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November 18, 1998
RUSSELL CORP (RML)
Quarterly Report (SEC form 10-Q)
Management's Discussion and Analysis of Results of Operations and Financial Condition
RESULTS OF OPERATIONS
The following is Management's Discussion and Analysis of certain significant factors which have affected the Company's earnings during the periods included in the accompanying consolidated condensed statements of operations.
A summary of the period to period changes in the principal items included in the consolidated condensed statements of operations is shown below:
Comparison of
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13 Weeks 39 Weeks
Ended 10/4/98 Ended 10/4/98
and 10/5/97 and 10/5/97
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Increase (Decrease)
(Dollars in Thousands)
Net sales $ 8,934 2.4% $ 8,555 1.0%
Cost of goods sold 27,701 10.9 41,734 6.7
Selling, general and
administrative expenses 7,027 10.1 8,577 4.6
Interest expense 4 0.1 921 4.5
Other - net (33,594) n/a (34,035) n/a
Income (loss) before taxes (59,392) n/a (76,712) n/a
Provision for (benefit from) (22,002) n/a (28,315) n/a
income taxes
Net Income (loss) (37,390) n/a (48,397) n/a
In a press release dated July 22, 1998, the Company announced its intent to restructure certain operations and record related charges of between $100-$125 million after-tax. This restructuring is intended to increase shareholder returns through improved asset utilization and cost reductions along with increased marketing efforts. The Company expects to record these charges over a three-year period beginning with the third quarter of 1998.
Included in the current 13 week period and the current 39 week period, are charges as part of that plan of $61,078,000 pre-tax, $39,407,000 after-tax or, $1.09 on a per share basis.
Net sales for the quarter were up 2.4% to $377,208,000 versus the similar period in 1997. For the comparable 39 week period, sales were up 1%.
Sales increases were strongest early in the quarter, and slowed in the last month as warmer weather impacted retailer sales of the Company's fleece products. Pricing pressures remained, as a major competitor led another round of price reductions in the distributor/screenprint channel.
Sales level increases at Cross Creek and the Jerzees brand offset slight declines in Russell Athletic and International. Margins were down, 25.5% versus 31.3%, as the previously mentioned charges associated with restructuring and price deterioration impacted the quarter.
Selling, general and administrative expenses increased to 20.3% of sales for the quarter, versus 18.9% in the third quarter of 1997. Again, the expenses reflects charges associated with the announced restructuring, primarily accounts receivable. Additionally, for the 39 week period, expenses included an approximately $8 million non-recurring charge related to the retirement, and subsequent replacement of, the Chairman, President, and Chief Executive Officer of the Company.
The net result was a loss of $14,156,000 for the quarter, compared to a profit of $23,234,000 in the previous year's third quarter, resulting in a loss of $5,747,000 year-to-date versus income of $42,650,000 last year.
Liquidity and Capital Resources
The financial condition of the Company remains strong. At the end of the quarter the current ratio was 2.9:1, the same as the like period of 1997. Debt to total capitalization was 34.0% at the end of the quarter versus 35.1% at October 5, 1997.
Required cash for inventories, purchases of property, plant and equipment, dividends, prepaid expenses, and treasury stock was provided from income net of non-cash charges, accounts receivable and short-term borrowings. The Company maintained $286 million of informal lines of credit at the end of the quarter.
Recording the charges associated with the Company's restructuring plan has caused the Company's interest coverage ratio to fall below the ratio required in agreements related to the Company's long term debt. The Company has reached agreement in principal with primary lenders and at this time believes that the covenants will be amended to exclude the impact of the restructuring charges. There exists no other violations of loan covenants, therefore, the debt has been classified as short-term or long-term according to its terms. The Company's restructuring plan is intended to improve asset utilization and should not have a negative impact on the Company's ability to perform under these agreements.
The Company utilizes two interest rate swap agreements in the management of its interest rate exposure. These agreements effectively convert a portion of the Company's interest rate exposure from a fixed to a floating rate basis and from a floating rate to a fixed rate basis. The effect of these agreements was to effectively lower interest expense on the Company's long-term debt in the first three quarters.
The Company periodically enters into futures contracts as hedges for its purchases of cotton inventories. Gains and losses on these hedges are deferred and reflected in cost of sales as such inventories are sold. Purchasing futures contracts not only limits the risk of price increases, but also limits the Company's ability to benefit from future price decreases. At October 4, 1998, the Company had outstanding futures contracts that, when combined with other contracts and inventories, exceeded the Company's anticipated remaining 1998 cotton requirements.
Subsequent Event
On November 17, 1998, a Jefferson County, Alabama jury returned a verdict in Sullivan, et al. V. Russell Corporation, et al. Five plaintiff families were awarded a total of $155,200 in compensatory property damages and $52,398,000 in punitive damages from the three defendants, Russell Corporation, Avondale mills and Alabama Power Company. Allegations in the case were that two of the defendants, including Russell Corporation, textile discharges in the Alexander City, Alabama wastewater treatment plant, the subsequent treatment by the City of Alexander City and discharge into Lake Martin constituted a nuisance and indirect trespass. Alabama Power Company, the third defendant, was alleged to have allowed the nuisance and trespass to continue as the owner of the land under the lake. The plaintiffs alleged mental anguish but no damages were granted for this claim. No allegation of personal injury was made in the case.
