damages from the three defendants, Russell
Corporation, Avondale Mills, Inc. and Alabama Power Company. Allegations
in the case were that two of the defendants', including Russell
Corporation, textile discharges into the Alexander City, Alabama
wastewater treatment plant, the subsequent treatment by the City of
Alexander City and discharge into Lake Martin constituted a nuisance and
indirect trespass. Alabama Power Company, the third defendant, was alleged
to have allowed the nuisance and trespass to continue as the owner of the
land under the lake. The plaintiffs alleged mental anguish but no damages
were granted for this claim. No allegation of personal injury was made in
the case.
The evidence was uncontroverted that Russell Corporation was and is in
compliance with its permit issued by the Alabama Department of
Environmental Management (ADEM) for the indirect discharge of its
wastewater to the Alexander City wastewater treatment plant. Therefore,
the Company believes that the verdict is contrary to the evidence
presented in the case and under applicable law, no damages should have
been awarded. The Company's appeal is pending before the Alabama Supreme
Court. If such appeal proves to be unsuccessful, damages associated with
this matter could have a significant adverse effect on the Company's
future results from operations and its ability to comply with certain debt
covenant requirements.
As management believes that the amount of the final verdict should be
significantly reduced, no immediate assessment can be made of the impact
on the Company's financial statements, liquidity or the Company's ability
to comply with its loan agreements. Accordingly, no accrual for this
contingency has been recorded as of October 3, 1999.
On February 23, 1999, a similar law suit was filed in Jefferson County,
Alabama by two former residents of the same residential subdivision. The
suit seeks unspecified damages for alleged nuisance and trespass. The
Company plans to vigorously defend this suit.
5. Earnings per share calculated in accordance with SFAS 128 are as follows:
(In thousands except shares and per share amounts)
13 Weeks Ended 39 Weeks Ended
--------------------------- ----------------------------
10/3/99 10/4/98 10/3/99 10/4/98
----------- ----------- ----------- -----------
Net income (loss) $ 19,937 $ (14,156) $ 7,029 $ (5,747)
Basic Calculation:
Average shares outstanding 33,301,647 36,206,064 34,108,029 36,300,029
=========== ----------- =========== -----------
Net income (loss) per share-basic $ 0.60 $ (0.39) $ 0.21 $ (0.16)
=========== ----------- =========== -----------
Diluted Calculation:
Average shares outstanding 33,301,647 36,206,064 34,108,029 36,300,029
Net common shares issuable
on exercise of dilutive stock options -- -- 31,667 --
----------- ----------- ----------- -----------
33,301,647 36,206,064 34,139,696 36,300,029
----------- =========== ----------- ===========
Net income (loss) per share-diluted $ 0.60 $ (0.39) $ 0.21 $ (0.16)
=========== ----------- =========== -----------
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6. For the thirteen and thirty-nine week periods ended October 3, 1999 and
October 4, 1998, accumulated other comprehensive loss as shown in the
consolidated condensed balance sheets was comprised of foreign currency
translation adjustments. The components of comprehensive income, net of
tax, for these periods were as follows: (In thousands)
13 Weeks Ended 39 Weeks Ended
--------------------------- -----------------------------
10/3/99 10/4/98 10/3/99 10/4/98
-------- -------- -------- --------
Net income (loss) $ 19,937 $(14,156) $ 7,029 $ (5,747)
Translation gain 3,332 1,472 336 2,124
-------- --------- -------- --------
Comprehensive income (loss) $ 23,269 $(12,684) $ 7,365 $ (3,623)
======== ======== ======== ========
7. The Company has three reportable segments: Activewear, International and
All Other. The following tables reflect segment financial information for
the thirteen week periods ended October 3, 1999 and October 4, 1998. (In
thousands)
13 Weeks ended October 3, 1999
------------------------------
Activewear International All Other Total
---------- ------------- --------- -----
Revenues from
external customers $271,374 $ 35,299 $ 38,242 $ 344,915
Earnings before interest
and income taxes
(EBIT) 38,922 2,862 4,037 45,821
Total assets 891,473 108,192 237,801 1,237,466
13 Weeks ended October 4, 1998
------------------------------
Activewear International All Other Total
---------- ------------ --------- -----
Revenues from
external customers $310,459 $ 32,203 $ 34,546 $ 377,208
EBIT 42,577 190 4,154 46,921
The Activewear EBIT for the thirteen weeks ended October 3, 1999, reflects
a charge of $499,000 in additional depreciation expense for changes in the
expected useful lives of certain facilities.
