<PAGE> 1
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
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 28, 1998
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, 1998: 66,248,942 shares of Class A
Common Stock, $.01 par value, and 5,684,276 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; March 28, 1998 (Unaudited) and
December 31, 1997 2
Condensed Consolidated Statement of Earnings (Unaudited); Three Months
Ended March 28, 1998 and March 31, 1997 3
Condensed Consolidated Statement of Cash Flows (Unaudited); Three Months
Ended March 28, 1998 and March 31, 1997 4
Notes to Condensed Consolidated Financial Statements (Unaudited) 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
<PAGE> 3
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands of dollars)
<TABLE>
<CAPTION>
MARCH 28, DECEMBER 31,
1998 1997
------------ -----------
(UNAUDITED)
ASSETS
- ------
<S> <C> <C>
Current Assets
Cash and cash equivalents (including restricted cash) $ 16,300 $ 16,100
Notes and accounts receivable (less allowance for possible
losses of $11,800 and $11,900, respectively) 114,900 98,100
Inventories
Finished goods 632,100 570,400
Work in process 251,300 212,300
Materials and supplies 70,400 64,800
---------- ----------
Total inventories 953,800 847,500
Other 57,000 53,900
---------- ----------
Total current assets 1,142,000 1,015,600
---------- ----------
Property, Plant and Equipment 1,209,300 1,232,200
Less accumulated depreciation 728,900 717,800
---------- ----------
Net property, plant and equipment 480,400 514,400
---------- ----------
Other Assets
Goodwill (less accumulated amortization of
$318,000 and $311,400, respectively) 706,300 712,900
Deferred income taxes 30,200 30,300
Other 214,800 209,900
---------- ----------
Total other assets 951,300 953,100
---------- ----------
$2,573,700 $2,483,100
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities
Current maturities of long-term debt $ 28,400 $ 28,200
Trade accounts payable 116,000 234,100
Other accounts payable and accrued expenses 274,500 262,900
---------- ----------
Total current liabilities 418,900 525,200
---------- ----------
Noncurrent Liabilities
Long-term debt 1,372,800 1,192,800
Other 341,500 343,000
---------- ----------
Total noncurrent liabilities 1,714,300 1,535,800
---------- ----------
Common Stockholders' Equity 440,500 422,100
---------- ----------
$2,573,700 $2,483,100
========== ===========
</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 28, MARCH 31,
1998 1997
-------------- ------------
<S> <C> <C>
Net sales.......................................... $457,200 $501,000
Cost of sales...................................... 309,500 358,200
-------- --------
Gross earnings.................................. 147,700 142,800
Selling, general and administrative expenses....... 83,100 83,700
Goodwill amortization.............................. 6,600 6,700
-------- --------
Operating earnings.............................. 58,000 52,400
Interest expense................................... (24,700) (18,900)
Other income (expense) - net....................... 4,300 (1,800)
-------- --------
Earnings before income tax expense.............. 37,600 31,700
Income tax expense................................. 6,400 9,100
-------- --------
Net earnings.................................... $ 31,200 $ 22,600
======== ========
Earnings per common share - Basic ................. $.43 $.30
======== ========
Earnings per common share - Diluted ............... $.43 $.29
======== ========
Average common shares outstanding:
Basic ........................................... 71,800 76,400
======== ========
Diluted ....................................... 72,300 77,600
======== ========
</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 28, MARCH 31,
1998 1997
--------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings....................................................... $ 31,200 $ 22,600
Adjustments to reconcile net cash
used for operating activities:
Depreciation and amortization................................ 32,000 37,600
Deferred income tax expense (benefit)........................ (100) 2,200
Increase in working capital.................................. (231,300) (157,900)
Other-net.................................................... (24,600) (20,000)
--------- ---------
Net cash used for operating activities..................... (192,800) (115,500)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures............................................... (6,400) (25,500)
Other-net.......................................................... 21,700 (2,100)
--------- ---------
Net cash provided by (used for) investing activities....... 15,300 (27,600)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds under line-of-credit agreements........................... 284,100 306,500
Payments under line-of-credit agreements........................... (96,400) (137,900)
Principal payments on long-term debt and capital leases............ (8,400) (3,000)
Common stock issued................................................ 1,400 7,200
Common stock repurchased........................................... (3,000) (30,000)
--------- ---------
Net cash provided by financing activities.................. 177,700 142,800
--------- ---------
Net increase (decrease) in Cash and cash equivalents (including
restricted cash)............................................... 200 (300)
Cash and cash equivalents (including restricted cash)
at beginning of period......................................... 16,100 18,700
--------- ---------
Cash and cash equivalents (including restricted cash)
at end of period............................................... $ 16,300 $ 18,400
========= =========
</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, 1997. 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 months ended March 28,
1998 are not necessarily indicative of results that may be expected for
the full year.
