<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---- ---
Commission File Number 1-8941
FRUIT OF THE LOOM, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-3361804
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5000 SEARS TOWER,
233 SOUTH WACKER DRIVE,
CHICAGO, ILLINOIS 60606
(Address of principal executive offices, including Zip Code)
(312) 876-1724
(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 (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
--- ---
Common shares outstanding at October 31, 1996: 70,188,089 shares of Class A
Common Stock, $.01 par value, and 6,690,976 shares of Class B Common Stock,
$.01 par value.
<PAGE> 2
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements
Condensed Consolidated Balance Sheet;
September 30, 1996 (Unaudited) and
December 31, 1995 2
Condensed Consolidated Statement of
Earnings (Unaudited); Three and Nine
Months Ended September 30, 1996 and
1995 3
Condensed Consolidated Statement of Cash
Flows (Unaudited); Nine Months Ended
September 30, 1996 and 1995 4
Notes to Condensed Consolidated Financial
Statements (Unaudited) 5
Item 2. Management's Discussion and
Analysis of Financial Condition and
Results of Operations 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 19
<PAGE> 3
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands of dollars)
<TABLE>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
ASSETS (UNAUDITED)
- ------
<S> <C> <C>
Current Assets
Cash and cash equivalents
(including restricted cash)............................... $ 2,000 $ 26,500
Notes and accounts receivable
(less allowance for possible losses
of $28,800 and $26,600, respectively)..................... 468,000 261,000
Inventories
Finished goods............................................ 442,700 522,300
Work in process........................................... 153,700 132,400
Materials and supplies.................................... 51,900 44,800
Other....................................................... 46,400 72,800
---------- ----------
Total current assets................................. 1,164,700 1,059,800
---------- ----------
Property, Plant and Equipment................................. 1,591,600 1,607,300
Less accumulated depreciation............................. 635,600 578,900
---------- ----------
Net Property, Plant and Equipment.................... 956,000 1,028,400
---------- ----------
Other Assets
Goodwill (less accumulated amortization of
$277,900 and $257,800, respectively).................... 751,000 771,100
Other..................................................... 61,800 60,200
---------- ----------
Total other assets................................... 812,800 831,300
---------- ----------
$2,933,500 $2,919,500
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities
Current maturities of long-term debt........................ $ 12,900 $ 14,600
Trade accounts payable...................................... 83,300 60,100
Other accounts payable and accrued expenses................. 221,900 229,100
---------- ----------
Total current liabilities............................ 318,100 303,800
---------- ----------
Noncurrent Liabilities
Long-term debt.............................................. 1,295,800 1,427,200
Deferred income taxes....................................... 18,100 -
Other....................................................... 282,900 292,900
---------- ----------
Total noncurrent liabilities......................... 1,596,800 1,720,100
---------- ----------
Common Stockholders' Equity................................. 1,018,600 895,600
---------- ----------
$2,933,500 $2,919,500
========== ==========
</TABLE>
See accompanying notes.
2
<PAGE> 4
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED)
(In thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- -------------------------------
1996 1995 1996 1995
------------- ------------ ------------- ----------------
<S> <C> <C> <C> <C>
Net sales................................... $628,000 $641,300 $1,866,400 $1,894,300
Cost of sales............................... 427,400 450,400 1,320,000 1,330,400
--------- --------- ---------- ----------
Gross earnings............................ 200,600 190,900 546,400 563,900
Selling, general and administrative expenses 99,700 99,500 280,400 291,400
Goodwill amortization....................... 6,700 9,500 20,100 28,300
--------- --------- ---------- ----------
Operating earnings........................ 94,200 81,900 245,900 244,200
Interest expense............................ (25,400) (30,000) (79,800) (89,100)
Other expense - net......................... (400) (2,600) (3,300) (2,200)
--------- --------- ---------- ----------
Earnings before income tax expense
and cumulative effect of change in
accounting principle..................... 68,400 49,300 162,800 152,900
Income tax expense.......................... 20,600 24,800 54,700 72,200
--------- --------- ---------- ----------
Earnings before cumulative effect of
change in accounting principle........... 47,800 24,500 108,100 80,700
Cumulative effect of change in
accounting for pre-operating costs....... - - - (5,200)
--------- --------- ---------- ----------
Net earnings.............................. $ 47,800 $ 24,500 $ 108,100 $75,500
========= ========= ========== ==========
Earnings per common share:
Earnings before cumulative effect
of change in accounting principle........ $ .63 $.32 $ 1.42 $ 1.06
Cumulative effect of change in
accounting for pre-operating costs........ - - - (.07)
--------- --------- ---------- ----------
Net earnings.............................. $ .63 $ .32 $ 1.42 $ .99
========= ========= ========== ==========
Average common shares outstanding......... 76,400 76,000 76,200 76,000
========= ========= ========== ==========
</TABLE>
See accompanying notes.
