<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 March 31, 1997
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 April 30, 1997: 69,538,531 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
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheet;
March 31, 1997 (Unaudited) and
December 31, 1996 2
Condensed Consolidated Statement of Earnings
(Unaudited); Three Months Ended
March 31, 1997 and 1996 3
Condensed Consolidated Statement of Cash Flows
(Unaudited); Three Months Ended
March 31, 1997 and 1996 4
Notes to Condensed Consolidated Financial
Statements (Unaudited) 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 18
</TABLE>
<PAGE> 3
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands of dollars)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
---------- ----------
ASSETS (UNAUDITED)
------
<S> <C> <C>
Current Assets
Cash and cash equivalents (including restricted cash) . . $ 18,400 $ 18,700
Notes and accounts receivable (less allowance for possible
losses of $17,200 and $20,600, respectively) . . . . 179,900 167,300
Inventories
Finished goods . . . . . . . . . . . . . . . . . . . 451,400 396,800
Work in process . . . . . . . . . . . . . . . . . . . 215,300 176,700
Materials and supplies . . . . . . . . . . . . . . . 52,600 44,500
---------- ----------
Total inventories 719,300 618,000
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . 40,200 38,100
---------- ----------
Total current assets . . . . . . . . . . 957,800 842,100
---------- ----------
Property, Plant and Equipment . . . . . . . . . . . . . . . . . . 1,550,000 1,541,000
Less accumulated depreciation . . . . . . . . . . . . . . . 665,600 641,100
---------- ----------
Net property, plant and equipment . . . . 884,400 899,900
---------- ----------
Other Assets
Goodwill (less accumulated amortization of
$291,200 and $284,500, respectively) . . . . . . . . 737,600 744,300
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 67,300 60,700
---------- ----------
Total other assets . . . . . . . . . . . 804,900 805,000
---------- ----------
$2,647,100 $2,547,000
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities
Current maturities of long-term debt . . . . . . . . . . . $ 18,400 $ 18,200
Trade accounts payable . . . . . . . . . . . . . . . . . . 81,400 111,900
Other accounts payable and accrued expenses . . . . . . . . 185,900 196,600
---------- ----------
Total current liabilities . . . . . . . 285,700 326,700
---------- ----------
Noncurrent Liabilities
Long-term debt . . . . . . . . . . . . . . . . . . . . . . 1,024,600 867,400
Deferred income taxes . . . . . . . . . . . . . . . . . . . 18,400 16,900
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 266,000 271,200
---------- ----------
Total noncurrent liabilities . . . . . . 1,309,000 1,155,500
---------- ----------
Common Stockholders' Equity . . . . . . . . . . . . . . . . . . . 1,052,400 1,064,800
---------- ----------
$2,647,100 $2,547,000
========== ==========
</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
MARCH 31,
-----------------------
1997 1996
-------- --------
<S> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . $501,000 $506,200
Cost of sales . . . . . . . . . . . . . . . . 360,400 369,200
-------- --------
Gross earnings . . . . . . . . . . . . . 140,600 137,000
Selling, general and
administrative expenses . . . . . . . . 83,700 80,300
Goodwill amortization . . . . . . . . . . . . 6,700 6,700
-------- --------
Operating earnings . . . . . . . . . . . 50,200 50,000
Interest expense . . . . . . . . . . . . . . (18,900) (27,200)
Other expense - net . . . . . . . . . . . . . (1,800) (1,900)
-------- --------
Earnings before income tax expense . . . 29,500 20,900
Income tax expense . . . . . . . . . . . . . 8,300 8,400
-------- --------
Net earnings . . . . . . . . . . . . . . $ 21,200 $ 12,500
======== ========
Earnings per common share . . . . . . . . . . $ .28 $ .16
======== ========
Average common shares outstanding . . . . . . 76,400 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>
THREE MONTHS ENDED
MARCH 31,
-------------------------------
1997 1996
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . $ 21,200 $ 12,500
Adjustments to reconcile net earnings to net cash
used for operating activities:
Depreciation and amortization . . . . . . . . . . . . . . 37,600 36,200
Deferred income tax expense . . . . . . . . . . . . . . . 1,400 6,300
Increase in working capital . . . . . . . . . . . . . . . (155,700) (67,400)
Other-net . . . . . . . . . . . . . . . . . . . . . . . . (20,000) (5,000)
--------- ---------
Net cash used for operating activities . . . . . . . (115,500) (17,400)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . (25,500) (11,500)
Other-net . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,100) 4,300
