Quarterly Report for period ended June 30, 2003

 

 

UNITED STATES

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, 2003

 

 

Commission File Number 1-11226

 

 

TOMMY HILFIGER CORPORATION

(Exact name of registrant as specified in its charter)

 

 

British Virgin Islands    98-0372112

(State or other jurisdiction

of incorporation or organization)

  

(I.R.S. Employer

Identification No.)

 

 

9/F, Novel Industrial Building, 850-870 Lai Chi Kok Road, Cheung Sha Wan, Kowloon, Hong Kong

(Address of principal executive offices)

 

 

852-2216-0668

(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  ¨

 

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

 

Yes  x                    No  ¨

 

 

Ordinary Shares, $0.01 par value per share, outstanding as of August 5, 2003: 90,584,212

 



TOMMY HILFIGER CORPORATION

INDEX TO FORM 10-Q

June 30, 2003

 

 

          Page

PART I—FINANCIAL INFORMATION

    

Item 1

  

Financial Statements

    
    

Condensed Consolidated Statements of Operations for the three months ended June 30, 2003 and 2002

   3
    

Condensed Consolidated Balance Sheets as of June 30, 2003 and March 31, 2003

   4
    

Condensed Consolidated Statements of Cash Flows for the three months ended June 30, 2003 and 2002

   5
    

Condensed Consolidated Statements of Changes in Shareholders’ Equity for the three months ended June 30, 2003 and the year ended March 31, 2003

   6
    

Notes to Condensed Consolidated Financial Statements

   7

Item 2

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   18

Item 3

  

Quantitative and Qualitative Disclosures About Market Risk

  

24

Item 4

  

Controls and Procedures

   24

PART II—OTHER INFORMATION

    

Item 1

   Legal Proceedings    25

Item 6

   Exhibits and Reports on Form 8-K    25

Signatures

   26

Certifications

   27

 

2


PART I

 

ITEM 1— FINANCIAL STATEMENTS

 

TOMMY HILFIGER CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

 

(Unaudited)   

For the Three Months

Ended June 30,


 
     2003

    2002

 

Net revenue

   $ 367,208     $ 366,330  

Cost of goods sold

     198,723       203,057  
    


 


Gross profit

     168,485       163,273  
    


 


Depreciation and amortization

     19,053       22,143  

Special item

     (11,000 )         —    

Other selling, general and administrative expenses

     129,441       127,266  
    


 


Total selling, general and administrative expenses

     137,494       149,409  
    


 


Income from operations

     30,991       13,864  

Interest and other expense

     8,638       12,569  

Interest income

     1,133       1,896  
    


 


Income before income taxes and cumulative effect of change in accounting principle

     23,486       3,191  

Provision for income taxes

     6,532       11,923  
    


 


Income (loss) before cumulative effect of change in accounting principle

     16,954       (8,732 )

Cumulative effect of change in accounting principle

     —         (430,026 )
    


 


Net income (loss)

   $ 16,954     $ (438,758 )
    


 


Earnings (loss) per share:

                

Earnings (loss) before cumulative effect of change in accounting principle

   $ 0.19     $ (0.10 )
    


 


Cumulative effect of change in accounting principle per share

   $ —       $ (4.78 )
    


 


Basic earnings (loss) per share

   $ 0.19     $ (4.88 )
    


 


Weighted average shares outstanding

     90,580       89,898  
    


 


Earnings (loss) before cumulative effect of change in accounting principle

   $ 0.19     $ (0.10 )
    


 


Cumulative effect of change in accounting principle per share

   $ —       $ (4.78 )
    


 


Diluted earnings (loss) per share

   $ 0.19     $ (4.88 )
    


 


Weighted average shares and share equivalents outstanding

     90,667       89,898  
    


 


 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

3


TOMMY HILFIGER CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

 

(Unaudited)   

June 30,

2003


   

March 31,

2003


 

Assets

                

Current assets

                

Cash and cash equivalents

   $ 273,886        $ 420,826  

Short-term investments

     20,751       —    

Accounts receivable

     92,902       185,039  

Inventories

     270,360       229,654  

Deferred tax assets

     41,790       51,830  

Other current assets

     44,848       28,183  
    


 