In 1998, the Company did not allocate specific assets (i.e. facilities) to
segments, therefore segment asset data is not available for the periods
ended on or before January 2, 1999.
The following tables reflect segment financial information for the
thirty-nine week periods ended October 3, 1999 and October 4, 1998.
39 Weeks ended October 3, 1999
------------------------------
Activewear International All Other Total
---------- ------------ --------- -----
Revenues from
external customers $ 640,008 $ 97,042 $ 101,491 $ 838,541
EBIT 53,611 5,049 12,723 71,383
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39 Weeks ended October 4, 1998
------------------------------
Activewear International All Other Total
---------- ------------ --------- -----
Revenues from
external customers $ 709,145 $ 94,758 $ 101,358 $ 905,261
EBIT (loss) 72,026 (2,431) 13,816 83,411
The Activewear EBIT for the thirty-nine weeks ended October 3, 1999,
reflects a charge of $4,950,000 in additional depreciation expense for
changes in the expected useful lives of certain facilities.
A reconciliation of combined EBIT for the three segments to consolidated
income (loss) before income taxes is as follows:
(In thousands)
13 Weeks Ended 39 Weeks Ended
-------------------------- ----------------------------
10/3/99 10/4/98 10/3/99 10/4/98
--------- ---------- --------- ---------
Total EBIT for reportable segments $ 45,821 $ 46,921 $ 71,383 $ 83,411
Restructuring, impairment, other
unusual and relocation charges (6,108) (61,078) (39,172) (69,337)
Interest expense (7,463) (7,589) (20,844) (21,590)
--------- ---------- --------- ---------
Income (loss) before income taxes $ 32,250 $ (21,746) $ 11,367 $ (7,516)
========= ========== ========= =========
8. On October 15, 1999, the Company announced that it would be closing its
Scottish manufacturing plants in Bo'ness and Livingston by the end of the
year 2000. This decision comes as part of the Company's continued efforts
associated with a strategic multi-year restructuring plan announced a year
ago on July 22, 1998. Due to the ongoing impact of increased competition
within the European marketplace and the fact that many of the Company's
competitors now source their product requirements from developing
countries, the economics of maintaining a manufacturing base in Scotland
are no longer viable. The Company plans to source approximately 100% of
its European product requirements from contractors or joint ventures in
developing countries.
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Item 2. 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 financial condition and
earnings during the periods included in the accompanying consolidated condensed
statements of operations.
A summary of the period to period changes in the principal items included
in the consolidated condensed statements of operations is shown below:
Comparison of
-------------------------------------------------------------
13 Weeks 39 Weeks
Ended 10/3/99 Ended 10/3/99
and 10/4/98 and 10/4/98
--------------------------- -----------------------------
Increase (Decrease)
(Dollars in Thousands)
Net sales $ (32,293) (8.6)% $ (66,720) (7.4)%
Cost of goods sold (39,371) (14.0) (45,187) (6.8)
Selling, general and
administrative expenses (18,069) (23.5) (34,948) (18.0)
Interest expense (126) (1.7) (746) (3.5)
Other income (28,723) (85.1) (4,722) (14.1)
Income before taxes 53,996 n/a 18,883 n/a
Provision for income taxes 19,903 n/a 6,107 n/a
Net income 34,093 n/a 12,776 n/a
Thirteen weeks ended October 3, 1999 compared to October 4, 1998
Sales. Sales decreased 8.6%, or $32,293,000, to $344,915,000 for the
thirteen weeks ended October 3, 1999 from $377,208,000 for the thirteen weeks
ended October 4, 1998. The decrease consisted of a 12.6% decline, or
$39,085,000 within the Company's Activewear segment and increases of 9.6% and
10.7% within the Company's International and All Other segments, respectively.