--------- ---------
Net cash used for investing activities . . . . . . . (27,600) (7,200)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt . . . . . . . . . . . . - 63,000
Proceeds under line-of-credit agreements . . . . . . . . . . . . 306,500 99,300
Payments under line-of-credit agreements . . . . . . . . . . . . (137,900) (153,200)
Principal payments on long-term debt and capital leases . . . . (3,000) (5,900)
Common stock issued . . . . . . . . . . . . . . . . . . . . . . 7,200 300
Common stock repurchased . . . . . . . . . . . . . . . . . . . . (30,000) -
--------- ---------
Net cash provided by financing activities . . . . . 142,800 3,500
--------- ---------
Net decrease in Cash and cash equivalents (including
restricted cash) . . . . . . . . . . . . . . . . . . . . . . . . (300) (21,100)
Cash and cash equivalents (including restricted cash)
at beginning of period . . . . . . . . . . . . . . . . . . . . . 18,700 26,500
--------- ---------
Cash and cash equivalents (including restricted cash)
at end of period . . . . . . . . . . . . . . . . . . . . . . . . $ 18,400 $ 5,400
========= =========
</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 common stock of Fruit of the Loom, Inc.
(the "Company") for the three month periods ended March 31, 1997 and 1996.
2. 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 March 31, 1997 related to discontinued operations
consist primarily of certain environmental and product liability reserves
of approximately $72,800,000. The Company has recorded receivables related
to these environmental liabilities of approximately $23,900,000 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 United States 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 1997 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 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
5
<PAGE> 7
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
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 any liability that may be assessed against MagneTek or
Universal in the LMP Litigation and to reimburse 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.
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
6
<PAGE> 8
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
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 reporting period.
In November 1996, in connection with the sale of a substantial portion of its
hosiery operations and related assets, the Company guaranteed the purchaser's
$10,000,000 subordinated note payable to a bank. The note bears interest at a
rate of 7.66% per annum and is due November 2006.
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.
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 March 31, 1997, the Company
has a contingent liability to repay, in whole or in part, grants received of
approximately $49,600,000 in the event that the Company
7
<PAGE> 9
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
does not meet defined average employment levels or terminates operations in the
Republic of Ireland, Northern Ireland and Germany.
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 March 31, 1997, 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 March 31, 1997, approximately $59,800,000 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>
MARCH 31, DECEMBER 31,
1997 1996
-------- --------
<S> <C> <C>
Current assets $ 25,400 $ 30,400
Noncurrent assets-net 2,500 1,600
-------- --------
$ 27,900 $ 32,000
======== ========
Current liabilities $ 67,800 $ 11,400
Noncurrent liabilities 10,600 68,400
Preferred stock 3,600 3,400
Common stockholders' deficit (54,100) (51,200)
-------- --------
$ 27,900 $ 32,000
======== ========
</TABLE>
8
<PAGE> 10
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1997 1996
------- -------
<S> <C> <C>
Net sales $11,100 $22,700
======= =======
Gross earnings $ 2,000 $ 7,400
======= =======
Operating loss ($ 1,400) ($ 1,100)
======= =======
Net loss ($ 2,900) ($ 1,100)
======= =======
</TABLE>
As a result of the Acme Boot operating performance and management's
assessment of existing facts and circumstances of Acme Boot's financial
condition, the Company recorded a $35,000,000 charge in 1996 related to the
Company's evaluation of its exposure under the Acme Boot guarantees.
In August 1994, the Company acquired Pro Player, Inc. ("Pro Player") for
approximately $55,700,000 including approximately $14,200,000 of Pro
Player debt which was repaid by the Company. The principals of Pro Player,
who are also key employees of that business, may also be entitled to
receive compensation of varying amounts up to a maximum of $47,100,000 in
1999 and 2000 based in part on the attainment of certain levels of
operating performance by the acquired entity.
