SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 1, 2000
[ ] 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: 0-9831
LIZ CLAIBORNE, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-2842791
--------------------------- -----------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
1441 Broadway, New York, New York 10018
---------------------------------------- ----------------------------
(Address of principal executive offices) (Zip Code)
(212) 354-4900
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check 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 [ ].
The number of shares of Registrant's Common Stock, par value $1.00 per share,
outstanding at May 12, 2000 was 54,575,194.
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LIZ CLAIBORNE, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
APRIL 1, 2000
<S> <C>
PAGE
NUMBER
------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of April 1, 2000, January 1, 2000
and April 3, 1999 ......................................................... 3
Condensed Consolidated Statements of Income for the Three Months
Ended April 1, 2000 and April 3, 1999 ..................................... 4
Condensed Consolidated Statements of Cash Flows for the Three Months
Ended April 1, 2000 and April 3, 1999 ..................................... 5
Notes to Condensed Consolidated Financial Statements ...................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ....................................... 12
OTHER INFORMATION
Item 1. Legal Proceedings ......................................................... 16
Item 5. Statement Regarding Forward-Looking Disclosure ............................ 17
Item 6. Exhibits and Reports on Form 8-K .......................................... 18
SIGNATURES .......................................................................... 19
[2]
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LIZ CLAIBORNE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(All amounts in thousands except share data)
(Unaudited) (Unaudited)
April 1, January 1, April 3,
2000 2000 1999
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 20,561 $ 37,940 $ 24,738
Marketable securities 7,429 -- --
Accounts receivable - trade 520,977 298,924 474,607
Inventories 388,454 418,348 406,616
Deferred income tax benefits 27,246 27,764 36,182
Other current assets 80,837 75,633 82,902
------------ ------------ ------------
Total current assets 1,045,504 858,609 1,025,045
------------ ------------ ------------
PROPERTY AND EQUIPMENT - NET 290,970 284,171 263,127
GOODWILL AND INTANGIBLES - NET 227,350 227,663 --
OTHER ASSETS 37,103 41,358 94,476
------------ ------------ ------------
TOTAL ASSETS $ 1,600,927 $ 1,411,801 $ 1,382,648
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 186,795 $ 184,556 $ 150,559
Accrued expenses 156,299 160,220 140,578
Income taxes payable 26,936 7,535 32,337
------------- ------------ ------------
Total current liabilities 370,030 352,311 323,474
------------- ------------ ------------
LONG TERM DEBT 307,720 116,085 --
OTHER NON CURRENT LIABILITIES 15,000 15,000 --
DEFERRED INCOME TAXES 23,320 23,111 17,107
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST AND PUT WARRANTS 3,579 3,125 20,801
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, authorized shares - 50,000,000,
issued shares - none -- -- --
Common stock, $1 par value, authorized shares - 250,000,000,
issued shares - 88,218,617 88,219 88,219 88,219
Capital in excess of par value 82,126 80,257 59,406
Retained earnings 1,862,153 1,827,720 1,699,970
Accumulated other comprehensive loss (1,960) (3,263) (2,638)
------------ ------------ ------------
2,030,538 1,992,933 1,844,957
Common stock in treasury, at cost, 33,071,076 , 31,498,577
and 24,475,302 shares (1,149,260) (1,090,764) (823,691)
------------ ------------ ------------
Total stockholders' equity 881,278 902,169 1,021,266
------------ ------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,600,927 $ 1,411,801 $ 1,382,648
============ ============ ============
The accompanying notes to condensed consolidated financial statements are an integral part
of these statements.
[3]
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LIZ CLAIBORNE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(All amounts in thousands, except per common share data)
(Unaudited)
---------------------------
Three Months Ended
---------------------------
April 1, April 3,
2000 1999
----------- -----------
<S> <C> <C>
NET SALES $ 809,459 $ 700,789
Cost of goods sold 506,585 438,157
----------- ----------
GROSS PROFIT 302,874 262,632
Selling, general & administrative expenses 228,529 192,890
----------- ----------
OPERATING INCOME 74,345 69,742
Other Income (Expense), net 2,299 (266)
Interest (Expense) Income, net (4,001) 937
----------- ----------
INCOME BEFORE PROVISION
FOR INCOME TAXES 72,643 70,413
Provision for income taxes 26,151 25,700
----------- ----------
NET INCOME $ 46,492 $ 44,713
=========== ==========
NET INCOME PER WEIGHTED AVERAGE SHARE, BASIC $0.85 $0.70
NET INCOME PER WEIGHTED AVERAGE SHARE, DILUTED $0.84 $0.70
WEIGHTED AVERAGE SHARES, BASIC 54,972 63,962
WEIGHTED AVERAGE SHARES, DILUTED 55,295 64,122
DIVIDENDS PAID PER COMMON SHARE $0.11 $0.11
The accompanying notes to condensed consolidated financial statements are an integral part
of these statements.