3
<PAGE> 5
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(In thousands of dollars)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1996 1995
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings................................................... $108,100 $ 75,500
Adjustments to reconcile to net cash provided by
(used for) operating activities:
Cumulative effect of change in accounting for
pre-operating costs.......................................... - 5,200
Depreciation and amortization................................. 113,900 127,400
Deferred income taxes......................................... 27,000 13,300
Increase in other working capital............................. (121,400) (237,300)
Other-net..................................................... (3,500) (4,700)
--------- ---------
Net cash provided by (used for) operating
activities.................................................. 124,100 (20,600)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures........................................... (27,100) (88,300)
Other-net...................................................... (2,200) 25,600
--------- ---------
Net cash used for investing activities...................... (29,300) (62,700)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt....................... 63,000 -
Proceeds under line-of-credit agreement........................ 308,500 447,600
Payments under line-of-credit agreement........................ (483,100) (382,900)
Principal payments on long-term debt and capital leases........ (19,000) (16,800)
Issuances of common stock...................................... 11,300 400
--------- ---------
Net cash provided by (used for) financing
activities.................................................. (119,300) 48,300
--------- ---------
Net decrease in Cash and cash equivalents (including
restricted cash)............................................. (24,500) (35,000)
Cash and cash equivalents (including restricted cash)
at beginning of period....................................... 26,500 49,400
-------- --------
Cash and cash equivalents (including restricted cash)
at end of period............................................. $ 2,000 $ 14,400
======== ========
</TABLE>
See accompanying notes.
4
<PAGE> 6
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. No dividends were declared on the Company's common stock for the
three and nine month periods ended September 30, 1996 and 1995.
2. Prior to 1995 pre-operating costs associated with the start-up of
significant new production facilities were deferred and amortized over
three years. Effective January 1, 1995 the Company recorded the
cumulative effect of a change in accounting principle related to the
Company's decision to adopt a more conservative position as a result of
changes in its business and to expense pre-operating costs as incurred
resulting in an after tax charge of $5,200,000 ($.07 per share) in the
first quarter of 1995. The results of operations for the first nine
months of 1995 have been restated to reflect this change in accounting
principle.
3. The Company and its subsidiaries are involved in certain legal
proceedings and have retained liabilities, including certain environmental
liabilities, such as those under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, its regulations and
similar state statutes ("Superfund Legislation"), in connection with the
sale of certain discontinued operations, some of which were significant
generators of hazardous waste. The Company and its subsidiaries have also
retained certain liabilities related to the sale of products in connection
with the sale of certain discontinued operations. The Company's retained
liability reserves at September 30, 1996 related to discontinued
operations consist primarily of certain environmental and product
liability reserves of approximately $68,800,000. The Company has recorded
receivables related to these environmental liabilities of approximately
$37,600,000 which management believes will be recovered from insurance and
other sources. Management believes that adequate reserves have been
established to cover potential claims based on facts currently available
and current Superfund Legislation.
Generators of hazardous wastes which were disposed of at offsite locations
which are now superfund sites are subject to claims brought by state
and Federal regulatory agencies under Superfund Legislation and by
private citizens under Superfund Legislation and common law theories.
Since 1982, the Environmental Protection Agency (the "EPA") has
actively sought compensation for response costs and remedial action
at offsite disposal locations from waste generators under the
Superfund Legislation, which authorizes such action by the EPA
regardless of fault, legality of original disposal or ownership of a
disposal site. The EPA's activities under the Superfund Legislation
can be expected to continue during the remainder of 1996 and future
years.