Total current assets

     744,537       915,532  

Property and equipment, at cost, less accumulated depreciation and amortization

     244,280       248,290  

Intangible assets, subject to amortization

     8,410       8,744  

Intangible assets, not subject to amortization

     629,300       625,205  

Goodwill

     227,337       219,153  

Other assets

     11,366       11,227  
    


 


Total Assets

   $ 1,865,230     $ 2,028,151  
    


 


Liabilities and Shareholders’ Equity

                

Current liabilities

                

Short-term borrowings

   $ 20,373     $ 19,380  

Current portion of long-term debt

     448       151,866  

Accounts payable

     20,117       47,753  

Accrued expenses and other current liabilities

     180,825       194,023  
    


 


Total current liabilities

     221,763       413,022  

Long-term debt

     350,470       350,280  

Deferred tax liability

     208,431       214,825  

Other liabilities

     7,131       6,649  

Shareholders’ equity

                

Preference Shares, $0.01 par value-shares authorized 5,000,000; none issued

     —         —    

Ordinary Shares, $0.01 par value-shares authorized 150,000,000; issued 96,776,812 and 96,771,312 shares, respectively

     968       968  

Capital in excess of par value

     606,881       606,836  

Retained earnings

     460,125       443,171  

Accumulated other comprehensive income

     70,692       53,631  

Treasury shares, at cost: 6,192,600 Ordinary Shares

     (61,231 )     (61,231 )
    


 


Total shareholders’ equity

     1,077,435       1,043,375  
    


 


Commitments and contingencies

                

Total Liabilities and Shareholders’ Equity

   $ 1,865,230     $ 2,028,151  
    


 


 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

4


TOMMY HILFIGER CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

(Unaudited)   

For the Three Months

Ended June 30,


 
     2003

    2002

 

Cash flows from operating activities

                

Net income (loss)

   $ 16,954     $ (438,758 )

Adjustments to reconcile net income (loss) to net cash from operating activities

                

Cumulative effect of change in accounting principle

     —         430,026  

Depreciation and amortization

     19,496       22,318  

Deferred taxes

     2,847       11,358  

Changes in operating assets and liabilities

                

Decrease (increase) in assets

                

Accounts receivable

     96,406       104,286  

Inventories

     (35,723 )         (63,301 )

Other assets

     (16,970 )     (12,161 )

Increase (decrease) in liabilities

                

Accounts payable

     (27,636 )     10,235  

Accrued expenses and other liabilities

     (19,074 )     3,434  
    


 


Net cash provided by operating activities

     36,300       67,437  
    


 


Cash flows from investing activities

                

Purchases of property and equipment

     (11,216 )     (22,816 )

Purchase of short-term investments

     (20,751 )     —    
    


 


Net cash used in investing activities

     (31,967 )     (22,816 )
    


 


Cash flows from financing activities

                

Payments of long-term debt

     (151,301 )     (33,967 )

Proceeds from the exercise of employee stock options

     44       6,017  

Short-term bank borrowings (repayments), net

     (16 )     (5,982 )
    


 


Net cash used in financing activities

     (151,273 )     (33,932 )
    


 


Net increase (decrease) in cash

     (146,940 )     10,689  

Cash and cash equivalents, beginning of period

     420,826       387,247  
    


 


Cash and cash equivalents, end of period

   $ 273,886     $ 397,936  
    


 


 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

5


TOMMY HILFIGER CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(dollar amounts in thousands)

 

(Unaudited)    Ordinary Shares

   Capital in
excess of
par value


   Retained
earnings


   

Accumulated
other com-

prehensive
income (loss)


    Treasury
shares


    Total
shareholders’
equity


 
     Outstanding

   Amount

           

Balance, March 31, 2002

   89,838,567    $ 960    $ 598,527    $ 956,776     $ 2,430     $ (61,231 )   $ 1,497,462  

Net income (loss)

   —        —        —        (513,605 )     —         —         (513,605 )

Foreign currency translation

   —        —        —        —         52,453       —         52,453  

Change in fair value of hedging instruments

   —        —        —        —         (1,252 )     —         (1,252 )

Exercise of employee stock options

   740,145      8      7,169      —         —         —         7,177  

Tax benefits from exercise of stock options

   —        —        1,140      —         —         —         1,140  
    
  

  

  


 


 


 


Balance, March 31, 2003

   90,578,712      968      606,836      443,171       53,631       (61,231 )     1,043,375  