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[4]
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LIZ CLAIBORNE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(All dollar amounts in thousands)
(Unaudited)
---------------------------
Three Months Ended
---------------------------
April 1, April 3,
2000 1999
----------- -----------
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 46,492 $ 44,713
Adjustments to reconcile net income to
net cash (used in) operating activities:
Depreciation and amortization 20,252 15,864
Other - net 4,353 717
Change in current assets and liabilities:
(Increase) in accounts receivable (222,053) (215,342)
Decrease in inventories 29,894 78,535
(Increase) in deferred income tax benefits (234) (523)
(Increase) decrease in other current assets (5,204) 1,678
Increase (decrease) in accounts payable 2,239 (74,306)
(Decrease) in accrued expenses (10,857) (2,175)
Increase in income taxes payable 19,401 21,303
----------- -----------
Net cash (used in) operating activities (115,717) (129,536)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investment instruments (14,573) --
Disposals of investment instruments 9,082 65,152
Purchases of property and equipment (20,046) (17,037)
Payments for acquisitions, net of cash acquired (2,005) (53,735)
Other - net (265) 990
----------- -----------
Net cash (used in) investing activities (27,807) (4,630)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in commercial paper, net 191,635 --
Proceeds from exercise of common stock options 10,973 1,385
Dividends paid (6,146) (7,159)
Purchase of common stock (70,264) --
----------- -----------
Net cash provided by (used in) financing activities 126,198 (5,774)
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (53) 19
----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS (17,379) (139,921)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 37,940 164,659
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 20,561 $ 24,738
=========== ===========
The accompanying notes to condensed consolidated financial statements are an integral part
of these statements.
</TABLE>
[5]
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LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The consolidated financial statements included herein have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
from this report, as is permitted by such rules and regulations; however,
the Company believes that the disclosures are adequate to make the
information presented not misleading. It is suggested that these condensed
financial statements be read in conjunction with the financial statements
and notes thereto included in the Company's latest annual report on Form
10-K. Certain items previously reported in specific captions in the
accompanying financial statements have been reclassified to conform with the
current period's classifications.
In the opinion of management, the information furnished reflects all
adjustments, all of which are of a normal recurring nature, necessary for a
fair presentation of the results for the reported interim periods. Results
of operations for interim periods are not necessarily indicative of results
for the full year.
2. ACQUISITIONS AND LICENSING COMMITMENTS
On November 2, 1999, the Company completed the purchase of the entire equity
interest of Podell Industries, Inc.; on June 8, 1999, the Company completed
the purchase of 85.0 percent of the equity interest of Lucky Brand
Dungarees, Inc.; and on February 12, 1999, the Company completed the
purchase of 84.5 percent of the equity interest of Segrets, Inc.
In August 1999, the Company consummated a license agreement with Kenneth
Cole Productions, Inc.; in January 1998 and December 1999 the Company
consummated license agreements with an affiliate of Donna Karan
International, Inc.; and in July 1998, the Company consummated a license
agreement with Candie's, Inc.
Reference is made to the Company's latest annual report on Form 10-K for
further information regarding the above transactions.
[6]
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LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. COMPREHENSIVE INCOME
Comprehensive income is comprised of net income, the effects of foreign
currency translation and changes in unrealized gains and losses on
securities. Total comprehensive income for interim periods was as follows:
Three Months Ended
April 1, April 3,
(Dollars in thousands) 2000 1999
---------------------------------------------- -------- --------
Comprehensive income, net of tax:
Net income $46,492 $44,713
Foreign currency translation (53) 19
Changes in unrealized gains or losses on
securities 1,356 215
Reclassification adjustment for gains or
losses included in net income -- (151)
-------- --------
Comprehensive income, net of tax: $47,795 $44,796
======== ========
4. MARKETABLE SECURITIES
The following are summaries of available-for-sale marketable securities and
maturities:
(Dollars in thousands)
April 1, 2000
--------------------------------------
Gross Estimated
Unrealized Fair
Cost Gains Losses Value
------- ------- ------- ---------
Equity securities $ 5,491 $ 1,938 $ -- $ 7,429
------- ------- ------- ---------
$ 5,491 $ 1,938 $ -- $ 7,429
======= ======= ======= =========
(Dollars in thousands)
April 3, 1999
--------------------------------------
Gross Estimated
Unrealized Fair
Cost Gains Losses Value
------- ------- ------- ---------
Tax exempt notes and bonds $ 3,887 $ -- $ -- $ 3,887
Equity securities 6,567 573 -- 7,140
------- ------- ------- ---------
$10,454 $ 573 $ -- $11,027
======= ======= ======= =========
At April 3, 1999, the above investments included $11,027,000, which is
classified as cash equivalents. There were no available-for-sale marketable
securities at January 1, 2000.