Effective January 1, 1998, the Company changed its year end from December
31 to a 52 or 53 week year ending on the Saturday nearest December 31. All
quarterly reporting periods are prepared on a 4-4-5 accounting cycle with
each quarter ending on the Saturday nearest the calendar quarter end.
2. No dividends were declared on the Company's common stock for the
three-month periods ended March 28, 1998 and March 31, 1997.
3. The Company's effective income tax rate of 17.0% and 29.0% for the first
three months of 1998 and 1997, respectively, 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.
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.
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 were increased by $7,500,000; these amounts
were recorded as a reduction to selling, general and administrative
expenses.
(5)
<PAGE> 7
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
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 March 28, 1998 related to discontinued operations
consist primarily of certain environmental reserves of approximately
$43,500,000 and product liability reserves of approximately $16,900,000.
The Company has recorded receivables related to these liabilities of
approximately $13,800,000, 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 1998 and future years.
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.
On November 20, 1997, the Board of Directors, excluding Mr. Farley and
other employee Directors, upon recommendation of a Special Committee
of the Board of Directors, comprised of Messrs. Al Askari and Wolfson,
guaranteed a bank loan to Mr. Farley in the amount of $26,000,000. The
proceeds of this loan were used by Mr. Farley to purchase all of the Zero
Coupon Convertible Subordinated Debentures due 2012 of Farley Inc. held by
non-affiliated third parties. Mr. Farley owns 100% of Farley Inc. In
consideration of the guarantee, Mr. Farley pays the Company an annual
guarantee fee equal to 1 1/8% of the outstanding principal balance of the
loan. The loan is secured by a second lien on 2,507,512 shares of Class B
Common Shares of the Company held by Mr. Farley and other assets. The
loan matures on November 19, 1998. The Special Committee received an
opinion from an independent financial advisor that the terms of the
transaction are commercially reasonable.
(6)
<PAGE> 8
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 March 28,
1998 the Company has a contingent liability to repay, in whole or in part,
grants received of approximately $63,300,000 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.
In connection with the Company's transaction with Acme Boot Company,
Inc. ("Acme Boot") during 1993, the Company guaranteed, on an unsecured
basis, the repayment of debt incurred by Acme Boot under Acme Boot's bank
credit facility (the "Acme Boot Credit Facility"). Farley Inc. owns 100%
of the common stock of Acme Boot. At March 28, 1998, the Acme Boot Credit
Facility provides for up to $30,000,000 of loans and letters of credit.
The Acme Boot Credit Facility is secured by first liens on substantially
all of the assets of Acme Boot and its subsidiaries. At March 28, 1998,
approximately $28,900,000 in loans and letters of credit were outstanding
under the Acme Boot Credit Facility.