The Activewear sales decline was expected as retail and distributor customers
planned deliveries later in the season than the prior year. Approximately
$11,250,000 of the sales decline was due to planned discontinuance of certain
business primarily within the Activewear segment.
Gross Margin %. The Company's overall gross margin percentage increased to
30.0% for the thirteen weeks ended October 3, 1999 versus 25.5% in the
comparable prior year period. Excluding the impact of restructuring and
additional depreciation for changes in the expected useful lives of certain
assets scheduled to be taken out of service in the near term, gross margins
were 30.6% and 29.5% for the thirteen week periods ended October 3, 1999 and
October 4, 1998, respectively. Gross margins were positively impacted primarily
by the reduction in manufacturing cost as a result of the Company's aggressive
move to assemble garments in low cost geographic locations versus last year.
However, the positive impact being experienced as a result of the above is
currently being offset by lower sales and sales prices as well as start-up
costs from the move off shore.
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Selling, General and Administrative (SGA). SGA for the thirteen week
period ended October 3, 1999 includes $598,000 of expenses associated with the
establishment of a dual headquarters in Atlanta, GA. The prior year period
includes $12,368,000 associated with Company's restructuring plan that was
announced on July 22, 1998. Exclusive of the above expenses, SGA as a percent
of net sales decreased slightly to 16.8% for the thirteen week period ended
October 3, 1999 from 17.1% in the comparable prior year period.
Earnings Before Interest and Tax (EBIT). The Company's overall EBIT as a
percent of net sales increased to 13.4% for the thirteen week period ended
October 3, 1999 from 12.4% in the comparable prior year period when calculated
exclusive of total non-recurring charges of $6,607,000 and $61,078,000 for the
thirteen week periods ended October 3, 1999 and October 4, 1998, respectively.
These non-recurring charges relate to restructuring, asset impairment, other
unusual expenses, and additional depreciation for changes in the expected
useful lives of certain assets that are scheduled to be taken out of service in
the near term. The Activewear segment EBIT as a percent of net sales is 14.5%
for the thirteen week period ended October 3, 1999 up from 13.7% for the
comparable prior year period. Again, this improvement is attributed to reduced
manufacturing cost associated with the move of much of the Company's apparel
assembly operations offshore. These savings for the quarter were approximately
$12,350,000. The International segment EBIT as a percent of net sales increased
to 8.1% for the thirteen week period ended October 3, 1999 up from 0.6% for the
comparable prior year period. This turnaround is due to the elimination of
certain operations and product lines. The All Other segment EBIT as a percent
of net sales decreased to 10.6% for the thirteen week period ended October 3,
1999 from 12.0% for the comparable prior year period. However, these results
were generally in line with management's expectations.
Thirty-nine weeks ended October 3, 1999 compared to October 4, 1998
Sales. Sales decreased 7.4%, or $66,720,000, to $838,541,000 for the
thirty-nine weeks ended October 3, 1999 from $905,261,000 for the thirty-nine
weeks ended October 4, 1998. The decrease consisted of a 9.7% decrease, or
$69,137,000 within the Company's Activewear segment and increases of 2.4% and
0.1% within the Company's International and All Other segments, respectively.
Approximately $21,250,000 of the sales decline was due to planned
discontinuance of certain business within the Activewear segment.
Gross Margin %. The Company's overall gross margin percentage decreased
slightly to 26.3% for the thirty-nine weeks ended October 3, 1999 versus 26.7%
in the comparable prior year period. Excluding the impact of restructuring and
additional depreciation for changes in the expected useful lives of certain
assets scheduled to be taken out of service in the near term, gross margins
were 28.0% and 28.4% for the thirty-nine week periods ended October 3, 1999 and
October 4, 1998, respectively. Gross margins were positively impacted primarily
by the reduction in manufacturing cost as a result of the Company's aggressive
move to assemble garments in low cost geographic locations versus last year.