3. The Company's effective income tax rate for the first quarter of 1997
differed from the Federal statutory rate of 35% primarily due to the impact
of increased foreign earnings, certain of which are taxed at lower rates
than in the United States, partially offset by goodwill amortization, a
portion of which is not deductible for Federal income taxes, and state
income taxes. In the first quarter of 1996, the Company's effective income
tax rate differed from the Federal statutory rate primarily due to goodwill
amortization, a provision for interest on prior years' taxes and state
income taxes, partially offset by the impact of foreign earnings.
The most significant difference in both years relates to the impact of
undistributed earnings of the Company's foreign subsidiaries, which are
estimated to reduce the effective income tax rate by 12.4% and 4.4% in 1997
and 1996, respectively.
9
<PAGE> 11
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
4. 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.
During the first quarter of 1997, the Company finalized certain of the
estimates recorded in connection with the above noted charges. As a result
of finalizing these estimates, earnings before income tax expense in the
first quarter of 1997 increased by $7,500,000.
5. In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 ("Statement No. 128"),
Earnings per Share, which is required to be adopted on December 31, 1997.
At that time, the Company will be required to change the method currently
used to compute earnings per share and to restate all prior periods.
Statement No. 128 is not expected to have any impact on the Company's
computation of primary earnings per share as the dilutive effect of common
stock equivalents is less than the 3% dilution materiality threshold for
inclusion in primary earnings per share. The Company does expect to have
to include a computation of diluted earnings per share in future periods
for the effect of common stock equivalents which did not meet the 3%
dilution materiality threshold in prior periods. The impact is expected to
result in diluted earnings per share for the first quarter ended March 31,
1997 of $.01 per share less than reported earnings per share.
Effective January 1, 1997, the Company adopted Statement of Financial
Accounting Standards No. 125 ("Statement No. 125"), Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, which requires an entity to recognize the financial and
servicing assets it controls and the liabilities it has incurred and to
derecognize financial assets when control has been surrendered in
accordance with the criteria provided in the Statement. Adoption of
Statement No. 125 did not have a material impact on the condensed
consolidated financial statements.
6. 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, 1996.
10
<PAGE> 12
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONCLUDED)
(UNAUDITED)
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.
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
FORWARD LOOKING INFORMATION
Fruit of the Loom desires to provide stockholders and investors with more
meaningful and useful information. Therefore, this Quarterly Report on Form
10-Q contains forward looking information and describes the Company's beliefs
concerning future business conditions and the outlook for the Company based on
currently available information. Wherever possible, the Company has identified
these forward looking statements by words such as "anticipates," "believes,"
"estimates," "expects" and similar expressions. These forward looking
statements are subject to risks and uncertainties which could cause the
Company's actual results or performance to differ materially from those
expressed in these statements. These risks and uncertainties include the
following: 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 ability of the Company to successfully move labor-intensive segments of the
manufacturing process offshore, the success of planned advertising, marketing
and promotional campaigns, international activities and the outcome of legal
proceedings. The Company assumes no obligation to update publicly any forward
looking statements, whether as a result of new information, future events or
otherwise.
The following discussion should be read in conjunction with the accompanying
condensed consolidated financial statements and related notes for the period
ended March 31, 1997 and the Company's consolidated financial statements and
related notes contained in the Company's Annual Report on Form 10-K for the
year ended December 31, 1996.
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
MARCH 31,
-------------------
1997 1996
---- ----
<S> <C> <C>
Net sales $501.0 $506.2
Gross earnings $140.6 $137.0
Gross margin 28.1% 27.1%
Operating earnings $ 50.2 $ 50.0
Operating margin 10.0% 9.9%
</TABLE>
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)
NET SALES
Net sales decreased 1.0% in the first quarter of 1997 compared to 1996. The
decrease in net sales related primarily to the sale of the Hosiery division in
November 1996. In the first quarter of 1996, net sales of the Hosiery division
were $15,500,000. Net sales were negatively affected by the discontinuation of
GITANO(R) sportswear products, reduced shipments of domestic activewear
T-shirts, price decreases on domestic activewear T-shirts and the impact of
promotional programs as a result of the highly competitive retail environment.