Also, in April 1995, Acme Boot entered into an additional secured
credit facility with its bank lender (the "New Acme Credit Agreement"). In
April 1995, Acme Boot used approximately $25,400,000 under this facility
to repurchase certain of its debt, preferred stock and common stock. In
November 1995, Acme Boot used approximately $11,300,000 under this
facility to repurchase substantially all of the remaining portions of its
publicly held debt, preferred stock and common stock issues. The New Acme
Credit Agreement is secured by a second lien on substantially all of the
assets of Acme Boot and its subsidiaries. In addition, the Company has
guaranteed, on an unsecured basis, repayment of debt incurred or created
under the New Acme Credit Agreement. In exchange for the additional
guarantee, the Company received $6,000,000 of initial liquidation
preference of Acme Boot's Series C 10% Redeemable Junior Preferred Stock
(the "Junior Preferred Stock"). The Company has fully reserved for the
amount of the Junior Preferred Stock. The Acme Boot Credit Facility and
the New Acme Credit Agreement provide that no dividends may be paid in
cash on the Junior Preferred Stock subject to certain tests. The Junior
Preferred Stock carries voting rights representing 5% of the total voting
power of Acme Boot so long as any of Acme Boot's 12 1/2% Preferred Stock
is outstanding. The Acme 12 1/2% Preferred Stock currently carries voting
rights representing in the aggregate 25% of the total voting power of Acme
Boot. If none of the Acme 12 1/2% Preferred Stock is outstanding, the
Junior Preferred Stock will carry voting rights representing 25% of the
total voting power of Acme Boot. At March 28, 1998, approximately
$36,700,000 remains available and outstanding under the New Acme Credit
Agreement which expires in July 1998. In addition, the Company loaned
Acme Boot $8,000,000 in August 1997 to provide Acme Boot with supplemental
working capital. This loan was made in the form of a demand note payable
and is senior to all indebtedness of Acme Boot. At March 28, 1998,
$8,000,000 remains outstanding under the senior note.
(7)
<PAGE> 9
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
Summarized unaudited financial information for Acme Boot follows (in
thousands of dollars):
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 28, DECEMBER 31,
1998 1997
---------- -----------
<S> <C> <C>
Current assets $30,100 $29,900
Noncurrent assets 3,300 3,400
------- -------
$33,400 $33,300
======= =======
Current liabilities $85,200 $81,500
Noncurrent liabilities 11,400 11,800
Preferred stock 4,600 4,300
Common stockholders' deficit (67,800) (64,300)
------- -------
$33,400 $33,300
======= =======
</TABLE>
CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 28, 1998 MARCH 31, 1997
-------------- --------------
<S> <C> <C>
Net sales $8,800 $11,100
======== ========
Gross earnings $1,400 $2,000
======== ========
Operating loss $(1,800) $(1,400)
======== ========
Net loss $(3,200) $(2,900)
======== ========
</TABLE>
As a result of the operating performance of Acme Boot and management's
assessment of existing facts and circumstances of Acme Boot's financial
condition, the Company increased its reserve by $32,000,000 from
$35,000,000 to $67,000,000 during the third quarter of 1997 to fully
reserve the Company's exposure under the Acme Boot guarantees.
In April 1998, Farley Inc. signed a letter of intent to sell certain
assets and liabilities of Acme Boot. In order to adequately capitalize
Acme Boot until this transaction can be completed, the Company intends to
increase the amount of its direct loan to Acme Boot from $8,000,000 to
$10,000,000 in May of 1998. The sale is expected to allow the Company to
recover the $10,000,000 loan.
(8)
<PAGE> 10
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
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 up to a maximum of $47,100,000, based in part on
the attainment of certain levels of operating performance by the acquired
entity in 1998 and 1999. In the fourth quarter of 1997, the Company
recorded a $22,000,000 charge related to this compensation agreement,
based on its assessment of the probability that Pro Player's operating
performance would result in such amount being earned.
6. As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income ("FAS 130").
FAS 130 establishes new rules for the reporting and display of
comprehensive income and its components. The adoption of FAS 130 had no
impact on the Company's Net earnings or Stockholders' Equity. Rather, FAS
130 requires foreign currency translation adjustments, minimum pension
liability adjustments and unrealized gains or losses on available-for-sale
securities, all of which were reported separately in Stockholders' Equity
prior to adoption, to be included in new disclosures related to
comprehensive income.