For the three-month period ended April 1, 2000, gross realized gains on
sales of available-for-sale securities totaled $4,729,000. For the
three-month period ended April 3, 1999, gross realized gains on sales of
available-for-sale securities totaled $297,000. The net adjustment to
unrealized holding gains and losses on available-for-sale securities for the
three month period ended April 1, 2000 and April 3, 1999, was a credit of
$2,107,000 (net of $751,000 in deferred taxes) and a credit of $64,000 (net
of $36,000 in deferred income taxes), respectively, which was included in
retained earnings.
[7]
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LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. INVENTORIES, NET
Inventories are stated at the lower of cost (using the first-in, first-out
method) or market and consist of the following:
(Dollars in thousands)
April 1, January 1, April 3,
2000 2000 1999
-------- ---------- --------
Raw materials $ 27,714 $ 24,028 $ 14,733
Work in process 5,482 7,516 6,101
Finished goods 355,258 386,804 385,782
-------- ---------- --------
$388,454 $418,348 $406,616
======== ========== ========
6. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
(Dollars in thousands)
April 1, January 1, April 3,
2000 2000 1999
-------- ---------- --------
Land and buildings $131,967 $131,681 $133,475
Machinery and equipment 255,324 243,262 215,136
Furniture and fixtures 69,432 67,928 65,497
Leasehold improvements 151,010 145,100 135,467
-------- ---------- --------
607,733 587,971 549,575
Less: Accumulated depreciation
and amortization 316,763 303,800 286,448
-------- ---------- --------
$290,970 $284,171 $263,127
======== ========== ========
[8]
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LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. RESTRUCTURING CHARGE
In December 1998, the Company recorded a $27.0 million (pre-tax)
restructuring charge. The amount included $14.4 million related to the
closure of 30 underperforming specialty retail stores and $12.6 million for
the streamlining of operating and administrative functions. Principal items
included in the charge are estimated contract termination costs, severance
and related benefits for staff reductions and the write-off of certain
assets. This charge reduced net income by $17.1 million, or $.26 per common
share. The remaining balance of the restructuring reserve was $5.1 million
as of January 1, 2000, and $4.2 million as of April 1, 2000. For the three
months ended April 1, 2000, the Company recorded spending against this
reserve of $0.9 million.
8. CASH DIVIDENDS and COMMON STOCK REPURCHASE
On March 9, 2000, the Company's Board of Directors declared a quarterly cash
dividend on the Company's common stock at the rate of $.1125 per share, to
be paid on June 2, 2000 to stockholders of record at the close of business
on May 12, 2000. Also, on October 14, 1999, the Company's Board of Directors
authorized the Company to purchase up to an additional $450 million of its
common stock in open market purchases and privately negotiated transactions.
As of May 12, 2000, we have $203.1 million remaining in our buyback
authorization.
9. EARNINGS PER COMMON SHARE
The following is an analysis of the differences between basic and diluted
earnings per share in accordance with SFAS No. 128 "Earnings per Share."
Three Months Ended
April 1, April 3,
(Dollars in thousands) 2000 1999
---------------------------------------------- -------- --------
Net income $46,492 $44,713
Weighted average common shares outstanding 54,972 63,962
Effect of dilutive securities:
Stock options and restricted stock grants 323 131
Put warrants -- 29
-------- --------
Weighted average common shares outstanding
and common share equivalents 55,295 64,122
======== ========
[9]
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LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
10. CONSOLIDATED STATEMENTS OF CASH FLOWS SUPPLEMENTARY DISCLOSURES
During the three months ended April 1, 2000, the Company made income tax
payments of $2,906,000 and interest payments of $3,314,000. During the three
months ended April 3, 1999, the Company made income tax payments of
$3,047,000 and interest payments of $238,000.