The evidence was uncontroverted that Russell Corporation is in compliance with its permit issued by the Alabama Department of Environmental Management (ADEM) for the indirect discharge of its wastewater to the Alexander City wastewater treatment plant. Therefore, the Company believes that the verdict is contrary to the evidence presented in the case and will immediately initiate, and vigorously pursue, post-trial motions and appellate proceedings.
As management believes that the amount of the final verdict should be significantly reduced, no immediate assessment can be made of the impact on the Company's financial statements, liquidity or the Company's ability to comply with its loan agreements. Accordingly, no adjustment has been recorded for the period ended October 4, 1998.
Year 2000 Disclosure Statement
The Company has been involved in an organized program to assure that the Company's information technology systems and related infrastructure will be Year 2000 compliant. These efforts began in July of 1996 with the assignment of a full-time coordinator of the Year 2000 Compliance. The project initially involved the computer applications which support the parent company.
The initial phase of the corporate project involved the inventory and analysis of existing information systems. From this analysis a plan for remediation was formulated and put into action in January of 1997. This plan is now ninety percent complete in bringing these systems into Year 2000 compliance with 19,458 actual hours expended against a planned 21,393 hours. The planned completion date for testing and implementation of this phase is March 31, 1999.
The second phase of the corporate project was to inventory, analyze and test the infrastructure that involves imbedded microchips. This phase began in January of 1998 and has identified 3,741 unique products (hardware and models, software and releases) that are being certified through vendor certification and testing where possible. To date 1,844 or forty-nine percent of these products have been certified. The planned completion date for this phase is June of 1999.
The Year 2000 corporate project was expanded into a third phase to include the Cross Creek and DeSoto Mills subsidiaries under the same project format and phases as the parent company. DeSoto Mills is one hundred percent complete in remediation of business and manufacturing systems and has certified twenty-two percent of infrastructure products. The Cross Creek subsidiary is forty-four percent complete on remediation of information systems and has certified sixty-four percent of infrastructure products.
The fourth phase of the Year 2000 project involves the identification, analysis and certification of suppliers of materials and services to the Company. Two thousand five hundred and fifty-five suppliers have been identified and have been individually contacted by questionnaires, letters and telephone contacts to determine their compliance status and ability to service the Company in the Year 2000. If it is determined that a supplier will be in non-compliance or of questionable compliance, contingency plans will be developed to address the need, including the selection and introduction of new suppliers.
The fifth phase of the Year 2000 project involves an assessment of the major customers of the Company and their Year 2000 readiness. A questionnaire is being mailed in November 1998 to two hundred customers to begin the assessment of their Year 2000 status and their potential as a viable customer in the Year 2000.
The Year 2000 efforts in the Russell UK subsidiary involves the replacement of purchased application software. The first phase of this project was to identify and select an information systems software solution that would meet the business needs of the subsidiary and resolve the Year 2000 issue. The progress to date has been to select a software solution and to conduct a pilot project for acceptance. This has been completed and the implementation project is scheduled to be completed by the end of June 1999. The second phase of the Russell UK project was the identification of infrastructure products. Fifty-nine products were identified with twenty-five percent being certified as compliant to date.
Management has determined that the costs for correction of the Year 2000 issues are expected to total approximately $1,770,000 with $1,470,000 being expended through the end of 1998. The Year 2000 project is being funded out of normal operating funds.
Senior management receives monthly updates on the progress of this project by each individual phase. The Year 2000 compliance project is a priority project for the Company and especially the IT department. Other IT projects, including upgrade of certain existing systems and implementation of new systems, continue while the Year 2000 project is being accomplished.
At the present time the Company does not have a contingency plan to operate in the event that its business systems are not Year 2000 compliant. If further systems testing and supplier analysis were to indicate that there is a substantial risk to the Company's ability to operate effectively, a contingency plan will be developed in those areas affected.
This document contains Year 2000 Readiness Disclosures as defined in the Year 2000 Information and Readiness Disclosure Act, P.L.105-271 (Oct 19, 1998). Accordingly, this disclosure, in whole or in part, is not, to the extent provided in the act, admissible in any state or federal civil action to prove the accuracy or truth of any Year 2000 statements contained herein.
New Accounting Pronouncement
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.
FORWARD LOOKING INFORMATION
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 upon currently available information. Wherever possible, the Company has identified these "forward looking" statements (as defined in Section 21E of the Securities and Exchange Act of 1934) by words such as "anticipates," "believes," "estimates," "expects," and similar phrases. These forward looking statements are based upon assumptions the Company believes are reasonable; however, such 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. Some forward looking statements in this report concern anticipated sales levels, cost estimates and resulting earnings that are not necessarily indicative of subsequent periods due to the mix of future orders, at once orders and product mix changes, which may vary significantly from quarter to quarter. The company assumes no obligation to update publicly any forward looking statements whether as a result of new information, future events or otherwise.
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