For the first quarter of 1998 and 1997, comprehensive income totaled
$19,300,000 and $8,900,000, respectively. The principal difference from
reported net income was reductions of $11,900,000 in 1998 and $12,900,000
in 1997 related to foreign currency translation adjustments resulting from
the financial statement translation of the accounts of certain of the
Company's foreign operations from local currencies to the U.S. dollar.
These adjustments reflect the strengthening of the U.S. dollar with
respect to the currencies of a number of Western European countries where
the Company has made long-term operating commitments.
7. The following table sets forth the computation of basic and diluted
earnings per common share (in thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------
MARCH 28, MARCH 31,
1998 1997
---------- --------
<S> <C> <C>
NUMERATOR
Net earnings $31,200 $22,600
======= =======
DENOMINATOR
For basic earnings per common share -
weighted average shares outstanding 71,800 76,400
Effect of dilutive employee stock options 500 1,200
------- -------
For diluted earnings per common share -
weighted average shares outstanding
and assumed conversions 72,300 77,600
======= =======
Earnings per common share:
Basic $.43 $.30
======= =======
Diluted $.43 $.29
======= =======
</TABLE>
(9)
<PAGE> 11
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
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 outside of the United
States, the success of planned advertising, marketing and promotional
campaigns, international activities and the resolution 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.
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the accompanying
condensed consolidated financial statements and related notes for the period
ended March 28, 1998 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, 1997.
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 28, 1998 MARCH 31, 1997
--------------- --------------
<S> <C> <C>
Net sales $457.2 $501.0
Gross earnings $147.7 $142.8
Gross margin 32.3% 28.5%
Operating earnings $58.0 $52.4
Operating margin 12.7% 10.5%
</TABLE>
(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 - (CONTINUED)
NET SALES
Net sales decreased $43,800,000 or 8.7% in the first quarter of 1998 compared
with the first quarter of 1997. Principal factors were lower volume in retail
and activewear lines. Retail sales were impacted by reduced shipments of men's
and boys' underwear, casualwear fleece and women's and girls' underwear.
Activewear sales declined on lower shipments of T-shirts and fleece for the
screenprint market. In addition, activewear sales declined due to a reduction
in list prices in December 1997, offset partially by the elimination of
promotional programs in the first quarter of 1998. Sports & Licensing sales
improved slightly due to increased sales of close-outs which were partially
offset by unfavorable mix. European sales declined slightly as unfavorable
currency translation adjustments due to the strong dollar more than offset
increased volume.
GROSS EARNINGS
Gross earnings increased $4,900,000 or 3.4% in the first quarter of 1998
compared with the first quarter of 1997. Gross margin improved 3.8 percentage
points to 32.3% for the quarter. The most significant factor in the margin
improvement was cost savings from the Company's offshore sewing and other cost
reduction initiatives. In addition, no activewear promotional programs were
offered in the first quarter of 1998, benefiting both gross earnings and
margin in the period. Volume decreases and reductions in list prices on
activewear products in December 1997, however, reduced the rate of improvement
in consolidated gross earnings and margin in the first quarter of 1998. Retail
gross earnings and margin improved substantially despite lower sales. Although
activewear gross earnings declined modestly on lower volume, gross margin
increased 3.4 percentage points. Sports & Licensing results were slightly
behind last year, and gross earnings and margin from European operations were
significantly better, principally due to cost reductions.
