<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 June 30, 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 July 25, 1997: 67,490,795 shares of Class A
Common Stock, $.01 par value, and 5,790,576 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;
June 30, 1997 (Unaudited) and
December 31, 1996 2
Condensed Consolidated Statement of
Earnings (Unaudited); Three and Six
Months Ended
June 30, 1997 and 1996 3
Condensed Consolidated Statement of Cash Flows
(Unaudited); Six Months Ended
June 30, 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 11
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 18
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>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- -------------
ASSETS (UNAUDITED)
- ------
<S> <C> <C>
Current Assets
Cash and cash equivalents (including restricted cash)........... $ 21,800 $ 18,700
Notes and accounts receivable (less allowance for possible
losses of $26,200 and $20,600, respectively)................ 312,600 167,300
Inventories
Finished goods.............................................. 468,800 396,800
Work in process............................................. 195,700 176,700
Materials and supplies...................................... 58,600 44,500
----------- -------------
Total inventories....................................... 723,100 618,000
Other........................................................... 39,700 38,100
----------- -------------
Total current assets................................ 1,097,200 842,100
----------- -------------
Property, Plant and Equipment...................................... 1,552,900 1,541,000
Less accumulated depreciation................................... 692,400 641,100
----------- -------------
Net property, plant and equipment................... 860,500 899,900
Other Assets ----------- -------------
Goodwill (less accumulated amortization of
$297,900 and $284,500, respectively)........................ 730,900 744,300
Other........................................................... 78,400 60,700
----------- -------------
Total other assets.................................. 809,300 805,000
----------- -------------
$2,767,000 $2,547,000
=========== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities
Current maturities of long-term debt........................... $ 18,000 $ 18,200
Trade accounts payable.......................................... 149,300 111,900
Other accounts payable and accrued expenses..................... 192,100 196,600
----------- -------------
Total current liabilities........................... 359,400 326,700
Noncurrent Liabilities ----------- -------------
Long-term debt.................................................. 1,155,400 867,400
Deferred income taxes........................................... 20,900 16,900
Other........................................................... 259,100 271,200
----------- -------------
Total noncurrent liabilities........................ 1,435,400 1,155,500
----------- -------------
Common Stockholders' Equity........................................ 972,200 1,064,800
----------- -------------
$2,767,000 $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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- --------------------------
1997 1996 1997 1996
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales................................ $640,700 $732,200 $1,141,700 $1,238,400
Cost of sales............................ 469,500 523,400 829,900 892,600
-------- -------- ---------- ----------
Gross earnings......................... 171,200 208,800 311,800 345,800
Selling, general and
administrative expenses................ 107,200 100,400 190,900 180,700
Goodwill amortization.................... 6,700 6,700 13,400 13,400
-------- -------- ---------- ----------
Operating earnings..................... 57,300 101,700 107,500 151,700
Interest expense......................... (21,100) (27,200) (40,000) (54,400)
Other expense - net...................... (4,200) (1,000) (6,000) (2,900)
-------- -------- ---------- ----------
Earnings before income tax expense..... 32,000 73,500 61,500 94,400
Income tax expense....................... 8,800 25,700 17,100 34,100
-------- -------- ---------- ----------
Net earnings........................... $ 23,200 $ 47,800 $ 44,400 $ 60,300
======== ======== ========== ==========
Earnings per common share................ $ .31 $ .63 $ .59 $ .79
======== ======== ========== ==========
Average common shares outstanding........ 75,200 76,100 75,800 76,100
======== ======== ========== ==========
</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>
SIX MONTHS ENDED
JUNE 30,
-----------------------
1997 1996
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings................................................... $ 44,400 $ 60,300
Adjustments to reconcile net earnings to net cash
used for operating activities:
Depreciation and amortization............................... 76,700 74,300
Deferred income tax expense................................. 4,000 15,000
Increase in working capital................................. (227,200) (152,200)
Other-net................................................... (28,100) (8,900)
--------- ---------
Net cash used for operating activities................... (130,200) (11,500)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures........................................... (34,500) (18,500)
Other-net...................................................... (2,500) (11,300)
--------- ---------
Net cash used for investing activities................... (37,000) (29,800)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt....................... - 63,000
Proceeds under line-of-credit agreements....................... 525,100 232,800
Payments under line-of-credit agreements....................... (223,600) (274,100)
Principal payments on long-term debt and capital leases........ (4,100) (8,900)
Common stock issued............................................ 10,900 3,300
Common stock repurchased....................................... (138,000) -
--------- ---------
Net cash provided by financing activities................ 170,300 16,100
--------- ---------
Net increase (decrease) in Cash and cash equivalents (including
restricted cash)............................................... 3,100 (25,200)
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............................................... $ 21,800 $ 1,300
========= =========
</TABLE>
See accompanying notes.