Again, the positive impact being experienced as a result of the above is
currently being offset by lower sales, and sales prices as well as start-up
costs from the move off shore.
Selling, General and Administrative (SGA). SGA for the thirty-nine week
period ended October 3, 1999 includes $2,389,000 of expenses associated with
the establishment of a dual headquarters in Atlanta, GA. The prior year period
includes approximately $8,259,000 related to the retirement, and subsequent
replacement of the chairman, president and chief executive officer of the
Company and $12,368,000 associated with the Company's restructuring plan
mentioned earlier. Exclusive of the above expenses, SGA as a percent of net
sales decreased slightly to 18.7% for the thirty-nine week period ended October
3, 1999 from 19.2% in the comparable prior year period.
Earnings Before Interest and Tax (EBIT). The Company's overall EBIT as a
percent of net sales remained flat at approximately 9.1% for the thirty-nine
week period ended October 3, 1999 compared to 9.2% in the comparable prior year
period when calculated exclusive of total non-recurring charges of $44,124,000
and $69,337,000 for the thirty-nine week periods ended October 3, 1999 and
October 4, 1998, respectively. These non-recurring charges relate to
restructuring, asset impairment, other unusual expenses, and additional
depreciation for changes in the expected useful lives of certain assets that
are scheduled to be taken out of service in the near term. The Activewear
segment EBIT as a percent of net sales is 9.2% for the thirty-nine week period
ended October
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3, 1999 down from 10.2% for the comparable prior year period. This is
attributable to year to date sales of the Activewear segment being down 9.7%,
or $69,137,000. However, the impact of the lower sales has been offset by the
Company's successful efforts in reducing its manufacturing cost associated with
the move of much of the Company's apparel assembly operations offshore. These
savings for the thirty-nine weeks were approximately $23,150,000. The
International segment EBIT as a percent of net sales increased to 5.2% for the
thirty-nine week period ended October 3, 1999 up from a negative 2.6% for the
comparable prior year period. The EBIT improvement within the International
segment for the thirty-nine weeks ended October 3, 1999 over the comparable
prior year period was $7,480,000 on additional net sales of only $2,284,000. As
mentioned earlier, this continued turnaround is due to the elimination of
certain operations and product lines. The All Other segment EBIT as a percent
of net sales decreased to 12.5% for the thirty-nine week period ended October
3, 1999 from 13.6% for the comparable prior year period. Again, these results
were generally in line with management's expectations.
Liquidity and Capital Resources
At the end of the quarter, the current ratio was 2.3, down from last
year's 2.9. Long-term debt to total capitalization was 35.5% and 34.0% at
October 3, 1999 and October 4, 1998, respectively. Long-term debt to equity was
55.0% and 51.5% at October 3, 1999 and October 4, 1998, respectively.
Required cash for purchases of property, plant and equipment, dividends
and treasury stock purchases was provided by short-term borrowings during the
period ended October 3, 1999. Subsequent to October 3, 1999, the Company
entered into a 5-year, $250 million unsecured revolving credit facility with a
group of six banks. The credit facility assures the Company availability of
funds at market-based rates, provided the Company continues to meet the various
covenants as set forth in the credit agreement. (The new covenants are
generally similar to the covenants under existing long-term loan agreements.)
Prior to entering into this new credit facility, the Company was dependent on
informal, uncommitted lines of credit to finance its working capital
requirements. Five of the six participating banks previously had a relationship
with the Company.
Approximately 670,000 shares were repurchased in the quarter ended October
3, 1999, bringing the total repurchased to 2.5 million year to date.
Approximately 1.8 million shares remain in the current authorization.