OPERATING EARNINGS
Operating earnings increased $5,600,000 in the first quarter of 1998 compared
with the corresponding 1997 period. Operating margin improved 2.2 percentage
points to 12.7%. Gross earnings and margin improved as noted above, while
selling, general and administrative expense declined $600,000 or .7%. This
decline in expenses reflected the recording of compensation expense related to
a performance share compensation plan for certain executive officers in the
first quarter of 1997, along with reductions in personnel, distribution center
depreciation and sales commissions (due to a higher sales mix of products which
carry no commission) in the first quarter of 1998. These favorable variances
were substantially offset by changes in estimates recorded in connection with
the special charges taken in 1995 which were finalized in the first quarter of
1997 (reducing selling, general and administrative expense by $7,500,000 in the
first quarter of 1997) and increases in advertising and promotion expenses in
the first quarter of 1998. Selling, general and administrative expense was
18.2% of sales in the first quarter of 1998 compared with 16.7% of sales in the
first quarter of 1997.
(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)
INTEREST EXPENSE
Interest expense increased $5,800,000 or 30.7% for the first quarter of 1998
compared with the first quarter of 1997. The increase was largely due to a
significantly higher average debt level resulting principally from purchases of
the Company's common stock ($146,600,000 since March 31, 1997), the LMP
settlement ($102,200,000 in the second half of 1997) and a greater investment
in working capital needed to better service customers while the Company
completes the offshore movement of its sewing and finishing operations and
realigns its domestic manufacturing and distribution facilities.
OTHER INCOME (EXPENSE) - NET
The favorable variance in other income (expense) - net compared with the first
quarter of 1997 reflected gains of $6,400,000 on the sale of two corporate
airplanes in the first quarter of 1998. Other income (expense) - net included
losses totaling $3,100,000 and $2,500,000 in the first quarter of 1998 and
1997, respectively, from sales of accounts receivable pursuant to its
receivables purchase agreement. In addition, other income (expense) - net in
the first quarter of 1998 and 1997 included translation gains of $1,400,000 and
$800,000.
INCOME TAXES
The Company's effective income tax rate of 17.0% and 29.0%, respectively, for
the first three months of 1998 and 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.
EARNINGS PER COMMON SHARE
Earnings per common share - basic were $0.43 and $0.30 and earnings per common
share - diluted were $0.43 and $0.29 in the first quarter of 1998 and 1997,
respectively. Average common shares were reduced compared with the first
quarter of 1997 by the repurchase of approximately 4,700,000 shares between
March 31, 1997 and March 28, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Funds generated from the Company's operations are its 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 $819,100,000 of revolving lines of credit. As of May 8, 1998,
approximately $135,100,000 was available and unused under these facilities.
(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)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Net cash used for operating activities was $192,800,000 in the first quarter of
1998 compared with $115,500,000 in the first quarter of 1997. The primary
factor in the unfavorable comparison with 1997 was the reduction in trade
accounts payable which included advances of $83,100,000 at December 31, 1997,
owed to the ultimate purchaser of the Company's receivables under its
receivables purchase agreement. Other changes in working capital were
consistent from year to year. In addition to the repayment of advances, the
working capital increases in 1998 and 1997 were primarily driven by higher
inventories ($106,300,000 and $101,300,000, respectively), higher accounts
receivable ($16,800,000 and $12,600,000, respectively) and lower accounts
payable ($35,000,000 and $30,500,000, respectively). The increases in working
capital in 1998 and 1997 reflect the seasonality of the Company's business as
it enters its peak selling season.
Investing activities generated $15,300,000 in the 1998 period compared with net
cash uses totaling $27,600,000 in the same 1997 period. Capital expenditures
in 1998 were $6,400,000 or $19,100,000 lower than the same 1997 period and
corporate airplane sales in 1998 added $21,600,000 in proceeds. Capital
spending, primarily to support offshore assembly operations, is anticipated to
approximate $57,000,000 in 1998.
Net cash provided by financing activities totaled $177,700,000 in the first
quarter of 1998 compared with $142,800,000 in the first quarter of 1997. The
Company borrowed $19,100,000 more under its revolving credit facilities in 1998
and paid $27,000,000 less toward stock repurchases. Offsetting factors were
higher payments on long-term debt and capital leases ($5,400,000) and lower
proceeds from issuance of common stock ($5,800,000).