Net sales were positively affected by increased shipments of underwear, GITANO
jeans and other GITANO products, WILSON(R)* branded products, PRO PLAYER(R)
branded fleece and outerwear and activewear products in Europe.
GROSS EARNINGS
Gross earnings increased 2.6% in the first three months of 1997 compared to the
same period of 1996. Gross margin was 28.1% in the first three months of 1997
compared to 27.1% in the same period of 1996. The increase in gross earnings
and gross margin was primarily due to the continuing migration of production to
the Company's offshore manufacturing operations which operate at lower costs
than the Company's domestic facilities and to decreases in workers compensation
costs as a result of improved safety and claims management in the domestic
plants, the sum of which more than offset the impact of lower domestic
activewear T-shirt selling prices, promotional programs and an unfavorable
impact from sales of closeout merchandise.
OPERATING EARNINGS
Operating earnings increased .4% in the first three months of 1997 compared to
the same period of 1996 while operating margin increased .1 percentage point to
10.0% of net sales. The improvement resulted from higher gross earnings offset
partially by higher selling, general and administrative expenses. Higher
selling general and administrative expenses included increases in management
information systems expense to meet customer demand for more sophisticated
distribution and inventory control. These increases were offset partially by
the finalization of certain of the estimates recorded in connection with the
special charges taken in the fourth quarter of 1995 which reduced selling,
general and administrative expenses by $7,500,000 in the first quarter of 1997.
Selling, general and administrative expense was 16.7% and 15.9% of net sales
for the first quarter of 1997 and 1996, respectively.
*WILSON(R) is a registered trademark of Wilson Sporting Goods Company and is
used by the Company under license for the sale of sweatshirts and sweatpants,
T-shirts, shorts and other athletic activewear.
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)
INTEREST EXPENSE
Interest expense for the first three months of 1997 decreased 30.5% from the
same period of 1996. The decrease was principally attributable to the effect of
lower average debt levels in the first quarter of 1997. Lower debt
levels in the first quarter of 1997 were due to repayment of debt out of the
Company's positive cash flow from operating activities (including the sale of
accounts receivable) and proceeds from the sale of the Hosiery division in
November 1996.
INCOME TAXES
The Company's effective income tax rate for the first quarter of 1997 differed
from the Federal statutory rate of 35% primarily due to the impact of increased
foreign earnings, certain of which are taxed at lower rates than in the United
States, partially offset by goodwill amortization, a portion of which is not
deductible for Federal income taxes, and state income taxes. In the first
quarter of 1996, the Company's effective income tax rate differed from the
Federal statutory rate primarily due to goodwill amortization, a provision for
interest on prior years' taxes and state income taxes, partially offset by the
impact of foreign earnings.
The most significant difference in both years relates to the impact of
undistributed earnings of the Company's foreign subsidiaries, which are
estimated to reduce the effective income tax rate by 12.4% and 4.4% in 1997 and
1996, respectively.
EARNINGS PER SHARE
Earnings per share were $.28 for the first quarter of 1997 compared to $.16 for
the same prior year period, a 75% increase.
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)
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 $644,500,000 of revolving lines of credit. As of April 30,
1997, approximately $276,500,000 was available and unused under these
facilities.
Net cash used for operating activities for the three months ended March 31,
1997 and 1996 was $115,500,000 and $17,400,000. The unfavorable year-to-year
comparison largely resulted from a larger increase in working capital in the
first three months of 1997 ($155,700,000 as compared with $67,400,000 in the
1996 period). Working capital was much higher at December 31, 1995 than at
December 31, 1996, and therefore 1996 required a smaller seasonal increase than
1997. The working capital increases in 1997 and 1996 were primarily driven by
higher inventories ($101,300,000 and $49,700,000, respectively) and higher
accounts receivable ($12,600,000 and $38,300,000, respectively). The increases
in 1997 and 1996 reflected the seasonality of the Company's business as it
enters its peak selling season.