11. FORWARD CONTRACTS
The Company enters into foreign exchange forward contracts to hedge
transactions denominated in foreign currencies for periods of less than one
year. Gains and losses on contracts which hedge specific foreign currency
denominated commitments are recognized in the period in which the
transactions are completed and are accounted for as part of the underlying
transaction. As of April 1, 2000, the Company had forward contracts maturing
through December 2000 to sell 33,000,000 Canadian dollars and contracts
maturing through December 2000 to sell 3,750,000 British pounds sterling.
The aggregate U.S. dollar value of the foreign exchange contracts is
approximately $28,900,000. Unrealized gains and losses for outstanding
foreign exchange forward contracts were not material at April 1, 2000.
[10]
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LIZ CLAIBORNE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
12. SEGMENT REPORTING
The Company has three segments: Wholesale Apparel, Wholesale Non-Apparel and
Retail. The Wholesale Apparel Segment consists of women's and men's apparel
designed and marketed under various trademarks owned or licensed by the
Company. The Wholesale Non-Apparel segment consists of accessories, jewelry
and cosmetics designed and marketed under certain of those and other
trademarks. The Retail segment operates specialty retail and outlet stores
that sell these apparel and non-apparel products to the public.
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For The First Quarter Ended April 1, 2000
Wholesale Wholesale Other/
(in thousands) Apparel Non-Apparel Retail Elim. Total
------------------------------- --------- ----------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenue from external customers $626,795 $83,432 $96,766 $ 2,466 $809,459
Intercompany sales 41,148 3,504 -- (44,652) --
Segment operating profit (loss) 69,542 5,487 1,830 (2,514) 74,345
For The First Quarter Ended April 3, 1999
Wholesale Wholesale Other/
(in thousands) Apparel Non-Apparel Retail Elim. Total
------------------------------- --------- ----------- -------- -------- --------
Revenue from external customers $543,201 $65,991 $89,294 $ 2,303 $700,789
Intercompany sales 47,841 7,055 -- (54,896) --
Segment operating profit (loss) 65,700 5,224 262 (1,444) 69,742
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The reconciling item to adjust segment operating profit to consolidated
pre-tax income consists of net other income of $2.3 million and net interest
expense of $4.0 million for the first three months of 2000, and net other
expense of $0.3 million and net interest income of $0.9 million for the
first three months of 1999.
13. DRESS LICENSE
In February 2000, the Company signed an agreement with Leslie Fay Company,
Inc. to license the Company's Liz Claiborne Dresses and Elisabeth Dresses
labels. The licensing agreement was effective as of the date of the
agreement and will not interrupt the flow of merchandise. Not included in
the agreement are dresses sold as part of the Liz Claiborne Collection,
Lizsport, Lizwear, Liz & Co. and Elisabeth sportswear lines. The initial
term of the license agreement runs through February 28, 2005, with an option
to renew for 2 additional 5-year terms, if certain sales thresholds are met.
[11]
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LIZ CLAIBORNE, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company operates the following business segments: Wholesale Apparel,
Wholesale Non-Apparel and Retail. All data and discussion with respect to
our specific segments included within this "Management's Discussion and
Analysis" is presented before applicable intercompany eliminations. Please
refer to Note 12 of Notes to Consolidated Financial Statements.
Net sales for the first quarter of 2000 were $809.5 million, an increase of
$108.7 million, or 15.5%, over net sales of $700.8 million for the first
quarter of 1999. This increase reflected a 13.0% increase in our Wholesale
Apparel segment to $667.9 million, an increase of 19.0% in Wholesale
Non-Apparel to $86.9 million, and an increase in Retail of 8.4% to $96.8
million.
The increase in net sales of Wholesale Apparel primarily reflected
significant growth in our Special Markets business due to higher unit volume
and higher average unit selling prices, as well as the inclusion of sales of
our SIGRID OLSEN business acquired on February 12, 1999, our LUCKY BRAND
DUNGAREES business acquired on June 8, 1999, and our LAUNDRY business
acquired on November 2, 1999 (together, our "recently acquired businesses",
which accounted for $48.1 million of our first quarter 2000 total net sales
increase). The sales increase also reflected the March 2000 launch of our
Crazy Horse Men's apparel line, and continued sales increases in our DKNY(R)
JEANS and DKNY(R)ACTIVE and Men's sportswear businesses, in each case due to
higher unit volume, partially offset by lower average unit selling prices.
These gains were partially offset by sales decreases resulting from the
licensing of our dress business in February, 2000. Sales also declined in
our DANA BUCHMAN, Career and ELISABETH businesses reflecting in each case
lower unit volume, and, in the case of our DANA BUCHMAN and Career
businesses, lower average unit selling prices reflecting weakness in demand.