4
<PAGE> 6
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(UNAUDITED)
-----------
1. The condensed consolidated financial statements contained herein should
be read in conjunction with the consolidated financial statements and
related notes contained in the Annual Report on Form 10-K of Fruit of the
Loom, Inc. (the "Company") for the year ended December 31, 1996. The
information furnished herein reflects all adjustments (consisting of
normal recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation of the results of operations of the
interim periods. Operating results for the three and six months ended
June 30, 1997 are not necessarily indicative of results that may be
expected for the year ended December 31, 1997.
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.
2. No dividends were declared on the Company's common stock for the six-month
periods ended June 30, 1997 and 1996.
3. The Company's effective income tax rate for the first six months of 1997
differed from the Federal statutory rate of 35% primarily due to the
impact of 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 six months of 1996, the Company's effective income
tax rate differed from the Federal statutory rate primarily due to
goodwill amortization 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 is
estimated to reduce the effective income tax rate by 12.8% and 5.0% in
1997 and 1996, respectively.
4. In 1995, management announced plans to close certain manufacturing
operations and to take other actions to reduce costs and improve
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.
5
<PAGE> 7
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
------------------------------------------------------------------
(UNAUDITED)
-----------
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
for the first quarter of 1997 increased by $7,500,000. These amounts were
substantially offset by additional expenses recorded related to a
performance share compensation plan for certain executive officers earned
in the first quarter of 1997.
5. 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 June 30, 1997 related to discontinued operations
consist primarily of certain environmental and product liability reserves
of approximately $70,600,000. The Company has recorded receivables
related to these environmental liabilities of approximately $23,600,000
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 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 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.
6
<PAGE> 8
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
------------------------------------------------------------------
(UNAUDITED)
-----------
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
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.
7
<PAGE> 9
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
------------------------------------------------------------------
(UNAUDITED)
-----------
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 is continuing 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 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 June 30,
1997, the Company has a contingent liability to repay, in whole or in
part, grants received of approximately $49,800,000 in the event that the
Company does not meet defined average employment levels or terminates
operations in the Republic of Ireland, Northern Ireland and Germany.
8
<PAGE> 10
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 June 30, 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
June 30, 1997, approximately $63,800,000 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>
JUNE 30, DECEMBER 31,
1997 1996
----------- -----------
<S> <C> <C>
Current assets $ 29,100 $ 30,400
Noncurrent assets 3,200 1,600
----------- -----------
$ 32,300 $ 32,000
=========== ===========
Current liabilities $ 75,400 $ 11,400
Noncurrent liabilities 10,500 68,400
Preferred stock 3,800 3,400
Common stockholders' deficit (57,400) (51,200)
----------- -----------
$ 32,300 $ 32,000
</TABLE> =========== ===========
CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
1997 1996 1997 1996
--------- -------- -------- ---------
<S> <C> <C> <C> <C>
Net sales $12,300 $19,200 $23,400 $41,900
========= ======== ======== =========
Gross earnings $ 2,000 $ 5,300 $ 4,100 $11,700
========= ======== ======== =========
Operating loss ($ 1,800) ($ 2,900) ($ 3,200) ($ 5,100)
========= ======== ======== =========
Net loss ($ 3,000) ($ 4,300) ($ 5,800) ($ 5,400)
========= ======== ======== =========
</TABLE>
9
<PAGE> 11
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONCLUDED)
------------------------------------------------------------------
(UNAUDITED)
-----------
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 in 1999 and 2000 up to a
maximum of $47,100,000 combined, based in part on the attainment of
certain levels of operating performance by the acquired entity.
6. 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 common share for the second quarter and
six months ended June 30, 1997 of $.01 and $.02 less than reported
earnings per common share.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 ("Statement No. 131"), Disclosures
about Segments of an Enterprise and Related Information, which is required
to be adopted for years beginning after December 15, 1997. Statement No.