Contingencies
On November 17, 1998, a Jefferson County, Alabama jury returned a verdict
in Sullivan, et al. v. Russell Corporation, et al. Five plaintiff families were
awarded a total of $155,200 in compensatory property damages and $52,398,000 in
punitive damages from the three defendants, Russell Corporation, Avondale
Mills, Inc. and Alabama Power Company. Allegations in the case were that two of
the defendants', including Russell Corporation, textile discharges into the
Alexander City, Alabama wastewater treatment plant, the subsequent treatment by
the City of Alexander City and discharge into Lake Martin constituted a
nuisance and indirect trespass. Alabama Power Company, the third defendant, was
alleged to have allowed the nuisance and trespass to continue as the owner of
the land under the lake. The plaintiffs alleged mental anguish but no damages
were granted for this claim. No allegation of personal injury was made in the
case.
The evidence was uncontroverted that Russell Corporation was and is in
compliance with its permit issued by the Alabama Department of Environmental
Management (ADEM) for the indirect discharge of its wastewater to the Alexander
City wastewater treatment plant. Therefore, the Company believes that the
verdict is contrary to the evidence presented in the case and under applicable
law, no damages should have been awarded. The Company's appeal is pending
before the Alabama Supreme Court. If such appeal proves to be unsuccessful,
damages associated with this matter could have a significant adverse effect on
the Company's future results from operations and its ability to comply with
certain debt covenant requirements.
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As management believes that the amount of the final verdict should be
significantly reduced, no immediate assessment can be made of the impact on the
Company's financial statements, liquidity or the Company's ability to comply
with its loan agreements. Accordingly, no accrual for this contingency has been
recorded as of October 3, 1999.
On February 23, 1999, a similar law suit was filed in Jefferson County,
Alabama by two former residents of the same residential subdivision. The suit
seeks unspecified damages for alleged nuisance and trespass. The Company plans
to vigorously defend this suit.
Year 2000 Disclosure Statement
The Company has been involved in an organized program to assure that the
Company's information technology systems and related infrastructure will be
Year 2000 compliant. These efforts began in July of 1996 with the assignment of
a full-time coordinator of Year 2000 Compliance. The project initially involved
the computer applications which support the parent company.
The initial phase of the corporate project involved the inventory and
analysis of existing information systems. From this analysis a plan for
remediation was formulated and put into action in January 1997. This plan is
now 100% complete in bringing these systems into Year 2000 compliance with
23,641 actual hours expended against a planned 22,319 hours. The Company met
its planned completion date for testing and implementation of this phase on
June 30, 1999.
The second phase of the corporate project was to inventory, analyze and
test the infrastructure that involves imbedded microchips. This phase began in
January, 1998, and has identified 3,622 unique products (hardware and models,
software and releases) that are being certified through vendor certification
and testing where possible. To date 3,506 or 97% of these products have been
certified. The planned completion date for this phase is the end of November of
this year.
The Year 2000 corporate project was expanded into a third phase to include
the Cross Creek and DeSoto Mills subsidiaries under the same project format and
phases as the parent company. DeSoto Mills is 100% complete in remediation of
business and manufacturing systems and has certified 86% of infrastructure
products. The Cross Creek subsidiary is 100% complete on remediation of
information systems and has certified 96% of infrastructure products.
The fourth phase of the Year 2000 project involves the identification,
analysis and certification of suppliers of materials and services to the
Company. There have been 2,044 suppliers identified and individually contacted
by questionnaires, letters and telephone contacts to determine their compliance
status and ability to service the Company in the Year 2000. If it is determined
that a supplier will be in non-compliance or of questionable compliance,
contingency plans will be developed to address the need, including the
selection and introduction of new suppliers.
The fifth phase of the Year 2000 project involves an assessment of the
major customers of the Company and their Year 2000 readiness. A questionnaire
was mailed in November 1998 to 200 customers to begin the assessment of their
Year 2000 status and their potential as a viable customer in the Year 2000.