The increase in our Wholesale Non-Apparel segment was due to significant net
sales increases in our Cosmetics business, which successfully launched the
licensed CANDIE'S fragrance in the third quarter of 1999, and, to a lesser
extent, our handbags business, principally reflecting higher, albeit
off-price, unit volume. These gains were partially offset by declines in our
fashion accessories businesses, due primarily to lower average unit selling
prices.
[12]
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The increase in net sales of our Retail segment reflected increased Outlet
store sales primarily due to 24 new stores on a period-to-period basis,
partially offset by a low single-digit comparable store sales decrease. Our
Specialty Retail Store sales increased slightly, with a significant increase
due to the inclusion of the sales of 12 LUCKY BRAND DUNGAREES stores, which
generated a substantial comparable store sales increase in the first
quarter, being offset by a slight decline in comparable store sales in the
balance of our Specialty Retail stores.
Gross profit dollars increased $40.2 million, or 15.3%, in 2000 over 1999.
Gross profit as a percent of sales decreased to 37.4% in 2000 from 37.5% in
1999. This decrease in gross profit rate reflected significantly higher
margins in our Casual, ELISABETH, Specialty Retail and Special Markets
businesses as well as contributions from our recently acquired businesses,
which generally run at relatively higher gross margin rates than the Company
average, and improved margins on the sale of excess inventories. These
increases were partially offset by lower gross margins in our wholesale
non-apparel segment as well as in our DANA BUCHMAN, Career and Men's
sportswear businesses reflecting higher markdown allowances, as well as
lower margins in our Dress business, which was licensed in February 2000. In
addition, increased penetration of our Special Markets business, which runs
at a lower gross profit rate than the Company average, caused our overall
gross profit rate to slightly decline in the quarter.
Selling, general and administrative expenses ("SG&A") increased $35.6
million, or 18.5%, in 2000 over 1999. These expenses as a percent of sales
increased to 28.2% in 2000 from 27.5% in 1999, principally reflecting the
increased penetration of our relatively higher cost Cosmetics business due
to higher marketing costs associated with the launch of new brands, as well
as relatively higher SG&A rates in our recently acquired businesses, the
planned dilution from the start-up costs of our new Kenneth Cole and DKNY
licenses, and an increase in our depreciation and amortization expense
related to our significant investments over the past several years in the
technological upgrading of our distribution facilities and information
systems and the expansion of our in-store merchandise shop programs, as well
as goodwill amortization generated by our recent acquisitions. This was
partially offset by increased penetration of our Special Markets business,
which is supported by relatively lower SG&A levels.
As a result of the factors described above, operating income increased $4.6
million, or 6.6%, to $74.3 million in the first quarter of 2000, and
operating income as a percent of sales declined by 80 basis points to 9.2%
in 2000 compared to 10.0% in 1999. Segment operating profit in our Wholesale
Apparel segment increased $3.8 million to $69.5 million (10.4% of sales) in
2000 compared to $65.7 million (11.1% of sales) in 1999, principally
reflecting significant contributions from our recently acquired businesses,
partially offset by the planned dilution from the start-up costs of our new
Kenneth Cole and DKNY licenses, and a reduction in the dollar value of
intercompany sales and profits, which are eliminated in consolidation.
Operating profit in our Wholesale Non-Apparel segment increased $0.3 million
to $5.5 million (6.3% of sales) in 2000 compared to $5.2 million (7.2% of
sales) in 1999, primarily reflecting a higher proportion of Special Markets
accessories sales, which run at a lower gross profit rate and operating
income rate than the Company's average accessories rates. Segment operating
profit in our Retail segment increased $1.6 million to $1.8 million (1.9% of
sales) in 2000 compared to $0.3 million (0.3% of sales) in 1999, principally
reflecting increased profit dollars from our Outlet stores with 24 new
stores on a period-to-period basis and an increase in our Specialty Retail
store profits due to the closure of 30 under-performing stores in 1999, and
the inclusion of the retail stores operated by our recently acquired
businesses.
[13]
<PAGE>
Net other income in the first quarter of 2000 was $2.3 million compared to
other expense of $0.3 million in 1999. This year's other income includes a
special investment gain of $3.0 million related to our sales of marketable
equity securities partially offset by minority interest and other
non-operating expenses.
Net interest expense in the first quarter of 2000 was $4.0 million compared
to interest income of $1.0 million in 1999. This increase of $4.9 million
represents the incremental interest cost on the cash and debt used to
finance our strategic initiatives and ongoing stock repurchase program.