131 requires that companies disclose segment data based on how management
makes decisions about allocating resources to segments and measuring their
performance. The Company is currently evaluating the requirements of
Statement No. 131.
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 Statement No. 125. Adoption of
Statement No. 125 did not have a material impact on the condensed
consolidated financial statements.
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
-----------------------------------
FORWARD LOOKING INFORMATION
The Company desires to provide investors with meaningful and useful
information. Therefore, this Quarterly Report on Form 10-Q contains certain
statements which describe the Company's beliefs concerning future business
conditions and the outlook for the Company based on currently available
information. Wherever possible, the Company has identified these "forward
looking" statements (as defined in Section 21E of the Securities Exchange Act
of 1934) 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, performance and
achievements to differ materially from those expressed in, or implied by, these
statements. These risks and uncertainties include but are not limited to the
following: the financial strength of the retail industry (particularly the
mass merchant channel), the level of consumer spending for apparel, demand for
the Company's activewear screenprint products, the competitive pricing
environment within the basic apparel segment of the apparel industry, the
Company's ability to develop, market and sell new products, the Company's
effective income tax rate, the Company's ability 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 and other contingent
liabilities. The Company assumes no obligation to update publicly any forward
looking statements, whether as a result of new information, future events or
otherwise.
RESTRUCTURING AND SPECIAL CHARGES
In 1995, management announced plans to close certain manufacturing operations
and to take other actions to reduce costs and improve operations. As a result,
the Company recorded charges of approximately $372,900,000 ($287,400,000 after
tax) related to impairment write-downs of goodwill, costs associated with the
closing or realignment of certain domestic manufacturing facilities and
attendant personnel reductions and charges related to inventory write-downs 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.
In the second half of 1997, the Company anticipates a further migration of
sewing operations to lower cost, offshore locations along with the realignment
of certain domestic manufacturing operations. On August 7, 1997, the Company
announced plans to close one domestic plant and relocate sewing operations from
five additional domestic facilities, with the termination of approximately
4,800 production and administrative personnel at these facilities. In
conjunction with the 1997 actions, the Company expects to incur costs ranging
from approximately $10,000,000 to $15,000,000 for production inefficiencies,
severance, fringe benefits (principally health insurance representing the net
cost of COBRA), lease termination and other costs. The majority of the costs
incurred are expected to result in cash payments.
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)
-------------------------------------------------
The following discussion should be read in conjunction with the accompanying
condensed consolidated financial statements and related notes for the period
ended June 30, 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- --------------------
1997 1996 1997 1996
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 640.7 $ 732.2 $1,141.7 $1,238.4
Gross earnings $ 171.2 $ 208.8 $ 311.8 $ 345.8
Gross margin 26.7% 28.5% 27.3% 27.9%
Operating earnings $ 57.3 $ 101.7 $ 107.5 $ 151.7
Operating margin 8.9% 13.9% 9.4% 12.2%
</TABLE>
NET SALES
Net sales decreased $91,500,000 or 12.5% in the second quarter and $96,700,000
or 7.8% in the first six months of 1997 compared with the same periods of 1996,
due mainly to significantly lower activewear sales in 1997 and the inclusion of
hosiery sales in 1996. The Company sold its hosiery division in November 1996.
Excessive inventories at wholesale activewear accounts combined with widespread
promotional activity in the highly competitive wholesale activewear market were
the principal negative factors. Licensed sportswear and European sales in the
second quarter of 1997 were also less than sales for the same period in 1996.
Retail product sales, before considering 1996 hosiery sales ($34,300,000 second
quarter, $49,800,000 first six months), improved modestly for the second
quarter and first six months of 1997 with sharply higher second quarter sales
of Gitano(R) jeans following significantly favorable first quarter sales of
men's and boys' underwear. In addition, sales of Wilson(R)* branded products
increased in the second quarter and first six months of 1997 compared to the
comparable periods of 1996.
*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.
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)
GROSS EARNINGS
Gross earnings decreased $37,600,000 or 18.0% in the second quarter and
$34,000,000 or 9.8% in the first six months of 1997 compared with the same
periods of 1996. Gross margin declined 1.8 percentage points to 26.7% in the
second quarter of 1997 and .6 percentage points to 27.3% for the first six
months of 1997 as compared to the same periods of 1996. The principal factors
in both 1997 periods were unfavorable activewear volume, pricing and other
related promotional activities. Unfavorable retail earnings and margin
comparisons reflected promotional pricing in both 1997 periods, and 1996
included earnings from hosiery operations. Sales of closeout and irregular
merchandise also had a negative effect, principally in casualwear. Gross
earnings and margin benefited significantly, however, from incremental offshore
production as offshore costs are lower than costs in the Company's domestic
facilities.