Response has been positive in this area with most customers reporting that they
had achieved compliance by September, 1999.
The Year 2000 efforts in the Russell UK subsidiary, part of our
international segment, involved the replacement of purchased application
software. The first phase of this project was to identify and select an
information systems software solution that would meet the business needs of the
subsidiary and resolve the Year 2000 issue. The software was selected and
implementation was completed as scheduled by the end of the third quarter. The
second phase of the Russell UK project was the identification of infrastructure
products. To date, 456 products were identified with 86% being certified as
compliant.
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Management has determined that the costs for correction of the Year 2000
issues are expected to total approximately $1,895,000 with $1,840,000 being
expended through the end of the third quarter of 1999. The Year 2000 project is
being funded out of normal operating funds.
Senior management receives monthly updates on the progress of this project
by each individual phase. The Year 2000 compliance project is a priority
project for the Company and especially the IT department. Other IT projects,
including upgrade of certain existing systems and implementation of new
systems, continue while the Year 2000 project is being accomplished.
Management of the Company believes it has an effective program in place to
resolve the Year 2000 issue in a timely manner. As previously noted, the
Company has not yet completed all necessary phases of the Year 2000 program. In
the event that the Company does not complete any additional phases, the Company
may be unable to take customer orders, manufacture and ship products, invoice
customers or collect payments. In addition, disruptions in the economy
generally resulting from Year 2000 issues could also materially adversely
affect the Company. The Company could be subject to litigation for computer
systems product failure, for example, equipment shutdown or failure to properly
date business records. The amount of potential liability and lost revenue
cannot be reasonably estimated at this time.
We continue to develop contingency plans for mission critical business
functions, in the event internal systems or external events negatively impact
our ability to provide service. The majority of our areas have completed their
contingency plans and we expect all contingency plans to be completed by the
end of November 1999.
This document contains Year 2000 Readiness Disclosures as defined in the
Year 2000 Information and Readiness Disclosure Act, P.L.105-271 (Oct 19, 1998).
Accordingly, this disclosure, in whole or in part, is not, to the extent
provided in the act, admissible in any state or federal civil action to prove
the accuracy or truth of any Year 2000 statements contained herein.
Impact of Recently Issued Accounting Standards
In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities. The Company plans to adopt the new
Statement effective January 1, 2001. The Statement will require the Company to
recognize all derivatives on the balance sheet at fair value. Derivatives that
are not hedges must be adjusted to fair value through income. If a derivative
is a hedge, depending on the nature of the hedge, changes in the fair value of
the derivative will either be offset against the change in fair value of the
hedged asset, liability, or firm commitment through earnings, or recognized in
other comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. The Company has not yet completed its analysis of the
impact, if any, that Statement 133 may have on its financial statements.
FORWARD LOOKING INFORMATION
This quarterly report on Form 10-Q, including management's discussion and
analysis, contains certain statements that describe the Company's beliefs
concerning future business conditions and prospects, growth opportunities, new
product lines 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," "projects" and similar phrases. These forward-looking statements are
based upon assumptions the Company believes are reasonable. Such
forward-looking statements are subject to risks and uncertainties which could
cause the Company's actual results, performance and achievements to differ
materially from those expressed in, or implied by, these statements, including
among other matters, significant competitive activity, including promotional
and price competition, changes in customer demand for the Company's products,
inherent risks in the market place associated with new products and new product
lines, including uncertainties about trade and
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consumer acceptance and other risk factors listed from time to time in the
Company's SEC reports and announcements. The Company assumes no obligation to
update publicly any forward-looking statements whether as a result of new
information, future events or otherwise.