In February 1986, the Company completed the sale of stock of its then
wholly owned subsidiary, Universal Manufacturing Corporation
("Universal") to MagneTek, Inc. ("MagneTek"). At the time of the
sale there was a suit pending against Universal and the
5
<PAGE> 7
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
Company's predecessor, Northwest Industries, Inc. ("Northwest"), by LMP
Corporation ("LMP"). The suit (the "LMP Litigation") alleged that
Universal and Northwest fraudulently induced LMP to sell its business
to Universal and then suppressed the development of certain
electronic lighting ballasts in breach of the agreement of sale,
which required Universal to pay to LMP a percentage of the net
profits from such business from 1982 through 1986. Two additional
plaintiffs, Stevens Luminoptics Partnership and Calmont Technologies,
Inc., joined the litigation in 1986. In December 1989 and January
1990, a jury returned certain verdicts against Universal and also
returned verdicts in favor of Northwest and on certain issues in
favor of Universal. A judgment totaling $25,800,000, of which
$7,500,000 represented punitive damages, reflecting these verdicts
was entered by the Alameda County, California Superior Court in
January 1990 against Universal.
In April 1992, the California Court of Appeals reversed the
$25,800,000 judgment against Universal and affirmed those verdicts
favorable to Universal and Northwest. In July 1992, the California
Supreme Court denied the plaintiffs' petition for review. The case
was then remanded to the trial court.
Pursuant to the stock purchase agreement (the "Stock Purchase Agreement")
under which Universal was sold, the Company agreed to indemnify MagneTek
for a two-year period following the sale of Universal for certain
contingent liabilities. MagneTek brought suit against the Company for
declaratory and other relief in connection with the indemnification under
the Stock Purchase Agreement. In April 1992, the Los Angeles County,
California Superior Court found that the Company was obligated by the
Stock Purchase Agreement to indemnify MagneTek for, among other things,
its costs and expenses in defending that case. The court entered a
judgment requiring the Company to reimburse and indemnify MagneTek in two
stages: currently, to reimburse MagneTek for costs of defense and related
expenses in the LMP Litigation, plus costs of litigating the indemnity
case with the Company; and at a later date, if and when any liability in
the LMP Litigation is finally determined or a settlement is reached in
that case, to reimburse and/or indemnify MagneTek for that amount as well.
In October 1994, following a retrial of the LMP Litigation, a jury
returned a verdict of approximately $96,000,000 against Universal. The
jury verdict included breach of contract and fraud damages and
approximately $6,000,000 in punitive damages. The Company is obligated to
indemnify Universal for damages incurred in this case.
6
<PAGE> 8
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
Management of the Company believes that the jury's decision is incorrect
and is contrary to the evidence. Based on discussions with counsel
and on other information currently available, management believes
that the court committed numerous errors during the trial and,
accordingly, that the judgment will not stand on appeal. All briefs
have been filed and the appeal is awaiting oral argument.
In March 1988, a class action suit entitled Endo, et al. v.
Albertine, et al. was filed in the United States District Court for
the Northern District of Illinois (the "District Court") against the
Company, its then directors, certain of its then executive officers,
its then underwriters and the Company's current independent auditors
in connection with the Company's initial public offering of Class A
Common Stock and certain debt securities in March 1987. The suit
alleges, among other things, violations of Federal and state
securities laws against all of the defendants, as well as breaches of
fiduciary duties by the director and officer defendants, and seeks
unspecified damages.
Motions to dismiss the complaint were filed by all defendants. In December
1990, a magistrate judge recommended that the District Court dismiss
all of the plaintiffs' claims with prejudice. In January 1993, the
District Court adopted in part and rejected in part the magistrate
judge's recommendation for dismissal of the complaint. As a result,
the litigation will continue as to various remaining counts of the
complaint. Both the defendants and the plaintiffs filed motions for
summary judgment which were denied in all material respects.
Management and the Board of Directors believe that this suit is without
merit and intend to continue to vigorously defend against this
litigation.
Management believes, based on information currently available, that the
ultimate resolution of the aforementioned matters will not have a
material adverse effect on the financial condition or results of
operations of the Company, but the ultimate resolution of certain of
these matters, if unfavorable, could be material to the results of
operations of a particular future period.
In June 1994, pursuant to authorization from the Company's Board of
Directors, the Company guaranteed a loan from a bank in an amount up to
$12,000,000 to Mr. William Farley, the Company's Chairman of the Board
and Chief Executive Officer. In exchange for the guarantee the Company
receives an annual fee from Mr. Farley equal to 1% of the value of the
loan covered by the guarantee. The guarantee is secured by a second
lien on certain shares of the Company held by the bank for other loans
made to Mr. Farley.