OPERATING EARNINGS
Operating earnings declined $44,400,000 or 43.7% in the second quarter and
$44,200,000 or 29.1% in the first six months of 1997 compared with the same
periods of 1996. Operating margin dropped 5.0 percentage points to 8.9% in the
second quarter and 2.8 percentage points to 9.4% for the first six months of
1997 compared with 1996. Gross earnings and margin were lower as noted above,
and the Company has continued to maintain increased advertising and promotion
expenditures and to implement management information systems to meet customer
demand for more sophisticated distribution and inventory control. Consequently,
selling, general and administrative expense increased $6,800,000 or 6.8% in the
second quarter and $10,200,000 or 5.6% in the first six months of 1997 over the
respective 1996 periods. The six-month period ended June 30, 1997 included
the finalization of certain of the estimates recorded in connection with
the special charges taken in 1995 which reduced selling, general and
administrative expenses by $7,500,000 in the first quarter of 1997. Additional
expenses of a substantially similar amount, however, were also recorded in the
first quarter of 1997 related to a performance share compensation plan for
certain executive officers. Selling, general and administrative expense was
16.7% of sales in the second quarter and first six months of 1997 compared with
13.7% and 14.6% in the same periods of 1996, respectively.
INTEREST EXPENSE
Interest expense decreased $6,100,000 or 22.4% and $14,400,000 or 26.5% for the
second quarter and first six months of 1997 compared with the same periods of
1996. The decrease was principally attributable to the effect of lower average
debt levels in 1997. The lower debt levels were due to repayment of debt out
of the Company's positive cash flow from operating activities in the second
half of 1996 (including the sale of accounts receivable) and proceeds from the
sale of the Company's Hosiery division in November 1996.
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)
-------------------------------------------------
OTHER EXPENSE - NET
Other expense for the second quarter and first six months of 1997 included
losses totalling $2,900,000 and $5,500,000 from sales of accounts receivable.
Accounts receivable were not sold during second quarter and first six months of
1996.
INCOME TAXES
The Company's effective income tax rate for the first six months of 1997
differed from the Federal statutory rate of 35% primarily due to the impact of
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 six
months of 1996, the Company's effective income tax rate differed from the
Federal statutory rate primarily due to goodwill amortization 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 is
estimated to reduce the effective income tax rate by 12.8% and 5.0% in 1997 and
1996, respectively.
EARNINGS PER COMMON SHARE
In 1997, earnings per common share were $.31 and $.59 for the second quarter
and first six months compared to $.63 and $.79 for the respective 1996 periods.
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 $643,100,000 from revolving lines of credit. As of July 25, 1997,
approximately $172,800,000 was available and unused under these facilities.
Net cash used for operating activities for the six months ended June 30, 1997
and 1996 was $130,200,000 and $11,500,000. The unfavorable year-to-year
comparison largely resulted from a greater increase in working capital in 1997
($227,200,000 as compared with $152,200,000 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 increase in 1997 was primarily driven by higher accounts receivable
($145,300,000) and inventories ($105,100,000) partially offset by higher trade
payables ($37,400,000). In 1996, an increase in receivables ($234,100,000) was
partially offset by lower inventories ($24,200,000) and higher trade payables
($17,900,000). These increases in 1997 and 1996 reflected the seasonality of
the Company's business as it enters its peak selling season.
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 - (CONCLUDED)
Net cash used for investing activities in the six months ended June 30, 1997
and 1996 was $37,000,000 and $29,800,000, respectively. Capital expenditures
were $34,500,000 and $18,500,000 in the first six 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 $75,000,000 in 1997.
Net cash provided by financing activities in the six months ended June 30, 1997
and 1996 was $170,300,000 and $16,100,000, respectively. In 1997, cash
provided by financing activities consisted principally of net borrowings under
the Company's revolving lines of credit partially offset by stock repurchased.
Total long-term debt was $1,173,400,000 at June 30, 1997, down $278,200,000
from June 30, 1996. 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.