Net income

   —        —        —        16,954       —         —         16,954  

Foreign currency translation

   —        —        —        —         18,159       —         18,159  

Change in fair value of hedging instruments

   —        —        —        —         (1,098 )     —         (1,098 )

Exercise of employee stock options

   5,500      —        44      —         —         —         44  

Tax benefits from exercise of stock options

   —        —        1      —         —         —         1  
    
  

  

  


 


 


 


Balance, June 30, 2003 (Unaudited)

   90,584,212    $ 968    $ 606,881    $ 460,125     $ 70,692     $ (61,231 )   $ 1,077,435  
    
  

  

  


 


 


 


 

Comprehensive income consists of net income (loss), foreign currency translation and unrealized gains and losses on hedging instruments and totaled $34,015 for the three months ended June 30, 2003 and $(462,404) for the fiscal year ended March 31, 2003.

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

6


TOMMY HILFIGER CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollar amounts in thousands, except per share amounts)

(Unaudited)

 

Note 1—Basis of Presentation

 

The accompanying unaudited interim Condensed Consolidated Financial Statements have been prepared by Tommy Hilfiger Corporation (“THC” or the “Company”; unless the context indicates otherwise, all references to the “Company” include THC and its subsidiaries) in a manner consistent with that used in the preparation of the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K, as amended, for the fiscal year ended March 31, 2003, as filed with the Securities and Exchange Commission (the “Form 10-K”). Certain items contained in these statements are based on estimates. In the opinion of management, the accompanying financial statements reflect all adjustments, which consist of only normal and recurring adjustments (except for the special item described in Note 3, the change in accounting estimate described in Note 4 and the cumulative effect of the change in accounting principle and the deferred tax charge described in Note 6), necessary for a fair presentation of the financial position and results of operations and cash flows for the periods presented. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

Operating results for the three-month period ended June 30, 2003 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2004, as the Company’s business is impacted by the general seasonal trends characteristic of the apparel and retail industries as well as other factors. These unaudited financial statements should be read in conjunction with the financial statements included in the Form 10-K.

 

The financial statements for the three-month period ended June 30, 2003 are unaudited. The Condensed Consolidated Balance Sheet as of March 31, 2003, as presented, has been derived from the Consolidated Balance Sheet as of March 31, 2003 included in the Form 10-K.

 

 

Note 2—Summary of Significant Accounting Policies

 

For a description of the Company’s significant accounting policies, see Note 1 to the Consolidated Financial Statements included in the Form 10-K. Additional information regarding the Company’s significant accounting policies is set forth below.

 

Stock Options

 

The Company uses the intrinsic value method to account for stock-based compensation in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and has adopted the disclosure-only provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”) as amended by SFAS No. 148 “Accounting for Stock-Based Compensation—Transition and Disclosure.”

 

At June 30, 2003, the Company had three stock-based employee compensation plans, which are described more fully in Note 14 to the Consolidated Financial Statements included in the Form 10-K. No stock-based employee compensation expense is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant.

 

7


The following table illustrates the effect on net income (loss) and earnings (loss) per share if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation.

 

     For the Three Months
Ended June 30,


 
     2003

    2002

 

Net income (loss), as reported

   $ 16,954     $ (438,758 )

Deduct: Total stock-based employee compensation expense determined under the fair value method for all awards, net of related tax effects

     (1,879 )       (3,450 )
    


 


Pro forma net income (loss)

   $ 15,075     $ (442,208 )
    


 


Earnings (loss) per share:

                

Basic—as reported

   $ 0.19     $ (4.88 )

Basic—pro forma

   $ 0.17     $ (4.92 )

Diluted—as reported

   $ 0.19     $ (4.88 )

Diluted—pro forma

   $ 0.17     $ (4.92 )

 

Shipping and Handling Costs

 

The Company reflects shipping and handling costs as a component of selling, general and administrative expenses in its condensed consolidated statements of operations. Shipping and handling costs approximated $10,670 and $11,545 for the three months ended June 30, 2003 and 2002, respectively. Amounts billed to customers that relate to shipping and handling on related sales transactions are de minimus.

 

 

Note 3—Special Items

 

In June 2003, the Company settled its trademark counterfeiting and infringement litigation with Goody’s Family Clothing, Inc. and received a payment of $11,000 on August 1, 2003, in connection with the settlement. The Company recorded this settlement as a special item, which reduced selling, general and administrative expenses during the first quarter of fiscal 2004.