Net cash used for investing activities in the three months ended March 31, 1997
and 1996 was $27,600,000 and $7,200,000, respectively. Capital expenditures
were $25,500,000 and $11,500,000 in the first three months of 1997 and 1996,
respectively. Capital spending, primarily to enhance finished cloth
manufacturing capabilities and to establish and support offshore assembly
operations, is anticipated to approximate $65,000,000 in 1997.
Net cash provided by financing activities in the first three months of 1997 and
1996 was $142,800,000 and $3,500,000, respectively. In 1997, cash provided by
financing activities consisted principally of net borrowings under the
Company's revolving lines of credit. In 1996, cash provided by financing
activities consisted principally of net proceeds from the issuance of long-term
debt, substantially offset by net payments under the Company's revolving lines
of credit.
15
<PAGE> 17
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)
In November 1996, the Company's Board of Directors authorized the purchase of
up to $200,000,000 of the Company's common stock in open market and privately
negotiated transactions. Total purchases under the program through March 31,
1997 were 1,197,500 shares at an aggregate cost of $46,700,000.
In December 1996, the Company entered into a three-year receivables purchase
agreement whereby it can sell up to a $200,000,000 undivided interest in a
defined pool of its trade accounts receivable. The maximum amount outstanding
as defined under the agreement varies based upon the level of eligible
receivables. Under the agreement, $200,000,000 of trade accounts receivable
had been sold at March 31, 1997 and December 31, 1996. The proceeds were used
to reduce amounts outstanding under the Company's revolving lines of credit.
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 March 31, 1997, 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.
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.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 ("Statement No. 128"), Earnings per
Share, which is required to be adopted on December 31, 1997. At that time, the
Company will be required to change the method currently used to compute
earnings per share and to restate all prior periods. Statement No. 128 is not
expected to have any impact on the Company's computation of primary earnings
per share as the dilutive effect of common stock equivalents is less than the
3% dilution materiality threshold for inclusion in primary earnings per
share. The Company does expect to have to include a computation of
diluted earnings per share in future periods for the effect of common
stock
16
<PAGE> 18
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)
equivalents which did not meet the 3% dilution materiality threshold in prior
periods. The impact is expected to result in diluted earnings per share for
the first quarter ended March 31, 1997 of $.01 per share less than reported
earnings per share.
Effective January 1, 1997, the Company adopted Statement of Financial
Accounting Standards No. 125 ("Statement No. 125"), Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities, which
requires an entity to recognize the financial and servicing assets it controls
and the liabilities it has incurred and to derecognize financial assets when
control has been surrendered in accordance with the criteria provided in the
Statement. Adoption of Statement No. 125 did not have a material impact on the
condensed consolidated financial statements.
17
<PAGE> 19
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. EXHIBITS
4(a)* $600,000,000 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, Chase Manhattan Bank, NationsBank, N.A., 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 Chase 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
March 31, 1997.
18
<PAGE> 20
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: May 12, 1997 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)
19
<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>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 18,400
<SECURITIES> 0
<RECEIVABLES> 197,100
<ALLOWANCES> 17,200
<INVENTORY> 719,300
<CURRENT-ASSETS> 957,800
<PP&E> 1,550,000
<DEPRECIATION> 665,600
<TOTAL-ASSETS> 2,647,100
<CURRENT-LIABILITIES> 285,700
<BONDS> 1,024,600
0
0
<COMMON> 457,400
<OTHER-SE> 595,000
<TOTAL-LIABILITY-AND-EQUITY> 2,647,100
<SALES> 501,000
<TOTAL-REVENUES> 501,000
<CGS> 360,400
<TOTAL-COSTS> 360,400
<OTHER-EXPENSES> 1,800
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,900
<INCOME-PRETAX> 29,500
<INCOME-TAX> 8,300
<INCOME-CONTINUING> 21,200
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,200
<EPS-PRIMARY> .28
<EPS-DILUTED> .28
</TABLE>