7
<PAGE> 9
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
The Company has guaranteed, on an unsecured basis, the repayment of
certain debt incurred or created by Acme Boot Company, Inc. ("Acme Boot"),
formerly a wholly-owned subsidiary of the Company, under Acme Boot's bank
credit facilities (the "Acme Boot Credit Facilities"). Acme Boot is a
majority owned subsidiary of Farley Inc. ("FI"). Mr. Farley holds 100% of
the common stock of FI. At September 30, 1996, the Acme Boot Credit
Facilities provide for up to approximately $67,000,000 of loans and
letters of credit. The Acme Boot Credit Facilities are secured by liens on
substantially all of the assets of Acme Boot and its subsidiaries. At
September 30, 1996, approximately $65,700,000 in loans and letters of
credit were outstanding under the Acme Boot Credit Facilities.
Summarized unaudited financial information for Acme Boot follows (in
thousands of dollars):
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
-------- --------
<S> <C> <C>
Current assets $ 45,700 $ 49,500
Noncurrent assets-net 7,500 9,000
-------- --------
$ 53,200 $ 58,500
======== ========
Current liabilities $ 77,300 $ 17,900
Noncurrent liabilities 10,800 65,300
Preferred stock 3,100 2,500
Common stockholders' deficit (38,000) (27,200)
-------- --------
$ 53,200 $ 58,500
======== ========
</TABLE>
CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1996 1995 1996 1995
------- ------- -------- -------
<S> <C> <C> <C> <C>
Net sales $20,400 $31,100 $ 62,300 $83,100
======= ======= ======== =======
Gross earnings $ 4,200 $ 6,500 $ 16,400 $18,200
======= ======= ======== =======
Operating loss $(3,700) $(2,000) $ (7,800) $(7,100)
======= ======= ======== =======
Extraordinary gain on
early retirement of debt $ - $ - $ - $18,100
======= ======= ======== =======
Net earnings (loss) $(4,800) $(4,100) $(10,200) $ 4,800
======= ======= ======== =======
</TABLE>
8
<PAGE> 10
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
The Company has negotiated grants from the governments of the Republic
of Ireland, Northern Ireland and Germany. The grants are being used
for employee training, the acquisition of property and equipment and
other governmental business incentives such as general employment. At
September 30, 1996, the Company has a contingent liability to repay, in
whole or in part, grants received of approximately $63,600,000 in the
event that the Company does not meet defined average employment levels
or terminates operations in the Republic of Ireland, Northern Ireland
or Germany.
4. The effective income tax rate for the third quarter and first nine
months of 1996 and 1995 differed from the Federal statutory rate of 35%
primarily due to the impact of goodwill amortization, a portion of which
is not deductible for Federal income tax purposes, state income taxes, the
provision for interest related to prior year's taxes and, in 1996, the
impact of higher foreign earnings, certain of which are taxed at lower
rates than in the United States.
5. In the fourth quarter of 1995, management announced plans to close
certain manufacturing operations and to take other actions to reduce costs
and streamline operations. As a result, the Company recorded charges of
approximately $372,900,000 ($287,400,000 after tax) related to impairment
writedowns of goodwill, costs associated with the closing or realignment
of certain domestic manufacturing facilities and attendant personnel
reductions and charges related to inventory writedowns and valuations,
foreign operations and other corporate issues. These charges were taken
in an effort to substantially reduce the Company's cost structure,
streamline operations and further improve customer service.
On October 2, 1996 the Company announced plans to close its Raymondville,
Texas manufacturing facility and reduce sewing operations at its
Campbellsville and Jamestown, Kentucky plants. These actions were taken
as part of the Company's continuing program to reduce costs and streamline
operations. The Company does not anticipate any significant charges will
be incurred related to the plant closing and reduction in operations.
6. On September 19, 1996 the Company announced it had signed a letter
of intent with an unrelated third party (the "Purchaser") to sell a
substantial portion of its hosiery related operations and related assets
for proceeds (including certain working capital items) of approximately
$70,000,000, resulting in an estimated pretax gain on the sale of
approximately $6,000,000. It was also announced that the Purchaser will
enter into a long-term license agreement with the Company granting the
Purchaser an exclusive license to use the Fruit of the Loom trade name and
trademarks for the manufacture, sale and distribution of athletic, casual
and dress socks for adults. The transaction is subject to
9
<PAGE> 11
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONCLUDED)
(UNAUDITED)
a definitive purchase agreement. Sales from hosiery related operations
were $30,900,000 and $33,400,000 for the third quarter of 1996 and 1995,
respectively, and $84,000,000 and $89,800,000 for the nine months ended
September 30, 1996 and 1995, respectively.