 

In fiscal 2003, the Company recorded special charges of $78,186 before taxes related to the closure of all but seven of its U.S. specialty stores and the impairment of fixed assets of the seven U.S. specialty stores that the Company will continue to operate. The special charges consisted of $38,929 for the impairment of leasehold improvements, store fixtures and other assets of stores that were closed, $24,263 for estimated lease termination costs, $2,600 for the write down of inventory (included in cost of goods sold), $764 for other expenses, including employee costs, and $11,630 for an impairment charge to write down to fair value the fixed assets and leasehold improvements at the seven stores that will remain open.

 

As of March 31, 2003, the Company had $5,944 of special charge accrual related to the specialty store closures. By June 30, 2003 the Company closed 37 stores and had utilized substantially all of this accrual.

 

 

Note 4—Change in Accounting Estimate

 

During the first quarter of fiscal 2004, the Company reevaluated the level of price adjustments it previously provided for its retailers and reduced its estimated accrual for such price adjustments, increasing income before income taxes and the cumulative effect of change in accounting principle by approximately $9,000.

 

Note 5—Short-Term Investments

 

As of June 30, 2003, the Company had invested in high quality debt instruments with original maturities of greater than 90 days but less than one year. These securities have been classified as short-term investments in the Company’s condensed consolidated balance sheet as of June 30, 2003 and accounted for as trading securities as defined under SFAS 115, “Accounting for Certain Investments in Debt and Equity Securities”. Accordingly these investments have been recorded at fair market value based on trading in the public market. The corresponding gain, which was de minimus, has been included in interest income in the Company’s condensed consolidated statements of operations for the quarter ended June 30, 2003.

 

Note 6—Goodwill and Intangible Assets

 

On April 1, 2002, the Company adopted Financial Accounting Standards Board Statement No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). SFAS 142 requires that goodwill, including previously existing goodwill, and intangible assets with indefinite useful lives not be amortized but that they be tested for impairment at adoption and at least annually thereafter. The Company performed its initial test upon adoption and will perform its annual impairment review during the fourth quarter of each fiscal year.

 

Upon adoption of SFAS 142 in the first quarter of fiscal 2003, the Company recorded a non-cash, non-operating charge of $430,026, or $4.78 per diluted share, to reduce the carrying value of its goodwill to fair value. Such charge is reflected as a cumulative effect of a change in accounting principle in the Condensed Consolidated Statements of Operations.

 

Prior to April 1, 2002, the Company recorded deferred tax liabilities relating to the difference in the book and tax basis of intangible assets, principally trademark rights. As a result of adopting SFAS 142, those deferred tax liabilities will no longer be used to support the realization of certain deferred tax assets. Accordingly, the Company recorded a one-time, non-cash, deferred tax charge totaling $11,358, or $0.13 per diluted share, in order to establish a valuation allowance against those deferred tax assets. This charge was included in the Company’s provision for income taxes for the first quarter of fiscal 2003.

 

 

Note 7—Debt Facilities

 

As of June 30, 2003, the Company’s principal debt facilities consisted of $200,000 of 6.85% notes maturing on June 1, 2008 (the “2008 Notes”), $150,000 of 9% bonds maturing on December 1, 2031 (the “2031 Bonds”) and a revolving credit facility which expires on June 30, 2005 (the “Credit Facility”). The 2008 Notes and the 2031 Bonds (collectively, the “Notes”) were issued by Tommy Hilfiger U.S.A., Inc., a subsidiary of THC (“TH USA”) and are fully and unconditionally guaranteed by THC. The indenture under which the Notes were issued contains covenants that, among other things, restrict the ability of subsidiaries of THC to incur additional indebtedness, restrict the ability of

 

8


THC and its subsidiaries to incur indebtedness secured by liens or enter into certain sale and leaseback transactions and restrict the ability of THC and TH USA to engage in mergers or consolidations.

 

In June 2003, upon maturity, the Company repaid the remaining $151,091 principal amount of 6.50% notes which matured on June 1, 2003 (the “2003 Notes”).