For the first quarter our effective income tax rate declined from 36.5% in
1999 to 36.0% in 2000. The 36.0% reflects our current estimate of our full
year effective income tax rate.
Net income increased $1.8 million in 2000 to $46.5 million and declined as a
percent of net sales to 5.7% in 2000 from 6.4% in 1999, due to the factors
described above. Diluted earnings per common share, excluding the $3.0
million special investment gain, increased 15.7% to $0.81 in 2000 from $0.70
in 1999, reflecting higher net income and a lower number of average
outstanding common shares and share equivalents in 2000. Diluted earnings
per common share, including the $3.0 million special investment gain was
$0.84 in 2000. Our average diluted shares outstanding declined by 8.8
million in the first quarter of 2000 on a period-to-period basis, to 55.3
million, as a result of our ongoing stock repurchase program. We purchased
1.928 million shares during the first quarter of 2000 for $71.5 million.
Since the end of the first quarter we have purchased an additional 1.0
million shares for $44.3 million. As of May 12, 2000, we have $203.1 million
remaining in our buyback authorization.
FINANCIAL POSITION, CAPITAL RESOURCES AND LIQUIDITY
We ended the first quarter of 2000 with $28.0 million in cash and marketable
securities, compared to $24.7 million at the end of the 1999 first quarter,
and $307.7 million of debt compared to no debt outstanding at the end of the
first quarter of 1999. This $304.4 million change in our cash and debt
position reflecting a reduction in cash flow over the last twelve months is
primarily attributable to our expenditure of $125.5 million for purchase
price payments in connection with the acquisitions of LUCKY BRAND DUNGAREES
and LAUNDRY, net of cash acquired, $342.6 million for the repurchase of
common stock, $100.3 million for capital expenditures primarily related to
the technological upgrading of our distribution facilities and information
systems and in-store merchandise shops, as well as $29.0 million for an
equity investment in Kenneth Cole Productions, Inc. Our borrowings peaked at
$343.6 million during the quarter.
[14]
<PAGE>
Net cash used by operating activities for the three months of 2000 was
$115.7 million, compared to $129.5 million in 1999. This $13.8 million
improvement in cash flow reflected improved working capital; specifically,
year over year increases in the amount of cash generated by changes in
inventory and accounts payable levels.
Inventory decreased $18.1 million, or 4.5%, at the first quarter end 2000
compared to the first quarter end 1999. Excluding the inventories of our
recently acquired businesses, inventories in the balance of our business
declined by $41.7 million or 10.4%. This decrease reflects the continuing
inventory management initiatives implemented at the end of 1998, which focus
on improving productivity in our replenishment and essential programs and
increasing our ratio of sales to our inventory ownership levels. As a result
of these efforts, we also improved our average inventory turnover rate by
15% in the 2000 first quarter to 4.4 times from 3.8 times during the first
quarter of 1999. Our accounts receivable ended the quarter at $521.0
million, up 9.8% over last year, which was less than our overall sales
increase. This increase in accounts receivable primarily reflected the
significant volume growth in our Special Markets business, and the
assumption of the accounts receivable of our recently acquired businesses,
which accounted for approximately 36% of the increase.
Net cash used in investing activities was $27.8 million in 2000, compared to
$4.6 million in 1999. The 2000 net cash used primarily reflected net
purchases of investments of $5.5 million and capital expenditures of $20.0
million, compared to the 1999 first quarter acquisition costs of our 84.5%
interest in SIGRID OLSEN and capital expenditures of $17.0 million partially
offset by disposals of investments of $65.2 million.
Net cash provided by financing activities was $126.2 million in 2000,
compared to net cash used of $5.8 million in 1999. This $132.0 million year
over year improvement in cash flow reflected net borrowings of $191.6
million in the first quarter of 2000, partially offset by $70.3 million
expended for stock purchases. There were no borrowings or stock purchases in
the first quarter of 1999.
Our anticipated capital expenditures for the full year 2000 approximate $75
million, of which $20.0 million has been expended through April 1, 2000.
These expenditures consist primarily of the continued technological
upgrading and expansion of our management information systems and
distribution facilities (including certain building and equipment
expenditures), leasehold improvements at our New York offices and the
opening of an additional 25 specialty retail and 22 outlet stores. In
addition, we anticipate spending approximately $25 million on in-store
merchandise shops for the full year of 2000. Capital expenditures, in-store
shops and working capital cash needs will be financed with net cash provided
by operating activities and our revolving credit and trade letter of credit
facilities.