Item 3. Quantitative and Qualitative Disclosure of Market Risk
The Company is exposed to market risks relating to fluctuations in
interest rates, currency exchange rates and commodity prices. There has been no
material change in the Company's market risks that would significantly affect
the disclosures made in the Form 10-K for the year ended January 2, 1999.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Contingencies
On November 17, 1998, a Jefferson County, Alabama jury returned a verdict
in Sullivan, et al. v. Russell Corporation, et al. Five plaintiff families were
awarded a total of $155,200 in compensatory property damages and $52,398,000 in
punitive damages from the three defendants, Russell Corporation, Avondale
Mills, Inc. and Alabama Power Company. Allegations in the case were that two of
the defendants', including Russell Corporation, textile discharges into the
Alexander City, Alabama wastewater treatment plant, the subsequent treatment by
the City of Alexander City and discharge into Lake Martin constituted a
nuisance and indirect trespass. Alabama Power Company, the third defendant, was
alleged to have allowed the nuisance and trespass to continue as the owner of
the land under the lake. The plaintiffs alleged mental anguish but no damages
were granted for this claim. No allegation of personal injury was made in the
case.
The evidence was uncontroverted that Russell Corporation was and is in
compliance with its permit issued by the Alabama Department of Environmental
Management (ADEM) for the indirect discharge of its wastewater to the Alexander
City wastewater treatment plant. Therefore, the Company believes that the
verdict is contrary to the evidence presented in the case and under applicable
law, no damages should have been awarded. The Company's appeal is pending
before the Alabama Supreme Court. If such appeal proves to be unsuccessful,
damages associated with this matter could have a significant adverse effect on
the Company's future results from operations and its ability to comply with
certain debt covenant requirements.
As management believes that the amount of the final verdict should be
significantly reduced, no immediate assessment can be made of the impact on the
Company's financial statements, liquidity or the Company's ability to comply
with its loan agreements. Accordingly, no accrual for this contingency has been
recorded as of October 3, 1999.
On February 23, 1999, a similar law suit was filed in Jefferson County,
Alabama by two former residents of the same residential subdivision. The suit
seeks unspecified damages for alleged nuisance and trespass. The Company plans
to vigorously defend this suit.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 4.1 Form of Rights Agreement, dated as of September 15,
1999, between Russell Corporation and SunTrust Bank, Atlanta, which includes as
Exhibit A thereto, the Form of Rights Certificate and as Exhibit B thereto, the
Summary of Rights to Purchase Preferred Stock (which Form of Rights Agreement
was filed as Exhibit 4.1 to the registrant's Current Report on Form 8-K filed on
September 17, 1999 and is incorporated herein by reference).
Exhibit 4.2 Form of Resolution Establishing and Designating
Series A Junior Participating Preferred Stock as adopted by the Board of
Directors of Russell Corporation as of October 25, 1989 (which was filed as
Exhibit 4.2 to the registrant's Current Report on Form 8-K filed on September
17, 1999 and is incorporated herein by reference).
Exhibit 27 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
On September 17, 1999, the Company filed a report on Form 8-K
with respect to Item 5 - Other Matters reporting the adoption by the Company of
a new shareholder rights plan which became effective upon the expiration of the
Company's previous rights plan on October 25, 1999.
Pursuant to the new Rights Agreement between the Company and
SunTrust Bank, Atlanta, as Rights Agent (the "1999 Rights Agreement"), one Right
was issued for each outstanding share of common stock, par value $.01 per share,
of the Company on October 25, 1999. Each of the new Rights will entitle the
registered holder to purchase from the Company one one-hundredth of a share of
Series A Junior Participating Preferred Stock, par value $.01 per share, at a
price of $85 per one one-hundredth of a share. The Rights generally will not
become exercisable unless and until, among other things, any person acquires 15%
or more of the outstanding shares of common stock. The new Rights are redeemable
under certain circumstances at $.01 per Right and will expire, unless earlier
redeemed or extended, on October 25, 2009.
The description and terms of the new Rights are set forth in the
1999 Rights Agreement, a copy of which was filed with the current Report on Form
8-K and has been incorporated into this report.
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 November 15, 1999 /s/ Eric N. Hoyle
------------------------------------------
Eric N. Hoyle, Executive Vice President
and Chief Financial Officer
(For the Registrant and as
Principal Financial Officer)
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