7. The condensed consolidated financial statements contained herein should
be read in conjunction with the consolidated financial statements and
related notes contained in the Company's Annual Report on Form 10-K for
the year ended December 31, 1995.
The information furnished herein reflects all adjustments (consisting only
of normal recurring adjustments) which are, in the opinion of management,
necessary to a fair statement of the results of the interim periods and is
not necessarily indicative of results for the entire year.
The Company uses the last-in, first-out ("LIFO") method of accounting for
the majority of inventories for financial reporting purposes. Interim
determinations of LIFO inventories are necessarily based on management's
estimates of year-end inventory levels and costs. Subsequent changes in
these estimates, including the final year-end LIFO determination, and the
effect of such changes on earnings are recorded in the interim periods in
which they occur.
10
<PAGE> 12
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Except for historical information contained herein, certain matters set forth
in this Quarterly Report on Form 10-Q are forward looking statements that
involve certain risks and uncertainties that could cause actual results to
differ materially from those in the forward looking statements. Potential
risks and uncertainties include such factors as the financial strength of the
retail industry (particularly the mass merchant channel), the level of consumer
spending for apparel, the amount of sales of the Company's activewear
screenprint products, the competitive pricing environment within the basic
apparel segment of the apparel industry, the continued ability of the Company
to successfully move labor-intensive segments of the manufacturing process
offshore and the success of planned advertising, marketing and promotional
campaigns. Investors are also directed to consider other risks and
uncertainties discussed in documents filed by the Company with the Securities
and Exchange Commission.
The following discussion should be read in conjunction with the accompanying
condensed consolidated financial statements for the period ended September 30,
1996 and the Company's Annual Report on Form 10-K for the year ended December
31, 1995.
The table below sets forth selected operating data (in millions of dollars and
as percentages of net sales) of the Company.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $628.0 $641.3 $1,866.4 $1,894.3
Gross earnings $200.6 $190.9 $ 546.4 $ 563.9
Gross margin 31.9% 29.8% 29.3% 29.8%
Operating earnings $ 94.2 $ 81.9 $ 245.9 $ 244.2
Operating margin 15.0% 12.8% 13.2% 12.9%
</TABLE>
NET SALES
Net sales decreased 2.1% and 1.5% respectively, in the third quarter and first
nine months of 1996 compared to the same periods of 1995. The decrease in net
sales for both periods relates primarily to price decreases on activewear tee
shirts, decreased shipments of Gitano, decreased shipments in Europe and the
impact of promotional programs, the sum of which more than offset increased
shipments of underwear, casualwear fleece and activewear products.
11
<PAGE> 13
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (CONTINUED)
GROSS EARNINGS
Gross earnings increased 5.1% in the third quarter, but decreased 3.1% for the
first nine months of 1996 compared to the same periods of 1995. The gross
margins were 31.9% and 29.3% in the third quarter and first nine months of 1996
compared to 29.8% in both periods of 1995. The increase in gross earnings
and gross margin in the third quarter is primarily due to the Company's
offshore manufacturing operations which operate at lower costs than the
Company's domestic facilities and decreases in casualty insurance costs as a
result of improved safety in the plants, the sum of which more than offset the
impact of lower domestic activewear tee shirt selling prices, lower margins on
sales of irregular products, promotional programs and normal cost increases.
The decrease in gross earnings and gross margin for the first nine months of
1996 compared to the same period of 1995 is primarily due to lower domestic
activewear tee shirt selling prices, increased sales of irregular products,
promotional programs, normal cost increases and operating certain domestic
manufacturing facilities at less than optimal levels to better manage
inventory. The decrease in gross earnings and gross margin for the first nine
months was reduced by the effect of the Company's offshore manufacturing
operations and decreases in casualty insurance costs as a result of improved
safety in the plants.
OPERATING EARNINGS
Operating earnings increased 15.0% and .7%, respectively, in the third quarter
and the first nine months of 1996 compared to the same periods of 1995.
Operating margins increased 2.2 percentage points to 15.0% of net sales in the
third quarter, and .3 percentage points to 13.2% of net sales for the first
nine months of 1996. The increase in the third quarter of 1996 compared to the
same period of 1995 resulted from higher gross earnings and lower goodwill
amortization. The increase in the first nine months of 1996 compared to the
same period of 1995 resulted from lower selling, general and administrative
expenses and lower goodwill amortization offset partially by lower gross
earnings. Lower selling, general and administrative expenses in the first nine
months of 1996 as compared to the same period in 1995 resulted principally from
a reduction of personnel as a result of the Company's 1995 actions taken in an
effort to substantially reduce the Company's cost structure and streamline
operations.