In December 1999, the Company received $600 million of financing commitments
under a bank revolving credit facility to finance our liquidity needs. This
bank facility, which has received credit ratings of BBB from Standard &
Poors and Baa2 from Moody's Investor Services, may be either drawn upon or
used as a liquidity facility to support the issuance of A2/P2 rated
commercial paper. At April 1, 2000, we had $307.7 million outstanding under
our commercial paper program. In addition, we have in place $383 million of
trade letter of credit facilities to support our merchandise purchasing
requirements. At April 1, 2000, we had $246.7 million outstanding under
these letter of credit facilities. We anticipate that the commercial paper
program and bank and letter of credit facilities will be sufficient to fund
our future liquidity requirements and that we will be able to adjust the
amounts available under these facilities if necessary.
YEAR 2000
The Company successfully completed the Year 2000 rollover with no business
interruptions. There has been no material change in total costs since the
last estimate, and all costs have been substantially incurred at April 1,
2000. We have not experienced any material Y2K problems since the Year 2000
rollover. We intend to continue to monitor our compliance, as well as the
compliance of others whose operations are material to our business.
[15]
<PAGE>
CERTAIN INTEREST RATE AND FOREIGN CURRENCY RISKS
We finance our capital needs through available cash and marketable
securities, operating cash flow, letter of credit and bank revolving credit
facilities and commercial paper issuances. Our floating rate bank revolving
credit facility and commercial paper program expose us to market risk for
changes in interest rates.
We mitigate the risks associated with changes in foreign currency rates
through foreign exchange forward contracts to hedge transactions denominated
in foreign currencies for periods of less than one year and to hedge
expected payment of intercompany transactions with our non-U.S.
subsidiaries. Gains and losses on contracts, which hedge specific foreign
currency denominated commitments are recognized in the period in which the
transaction is completed.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In January 1999, two actions were filed in California naming as defendants
more than a dozen United States-based apparel companies that source garments
from Saipan (Commonwealth of the Northern Mariana Islands) and a large
number of Saipan-based garment factories. The actions assert that the Saipan
factories engage in unlawful practices relating to the recruitment and
employment of foreign workers and that the apparel companies, by virtue of
their alleged relationships with the factories, have violated various
federal and state laws. One action, filed in California Superior Court in
San Francisco by a union and three public interest groups, alleges unfair
competition and false advertising (the "State Court Action"). The State
Court Action seeks equitable relief, unspecified amounts for restitution and
disgorgement of profits, interest and an award of attorney's fees. The
second, initially filed in Federal Court for the Central District of
California and subsequently transferred to the District of Hawaii, is
brought on behalf of a purported class consisting of the Saipan factory
workers (the "Federal Court Action"). The Federal Court Action alleges
claims under the civil RICO statute and the Alien Tort Claims Act, premised
on supposed violations of the federal anti-peonage and indentured servitude
statutes, as well as other violations of Saipan and international law, and
seeks equitable relief and unspecified damages, including treble and
punitive damages, interest and an award of attorney's fees. A third action,
brought in Federal Court in Saipan solely against the garment factory
defendants on behalf of a putative class of their workers, alleges
violations of federal and Saipanese wage and employment laws. The Company
sources products in Saipan but was not named as a defendant in the actions.
The Company, and certain other apparel companies not named as defendants,
were advised in writing, however, that they would be added as parties if a
consensual resolution of the complaint was not reached. The Company has
since reached an agreement to settle all claims that were or could have been
asserted in the Federal or State Court actions. To date, several other
apparel companies have also agreed to settle these claims. The agreement
concluded by the Company is subject to Federal Court approval. Under the
terms of the agreement, if the settlement does not receive final Federal
Court approval, the Company will be entitled to a refund of the entire
settlement amount except for funds of up to $10,000 spent on costs of notice
to the settlement class. As part of the settlement, the Company has since
been named as a defendant, along with certain other apparel companies, in a
State Court action in California styled Union of Needletrades Industrial and
Textile Employees, et al. v. Brylane, L.P., et al., pending in the San
Francisco County Superior Court, and in a Federal Court action styled Doe I,
et al. v. Brylane, L.P. et al., pending in the United States District Court
for the District of Hawaii, that mirror portions of the larger State and
Federal Court actions but do not include RICO and certain of the other
claims alleged in those actions. The newly filed actions against the Company
will remain inactive unless settlement is not finally approved by the
Federal Court. Because the litigation is at a preliminary stage, with no
merits discovery having taken place, if the settlement is not finally
approved by the Federal Court, we cannot at this juncture determine the
likelihood of a favorable or unfavorable outcome, or the magnitude of the
latter if it were to occur. Although the outcome of any such litigation
cannot be determined with certainty, management is of the opinion that the
final outcome should not have a material adverse effect on the Company's
financial position or results of operations.