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 28,
1998 were 5,890,000 shares at an aggregate cost of $193,200,000.
In December 1996, the Company entered into a three-year receivables purchase
agreement whereby it can currently sell up to a $250,000,000 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 $221,000,000 of
receivables at March 28, 1998 and $183,000,000 of receivables at December 31,
1997 were sold to the Company's unconsolidated, wholly-owned special purpose
entity, reducing consolidated notes and accounts receivable. Proceeds of
approximately $171,500,000 and $214,500,000 from the ultimate purchaser at the
respective balance sheet dates were used to reduce amounts outstanding under
the Company's revolving lines of credit.
(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)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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
anticipates that the net proceeds from any future sale of the Securities 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.
ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued FAS 131,
Disclosures about Segments of an Enterprise and Related Information. FAS 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. FAS 131 is effective for annual financial statements for fiscal
years beginning after December 15, 1997. Management has not completed its
review of FAS 131.
(14)
<PAGE> 16
FRUIT OF THE LOOM, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. EXHIBITS
4(a)* $900,000,000 Credit Agreement dated as of September 19, 1997, among the
several banks and other financial institutions from time to time parties
thereto (the "Lenders"), NationsBank, N.A., as administrative agent for
the Lenders thereunder, Chase Manhattan Bank, Bankers Trust Company, The
Bank of New York and the Bank of Nova Scotia, as co-agents (incorporated
herein by reference to Exhibit 4(a) to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1997).
4(b)* 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
In February, 1998, the Company filed a Current Report on Form 8-K dated
February 11, 1998, reporting the Company's February 11, 1998 press release
announcing that the Company had filed a registration statement and preliminary
proxy material with the Securities and Exchange Commission regarding a
reorganization of the Company.
In February, 1998, the Company filed a Current Report on Form 8-K dated
February 12, 1998 reporting the Company's February 12, 1998 press release
announcing its earnings for the three months and years ended December 31, 1997
and 1996. The financial statements attached to the press release consisted of
a condensed consolidated balance sheet as of December 31, 1997 and 1996, a
condensed consolidated statement of operations for the three months and years
ended December 31, 1997 and 1996 and a condensed consolidated statement of cash
flows for the years ended December 31, 1997 and 1996.
In February, 1998, the Company filed a Current Report on Form 8-K/A dated
February 23, 1998, reporting the Company's February 12, 1998 press release
announcing its earnings for the three months and years ended December 31, 1997
and 1996. The financial statements attached to the press release consisted of
a condensed consolidated balance sheet as of December 31, 1997 and 1996, a
condensed consolidated statement of operations for the three months and years
ended December 31, 1997 and 1996 and a condensed consolidated statement of cash
flows for the years ended December 31, 1997 and 1996.
(15)
<PAGE> 17
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, 1998 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)
(16)
<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-31-1998
<PERIOD-END> MAR-28-1998
<CASH> 16,300
<SECURITIES> 0
<RECEIVABLES> 126,700
<ALLOWANCES> 11,800
<INVENTORY> 953,800
<CURRENT-ASSETS> 1,142,000
<PP&E> 1,209,300
<DEPRECIATION> 728,900
<TOTAL-ASSETS> 2,573,700
<CURRENT-LIABILITIES> 418,900
<BONDS> 1,372,800
0
0
<COMMON> 317,900
<OTHER-SE> 122,600
<TOTAL-LIABILITY-AND-EQUITY> 2,573,700
<SALES> 457,200
<TOTAL-REVENUES> 457,200
<CGS> 309,500
<TOTAL-COSTS> 309,500
<OTHER-EXPENSES> (4,300)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,700
<INCOME-PRETAX> 37,600
<INCOME-TAX> 6,400
<INCOME-CONTINUING> 31,200
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 31,200
<EPS-PRIMARY> .43
<EPS-DILUTED> .43
</TABLE>