The first nine months of 1995 included charges related to the curtailment of
selling and marketing activities in Mexico, and charges related to the closing
of Gitano's New York office and integration of all Gitano related management
functions into the Company's existing
12
<PAGE> 14
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (CONTINUED)
OPERATING EARNINGS - (CONCLUDED)
operations. These cost reductions were partially offset by increases in both
1996 periods in management information systems expenses as compared to the same
periods of 1995 and increased advertising in the first nine months of 1996 as
compared to the same period in 1995. Selling, general and administrative
expense was 15.9% and 15.5% of net sales for the third quarter of 1996 and
1995, respectively, and was 15.0% and 15.4% of net sales in the first nine
months of 1996 and 1995, respectively.
In addition, during 1995 the Company determined that the carrying value of the
intangible assets related to certain acquired businesses were not expected to
be recovered by their future undiscounted cash flows. Accordingly, impairment
write downs of goodwill in the fourth quarter of 1995 reflected the write-off
of all goodwill related to these certain acquired businesses. The effect of
this impairment write down was to reduce goodwill amortization expense in the
third quarter and first nine months of 1996 by approximately $2,800,000 and
$8,200,000, respectively, compared to the same periods of 1995.
INTEREST EXPENSE
Interest expense for the third quarter and first nine months of 1996 decreased
15.3% and 10.4%, respectively, from the same periods of 1995. The decrease was
principally attributable to the effect of lower average debt levels in both
periods of 1996. Working capital levels in both periods of 1996 were down as
compared to the same periods of 1995, primarily from lower inventories, the
effect of which is partially offset by higher accounts receivable. In
addition, the Company has significantly reduced its capital expenditures
between 1996 and 1995, thereby reducing its borrowing needs.
INCOME TAXES
The effective income tax rate for the third quarter and first nine months of
1996 and 1995 differed from the Federal statutory rate of 35% primarily due to
the impact of goodwill amortization, a portion of which is not deductible for
Federal income tax purposes, state income taxes, the provision for interest
related to prior years' taxes and, in 1996, the impact of higher foreign
earnings, certain of which are taxed at lower rates than in the United States.
13
<PAGE> 15
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (CONTINUED)
EARNINGS PER SHARE
Earnings per share were $.63 for the third quarter of 1996 compared to $.32 for
the same prior year period, a 96.9% increase. For the first nine months of
1996, earnings per share before cumulative effect of change in accounting
principle increased 34.0% from the same period of 1995. Earnings per share
before cumulative effect of change in accounting principle were $1.42 for the
first nine months of 1996 compared to $1.06 for the same period of 1995.
Included in the restated first nine months of 1995 was a charge of $.07 per
share related to the Company's decision to adopt a more conservative position
as a result of changes in its business and to expense pre-operating costs as
incurred. Net earnings per share were $1.42 for the first nine months of 1996
compared to $.99 for the same prior year period.
EFFECTS OF INFLATION
Management believes that the moderate rate of inflation over the past few years
has not had a significant impact on the Company's sales or profitability.
LIQUIDITY AND CAPITAL RESOURCES
Funds generated from the Company's operations are the major source of liquidity
and are supplemented by funds obtained from capital markets including bank
facilities. The Company has available for the funding of its operations
approximately $973,600,000 of revolving lines of credit. As of November 6,
1996, approximately $561,300,000 was available and unused under these
facilities.
The Company has available a $125,000,000 short-term revolving commitment from a
group of banks which expires in May 1997 to supplement its existing revolving
lines of credit. No borrowings are outstanding under this facility.