 

The Credit Facility, which is guaranteed by THC, consists of an unsecured $300,000 TH USA three-year revolving credit facility, of which up to $175,000 may be used for direct borrowings. The Credit Facility is available for letters of credit, working capital and other general corporate purposes. As of June 30, 2003, $116,075 of the available borrowings under the Credit Facility had been used to open letters of credit, including $26,337 for inventory purchased that are included in current liabilities and $89,738 related to commitments to purchase inventory. There were no direct borrowings outstanding under the Credit Facility as of June 30, 2003.

 

The Credit Facility contains a number of covenants that, among other things, restrict the ability of subsidiaries of THC to dispose of assets, incur additional indebtedness, create liens on assets, pay dividends or make other payments in respect of capital stock, make investments, loans and advances, engage in transactions with affiliates, enter into certain sale and leaseback transactions, engage in mergers or consolidations or change the businesses conducted by them. The Credit Facility also restricts the ability of THC to create liens on assets or enter into certain sale and leaseback transactions. Under the Credit Facility, subsidiaries of THC may not pay dividends or make other payments in respect of capital stock to THC that, in the aggregate, exceed 33% of the Company’s cumulative consolidated net income, commencing with the fiscal year ended March 31, 2002 plus $125,000, less certain deductions. In addition, under the Credit Facility, THC and TH USA are required to comply with and maintain specified financial ratios and meet certain tests (based on the Company’s consolidated financial results excluding the effects of changes in accounting principles generally accepted in the United States), including, without limitation, a minimum fixed charge coverage ratio, a maximum leverage ratio and a minimum consolidated net worth test.

 

The Company was in compliance with all covenants in respect of the Notes and the Credit Facility as of, and for the twelve-month period ended, June 30, 2003.

 

Certain of the Company’s non-U.S. subsidiaries have separate credit facilities, totaling approximately $105,000 at June 30, 2003, for working capital or trade financing purposes. In addition to short-term borrowings of $20,373, as of June 30, 2003, $37,372 of available borrowings under these facilities had been used to open letters of credit, including $4,415 for inventory purchased that is included in current liabilities and $32,957 related to commitments to purchase inventory. Borrowings under these credit facilities bear interest at variable rates which, on a weighted average annual basis, amounted to 3.58% and 3.69% as of, and for the three-month period ended, June 30, 2003, respectively.

 

The Company’s credit facilities provide for issuance of letters of credit without restriction on cash balances.

 

 

Note 8—Condensed Consolidating Financial Information

 

The Notes discussed in Note 7 were issued by TH USA and are fully and unconditionally guaranteed by THC. Accordingly, condensed consolidating balance sheets as of June 30, 2003 and March 31, 2003, and the related condensed consolidating statements of operations and cash flows for each of the three-month periods ended June 30, 2003 and 2002, are provided. The operations of TH USA, excluding its subsidiaries, consist of the U.S. operations of certain wholesale divisions, together with TH USA corporate overhead charges not allocated to subsidiaries. The non-guarantor subsidiaries of TH USA consist of the Company’s U.S. retail, licensing and other wholesale divisions, as well as the Company’s Canadian operations. Such operations contributed net revenue of $236,549 and $252,026 for the three-month periods ended June 30, 2003 and 2002, respectively. The other non-guarantor subsidiaries of THC are primarily those non-U.S. subsidiaries involved in investing and buying office operations, as well as the Company’s European operations. These condensed consolidating financial statements have been prepared using the equity method of accounting in accordance with the requirements for presentation of such information under which TH USA’s and THC’s results reflect 100% of the earnings of their respective subsidiaries in each of the years presented. See Note 7 for a description of certain restrictions on the ability of subsidiaries of THC to pay dividends to THC.

 

9


Condensed Consolidating Statements of Operations

Three Months Ended June 30, 2003

     Subsidiary
Issuer
(TH USA)


    Non-Guarantor
Subsidiaries


    Parent
Company
Guarantor
(THC)


    Eliminations

    Total

 

Net revenue

   $ 95,903     $ 279,518     $ —       $ (8,213 )     $ 367,208  

Cost of goods sold

     61,553       139,867       —         (2,697 )     198,723  
    


 


 


 


 


Gross profit

     34,350       139,651       —         (5,516 )     168,485  
    


 


 


 


 


Depreciation and amortization

     5,007       14,046       —         —         19,053  

Special item

     —         (11,000 )     —         —         (11,000 )

Other selling, general and administrative expenses

     28,598       106,469       (1,051 )     (4,575 )     129,441  
    


 