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 June 30,
1997 were 4,333,800 shares at an aggregate cost of $154,600,000.
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, approximately $200,000,000 of trade accounts
receivable had been sold at June 30, 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 June 30, 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.
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)
On July 11, 1997, the Company filed with the Securities and Exchange Commission
a shelf registration statement on Form S-3 (the "Registration Statement") to
register under the Securities Act of 1933, as amended, the sale of up to
$850,000,000 of its debt securities, preferred stock and Class A Common Stock
(collectively, the "Securities"). The Registration Statement does not relate
to any particular offering of Securities; rather, the Registration Statement
was filed to provide the Company with the flexibility to engage in future
offerings without the delay which could result from the filing of new
registration statements at that time. The types of Securities offered, and
their terms, will be determined prior to any particular offering. The Company
does not currently have specific plans for the use of the net proceeds from the
future sale of the Securities but anticipates that any such net proceeds would
be used for general corporate purposes, including, but not limited to, working
capital, capital expenditures, expansion of existing properties, development of
new projects, prepayment of outstanding indebtedness, investments and
acquisitions.
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.
NEW ACCOUNTING PRONOUNCEMENTS
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 common share for the
second quarter and first six months of 1997 of $.01 and $.02 less than reported
earnings per common share.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 ("Statement No. 131"), Disclosures about
Segments of an Enterprise and Related Information, which is required to be
adopted for years beginning after December 15, 1997. Statement No. 131 requires
that companies disclose segment data based on how management makes decisions
about allocating resources to segments and measuring their performance. The
Company is currently evaluating the requirements of Statement No. 131.
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)
-------------------------------------------------
NEW ACCOUNTING PRONOUNCEMENTS - (CONCLUDED)
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
Statement No. 125. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders was held on May 13, 1997. Three proposals
were submitted to stockholders as described in the Company's Proxy Statement
dated April 7, 1997 and were voted upon and approved by the stockholders at the
meeting. The table below briefly describes the proposals and results of the
stockholder votes. A total of 93,360,023 votes, or 90.7% of the possible votes
based on common shares outstanding at the record date, were represented at the
meeting.
<TABLE>
<CAPTION>
VOTES VOTES AUTHORITY BROKER
IN FAVOR OPPOSED ABSTAIN WITHHELD NONVOTES
-------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Proposal to elect the following
nine directors:
Elected by holders of Class A
Common Stock:
Omar Z. Al Askari 59,586,067 - - 319,076 -
Dennis S. Bookshester 59,585,406 - - 319,737 -
Lee W. Jennings 59,586,012 - - 319,131 -
Elected by holders of Class A
and Class B Common Stock:
William Farley 93,030,618 - - 329,405 -
Henry A. Johnson 93,038,388 - - 321,635 -
Richard C. Lappin 93,031,544 - - 328,479 -
Larry K. Switzer 93,043,854 - - 316,169 -
A. Lorne Weil 93,041,882 - - 318,141 -
Sir Brian Wolfson 93,043,019 - - 317,004 -
Proposal to approve the
Company's 1995 Executive
Incentive Compensation
Plan, as Amended
and Restated 65,660,543 27,574,037 125,443 - -
Stockholder proposal
to redeem stockholder
rights previously issued
by the Company 40,674,044 47,513,660 299,960 - 4,872,359
</TABLE>
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)* $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 June
30, 1997.
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: August 8, 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)
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>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 21,800
<SECURITIES> 0
<RECEIVABLES> 338,800
<ALLOWANCES> 26,200
<INVENTORY> 723,100
<CURRENT-ASSETS> 1,097,200
<PP&E> 1,552,900
<DEPRECIATION> 692,400
<TOTAL-ASSETS> 2,767,000
<CURRENT-LIABILITIES> 359,400
<BONDS> 1,155,400
0
0
<COMMON> 356,000
<OTHER-SE> 616,200
<TOTAL-LIABILITY-AND-EQUITY> 2,767,000
<SALES> 1,141,700
<TOTAL-REVENUES> 1,141,700
<CGS> 829,900
<TOTAL-COSTS> 829,900
<OTHER-EXPENSES> 6,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 40,000
<INCOME-PRETAX> 61,500
<INCOME-TAX> 17,100
<INCOME-CONTINUING> 44,400
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 44,400
<EPS-PRIMARY> .59
<EPS-DILUTED> .59
</TABLE>