Net cash provided by operating activities for the nine months ended September
30, 1996 was $124,100,000, as compared to net cash used for operating
activities of $20,600,000 in the comparable 1995 period. The favorable
year-to-year comparison largely resulted from a smaller increase in working
capital in the first nine months of 1996 ($121,400,000 as compared with
$237,300,000 in the 1995 period). In 1996 accounts receivable increased
$207,000,000, reflecting the seasonality of the Company's business at its peak
combined with the impact of promotional programs that include extended terms on
the purchase of selected products, all of
14
<PAGE> 16
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - (CONTINUED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES - (CONTINUED)
which are scheduled to be collected in the fourth quarter. Inventories, on the
other hand, have been reduced by $51,200,000 since the beginning of 1996. The
reduction was primarily due to the Company's efforts to reduce the number of
product offerings and better manage inventory levels. This contrasts with
inventory growth of $159,700,000 in the first nine months of 1995 coupled with
a seasonal increase of $68,400,000 in accounts receivable. The inventory
growth in 1995 was the result of higher raw material costs, an increase in
heavier weight apparel carried in inventory to meet increased consumer demand,
the effect of the Company's ongoing efforts to improve customer service and the
effect of the sluggish retail environment which led to lower than anticipated
sales volumes.
Net cash used for investing activities in the nine months ended September 30,
1996 and 1995 was $29,300,000 and $62,700,000, respectively. Capital
expenditures were $27,100,000 and $88,300,000 in the first nine months of 1996
and 1995, respectively. Capital spending, primarily to enhance distribution
and finished cloth manufacturing capabilities and to establish and support
offshore assembly operations, is anticipated to approximate $60,000,000 to
$75,000,000 in 1996.
Net cash used for financing activities in the nine months ended September 30,
1996 was $119,300,000 and consisted principally of payments on long-term debt
and capital leases and net payments under the Company's line-of-credit
agreement of $174,600,000, offset partially by proceeds from the issuance of
long-term debt of $63,000,000. Net cash provided by financing activities in
the nine months ended September 30, 1995 was $48,300,000, and consisted
principally of net borrowings under the Company's bank facilities, partially
offset by principal payments on long-term debt and capital leases.
Cash payments made in the third quarter and for the nine months ended September
30, 1996 approximated $14,900,000 and $44,700,000 related to special charges
recorded in the fourth quarter of 1995.
In September 1994, the Company entered into a five year operating lease
agreement, with two annual renewal options, primarily for certain machinery and
equipment. The total cost of the assets to be covered by the lease is limited
to $175,000,000. At September 30, 1996, approximately $30,400,000 was
available and unused under this facility. The lease provides for a
substantial residual value guarantee by the Company at the termination of the
lease and includes purchase and renewal options at fair market values.
15
<PAGE> 17
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - (CONCLUDED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (CONCLUDED)
LIQUIDITY AND CAPITAL RESOURCES - (CONCLUDED)
Management believes the funding available to the Company is sufficient to meet
anticipated requirements for capital expenditures, working capital and other
needs.
The Company's debt instruments, principally its bank agreements, contain
covenants restricting the Company's ability to sell assets, incur debt,
pay dividends and make investments and require the Company to maintain
certain financial ratios.
16
<PAGE> 18
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Internal Revenue Service (the "IRS") declined to seek United States Supreme
Court review of a decision by the United States Court of Appeals for the Third
Circuit which reversed a lower court ruling and directed the lower court to
order a refund to the Company of approximately $10,500,000 in Federal income
taxes collected from a predecessor of the Company, plus approximately
$49,400,000 in interest thereon applicable to the tax years 1964-1968. The
Company received the full refund of approximately $60,000,000 in March 1992.
However, in September 1992 the IRS issued a statutory notice of deficiency in
the amount of approximately $7,300,000 for the taxable years from which the
March 1992 refund arose, exclusive of interest which would accrue from the date
the IRS asserted the tax was due until payment, presently a period of about 29
years. In October 1994, the United States Tax Court ruled in favor of the
Company in the above case. On January 5, 1996, the United States Court of
Appeals for the Seventh Circuit affirmed the decision of the United States Tax
Court. The IRS had a period of 90 days from the date of the decision to
petition for a review by the United States Supreme Court. The IRS did not
petition for a review and, accordingly, the case is now closed.
On December 23, 1993, James J. Locke, as Trustee of Locke Family Trust, and I.
Jack Saline filed a lawsuit against the Company and certain of its then
officers and directors in the District Court. The lawsuit was then amended to
add additional plaintiffs. On April 19, 1994, the District Court granted
plaintiffs' motion for class certification. The plaintiffs claim that all of
the defendants engaged in conduct violating Section 10b of the Securities
Exchange Act of 1934 (the "Act") and that certain of its then officers and
directors also violated Section 20a of the Act. According to the plaintiffs,
beginning before June 1992 and continuing through early June 1993, the Company,
with the knowledge and assistance of the individual defendants, issued positive
public statements about its expected sales increases and growth through 1993
and afterwards. They also allege that beginning in approximately mid-1992 and
continuing afterwards, the Company's business was not as strong and its growth
prospects were not as certain as represented. The plaintiffs further allege
that during the end of 1992 and beginning of 1993, certain of the individual
defendants traded the stock of the Company while in the possession of material,
non-public information.