 


 


 


Total selling, general, and administrative expenses

     33,605       109,515       (1,051 )     (4,575 )     137,494  
    


 


 


 


 


Income (loss) from operations

     745       30,136       1,051       (941 )     30,991  

Interest and other expense

     8,665       (27 )     —         —         8,638  

Interest income

     270       654       209       —         1,133  

Intercompany interest and other expense (income)

     8,952       (6,950 )       (17,002 )       15,000       —    
    


 


 


 


 


Income (loss) before income taxes

     (16,602 )       37,767       18,262       (15,941 )     23,486  

Provision (benefit) for income taxes

     (4,428 )     14,605       1,605       (5,250 )     6,532  

Equity in net earnings of unconsolidated subsidiaries

     33,646       —         297       (33,943 )     —    
    


 


 


 


 


Net income (loss)

   $ 21,472     $ 23,162     $ 16,954     $ (44,634 )   $ 16,954  
    


 


 


 


 


 

10


Condensed Consolidating Statements of Operations

Three Months Ended June 30, 2002

 

    

Subsidiary

Issuer

(TH USA)


    Non-Guarantor
Subsidiaries


    Parent
Company
Guarantor
(THC)


    Eliminations

    Total

 

Net revenue

   $ 106,656     $ 268,203     $ —       $ (8,529 )     $ 366,330  

Cost of goods sold

     68,877       136,281       —         (2,101 )     203,057  
    


 


 


 


 


Gross profit

     37,779       131,922       —         (6,428 )     163,273  
    


 


 


 


 


Depreciation and amortization

     6,132       16,011       —         —         22,143  

Other selling, general and administrative expenses

     31,766       101,630       (1,492 )       (4,638 )     127,266  
    


 


 


 


 


Total selling, general, and administrative expenses

     37,898       117,641       (1,492 )     (4,638 )     149,409  
    


 


 


 


 


Income (loss) from operations

     (119 )       14,281       1,492       (1,790 )     13,864  

Interest and other expense

     10,114       2,455       —         —         12,569  

Interest income

     751       654       488       3       1,896  

Intercompany interest expense (income)

     23,951       (5,494 )     (18,461 )     4       —    
    


 


 


 


 


Income (loss) before income taxes and cumulative effect of change in accounting principle

     (33,433 )     17,974       20,441       (1,791 )     3,191  

Provision (benefit) for income taxes

     (4,165 )     14,336       1,752       —         11,923  
    


 


 


 


 


Income (loss) before cumulative effect of change in accounting principle

     (29,268 )     3,638       18,689       (1,791 )     (8,732 )

Cumulative effect of change in accounting principle

     —         (430,026 )       —         —         (430,026 )

Equity in net earnings of unconsolidated subsidiaries

     (416,294 )     —         (457,447 )     873,741       —    
    


 


 


 


 


Net income (loss)

   $ (445,562 )   $ (426,388 )   $ (438,758 )   $ 871,950     $ (438,758 )
    


 


 


 


 


 

11


Condensed Consolidating Balance Sheets

June 30, 2003

     Subsidiary
Issuer (TH
USA)


    Non-Guarantor
Subsidiaries


    Parent
Company
Guarantor
(THC)


    Eliminations

    Total

Assets

                                      

Current Assets

                                      

Cash and cash equivalents

   $ 58,073     $ 188,832     $ 26,981     $ —       $ 273,886

Short-term investments

     —         20,751       —         —         20,751

Accounts receivable

     20,656       72,246       —         —         92,902

Inventories

     59,230       213,476       —         (2,346 )     270,360

Deferred tax assets

     24,967       16,823       —         —         41,790

Other current assets

     10,298       33,553       997       —         44,848
    


 


 


 


 

Total current assets

     173,224       545,681       27,978       (2,346 )     744,537

Property, plant and equipment, at cost, less accumulated depreciation and amortization

     127,829       116,451       —         —         244,280

Intangible assets, subject to amortization

     —         8,410       —         —         8,410

Intangible assets, not subject to amortization

     —         629,300       —         —         629,300

Goodwill

     —         227,337       —         —         227,337

Investment in subsidiaries

     1,002,672       209,290       475,906       (1,687,868 )     —  

Other assets

     6,854       4,512       —         —         11,366
    


 


 


 


 