[16]
<PAGE>
Item 5. Statement Regarding Forward-Looking Disclosure
Statements contained herein and in future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases, and in
oral statements made by or with the approval of authorized personnel that
relate to the Company's future performance, including, without limitation,
statements with respect to the Company's anticipated results of operations
or level of business for 2000 or any other future period, are
forward-looking statements within the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995, as a number of factors affecting
the Company's business and operations could cause actual results to differ
materially from those contemplated by the forward-looking statements. Such
statements are based on current expectations only, and are subject to
certain risks, uncertainties and assumptions, referred to below, including
but not limited to economic, competitive, governmental and technological
factors affecting the Company's operations, markets, products, services and
prices, and are indicated by words or phrases such as "plan", "anticipate",
"estimate", "project", "management expects", "the Company believes", "is or
remains optimistic" or "currently envisions" and similar words or phrases.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially
from those anticipated, estimated or projected.
These factors include, among others, changes in regional, national, and
global economic conditions; risks associated with changes in the competitive
marketplace, including the levels of consumer confidence and spending (which
may be impacted by, among other things, higher interest rates), and the
financial condition of the apparel industry and the retail industry,
retailer or consumer acceptance of the Company's products as a result of
fashion trends or otherwise and the introduction of new products or pricing
changes by the Company's competitors; risks associated with the Company's
dependence on sales to a limited number of large department store customers,
including risks related to customer requirements for vendor margin support,
and those related to extending credit to customers; risks associated with
year 2000 related issues that may arise with the Company, third party
customers or suppliers in connection with systems that have not been fully
tested; uncertainties relating to the Company's ability to successfully
implement its growth strategies, integrate acquisitions, or successfully
launch new products and lines; risks associated with the possible inability
of the Company's unaffiliated manufacturers to manufacture and deliver
products in a timely manner, to meet quality standards or to comply with the
Company's policies regarding labor practices; and risks associated with
changes in social, political, economic and other conditions affecting
foreign operations and sourcing.
With respect to foreign sourcing, the Company notes that legislation which
would further restrict the importation and/or increase the cost of textiles
and apparel produced abroad has periodically been introduced in Congress.
Although it is unclear whether any new legislation will be enacted into law,
it appears likely that various new legislative or executive initiatives will
be proposed. These initiatives may include a reevaluation of the trading
status of certain countries, including Normal Trade Relations ("NTR")
treatment for the People's Republic of China ("PRC") and/or retaliatory
duties, quotas or other trade sanctions, which, if enacted, would increase
the cost of products purchased from suppliers in such countries. The PRC's
NTR treatment was renewed in July 1999 for an additional year. In light of
the very substantial portion of the Company's products, which are
manufactured by foreign suppliers, the enactment of new legislation or the
administration of current international trade regulations, or executive
action affecting international textile agreements could adversely affect the
Company's operations. Reference is also made to the other economic,
competitive, governmental and technological factors affecting the Company's
operations, markets, products, services and prices as are set forth in our
1999 Annual Report on Form 10-K, including, without limitation, those set
forth under the heading "Business-Competition; Certain Risks". The Company
undertakes no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or
otherwise.
[17]
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule as of April 1, 2000.
(b) The Company did not file any reports on Form 8-K in the quarter.
[18]
<PAGE>
SIGNATURE
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.
DATE: May 16, 2000
LIZ CLAIBORNE, INC.
By: /s/ Richard F. Zannino By: /s/ Elaine H. Goodell
---------------------- ---------------------
RICHARD F. ZANNINO ELAINE H. GOODELL
Senior Vice President - Finance Vice President - Corporate
& Administration and Controller and Chief Accounting
Chief Financial Officer Officer
(Principal financial officer) (Principal accounting officer)
[19]
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE LIZ
CLAIBORNE, INC. CONDENSED CONSOLIDATED BALANCE SHEET AS OF APRIL 1, 2000 AND
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS THEN ENDED
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-30-2000
<PERIOD-END> Apr-01-2000
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<SECURITIES> 7,429
<RECEIVABLES> 520,977
<ALLOWANCES> 0
<INVENTORY> 388,454
<CURRENT-ASSETS> 1,045,504
<PP&E> 607,733
<DEPRECIATION> 316,763
<TOTAL-ASSETS> 1,600,927
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