On May 8, 1996, the parties preliminarily agreed to settle the case. At that
time, the parties executed an agreement in principle pursuant to which
plaintiffs agreed to drop their claims against the defendants and defendants'
insurers agreed to pay into an escrow account, for the benefit of plaintiffs,
the sum of $7,250,000.
17
<PAGE> 19
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION - (CONTINUED)
ITEM 1. LEGAL PROCEEDINGS - (CONCLUDED)
On August 19, 1996, the parties submitted for the District Court's approval a
more extensive settlement agreement to supersede the agreement in principle and
control all issues relating to the settlement. On October 28, 1996, the
District Court approved the settlement agreement in all material respects,
including the allocation of the settlement proceeds between the plaintiffs and
class counsel. As part of its approval, the District Court entered a final
judgment order dismissing with prejudice all of the plaintiffs' claims against
the defendants.
18
<PAGE> 20
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION - (CONCLUDED)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
4(a)* $800,000,000 Credit Agreement dated as of August 16, 1993, among
the several banks and other financial institutions from time to time
parties thereto (the "Lenders"), Bankers Trust Company, a New York banking
corporation, as administrative agent for the Lenders thereunder, Chemical
Bank, NationsBank, N.A. (Carolinas), The Bank of New York and the Bank of
Nova Scotia, as co-agents (incorporated herein by reference to Exhibit 4.3
to the Company's Registration Statement on Form S-3, Reg. No. 33-50567
(the "1993 S-3")).
4(b)* Subsidiary Guarantee Agreement dated as of August 16, 1993 by each
of the guarantors signatory thereto in favor of the beneficiaries referred
to therein (incorporated herein by reference to Exhibit 4.4 to the 1993
S-3).
4(c)* Rights Agreement, dated as of March 8, 1996 between Fruit of the
Loom, Inc. and Chemical Mellon Shareholder Services, L.L.C., Rights Agent
(incorporated herein by reference to Exhibit 4(c) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995).
27 Financial Data Schedule.
- -----------------------------
* Document is available at the Public Reference Section of the Securities and
Exchange Commission, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D. C.
20549 (Commission file No. 1-8941).
The Registrant has not listed nor filed as an Exhibit to this Quarterly Report
certain instruments with respect to long-term debt representing indebtedness of
the Registrant and its subsidiaries which do not individually exceed 10% of the
total assets of the Registrant and its subsidiaries on a consolidated basis.
Pursuant to Item 601(b)(4)(iii) of Regulation S-K, the Registrant agrees to
furnish such instruments to the Securities and Exchange Commission upon
request.
B. REPORTS ON FORM 8-K
No report on form 8-K was filed by the Registrant during the quarter ended
September 30, 1996.
19
<PAGE> 21
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.
FRUIT OF THE LOOM, INC.
-------------------------------
(Registrant)
Date: November 12, 1996 LARRY K. SWITZER
-------------------------------
Larry K. Switzer
Senior Executive Vice President
and Chief Financial Officer
(Principal Financial Officer
and duly authorized to sign
on behalf of Registrant)
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's quarterly report on Form 10-Q and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 2,000
<SECURITIES> 0
<RECEIVABLES> 496,800
<ALLOWANCES> 28,800
<INVENTORY> 648,300
<CURRENT-ASSETS> 1,164,700
<PP&E> 1,591,600
<DEPRECIATION> 635,600
<TOTAL-ASSETS> 2,933,500
<CURRENT-LIABILITIES> 318,100
<BONDS> 1,295,800
<COMMON> 485,500
0
0
<OTHER-SE> 533,100
<TOTAL-LIABILITY-AND-EQUITY> 2,933,500
<SALES> 1,866,400
<TOTAL-REVENUES> 1,866,400
<CGS> 1,320,000
<TOTAL-COSTS> 1,320,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 79,800
<INCOME-PRETAX> 162,800
<INCOME-TAX> 54,700
<INCOME-CONTINUING> 108,100
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 108,100
<EPS-PRIMARY> 1.42
<EPS-DILUTED> 1.42
</TABLE>