Total Assets

   $ 1,310,579     $ 1,740,981     $ 503,884     $ (1,690,214 )   $ 1,865,230
    


 


 


 


 

Liabilities and Shareholders’ Equity

                                      

Current liabilities

                                      

Short-term borrowings

   $ —       $ 20,373     $ —       $ —       $ 20,373

Current portion of long-term debt

     168       280       —         —         448

Accounts payable

     7,749       12,368       —         —         20,117

Accrued expenses and other current liabilities

     112,256       73,019       825       (5,275 )     180,825
    


 


 


 


 

Total current liabilities

     120,173       106,040       825       (5,275 )     221,763

Intercompany payable (receivable)

     832,584       (258,109 )     (574,376 )     (99 )     —  

Long-term debt

     349,927       543       —         —         350,470

Deferred tax liability

     (5,618 )     214,049       —         —         208,431

Other liabilities

     308       6,823       —         —         7,131

Shareholders’ equity

     13,205       1,671,635       1,077,435       (1,684,840 )     1,077,435
    


 


 


 


 

Total Liabilities and Shareholders’ Equity

   $ 1,310,579     $ 1,740,981     $ 503,884     $ (1,690,214 )   $ 1,865,230
    


 


 


 


 

 

12


Condensed Consolidating Balance Sheets

March 31, 2003

 

    

Subsidiary

Issuer

(TH USA)


    Non-Guarantor
Subsidiaries


    Parent
Company
Guarantor
(THC)


    Eliminations

    Total

Assets

                                      

Current Assets

                                      

Cash and cash equivalents

   $ 28,493     $ 229,758     $ 162,575     $ —       $ 420,826

Accounts receivable

     13,929       171,110       —         —         185,039

Inventories

     42,128       188,931       —         (1,405 )       229,654

Deferred tax assets

     27,854       23,976       —         —         51,830

Other current assets

     10,542       16,299       1,342       —         28,183
    


 


 


 


 

Total current assets

     122,946       630,074       163,917       (1,405 )     915,532

Property, plant and equipment, at cost, less accumulated depreciation and amortization

     130,136       118,154       —         —         248,290

Intangible assets, subject to amortization

     —         8,744       —         —         8,744

Intangible assets, not subject to amortization

     —         625,205       —         —         625,205

Goodwill

     —         219,153       —         —         219,153

Investment in subsidiaries

     969,025       209,290       66,527       (1,244,842 )     —  

Other assets

     6,318       4,909       —         —         11,227
    


 


 


 


 

Total Assets

   $ 1,228,425     $ 1,815,529     $ 230,444     $ (1,246,247 )   $ 2,028,151
    


 


 


 


 

Liabilities and Shareholders’ Equity

                                      

Current liabilities

                                      

Short-term borrowings

   $ —       $ 19,380     $ —       $ —       $ 19,380

Current portion of long-term debt

     151,249       617       —         —         151,866

Accounts payable

     20,729       27,024       —         —         47,753

Accrued expenses and other current liabilities

     74,625       118,912       512       (26 )     194,023
    


 


 


 


 

Total current liabilities

     246,603       165,933       512       (26 )     413,022

Intercompany payable (receivable)

     1,042,234       (223,922 )       (813,443 )       (4,869 )     —  

Long-term debt

     349,958       322       —         —         350,280

Deferred tax liability

     (5,618 )       220,443       —         —         214,825

Other liabilities

     308       6,341       —         —         6,649

Shareholders’ equity

     (405,060 )     1,646,412       1,043,375       (1,241,352 )     1,043,375
    


 


 


 


 

Total Liabilities and Shareholders’ Equity

   $ 1,228,425     $ 1,815,529     $ 230,444     $ (1,246,247 )   $ 2,028,151
    


 


 


 


 

 

13


Condensed Consolidating Statements of Cash Flows

Three Months Ended June 30, 2003

 

    

Subsidiary
Issuer

(TH USA)


    Non-Guarantor
Subsidiaries


    Parent
Company
Guarantor
(THC)


    Eliminations

    Total

 

Cash flows from operating activities

                                        

Net income (loss)

   $ 21,472     $ 23,162     $ 16,954     $ (44,634 )   $ 16,954  

Adjustments to reconcile net income (loss) to net cash provided by operating activities

                                        

Depreciation and amortization

     5,007       14,489       —         —         19,496  

Deferred taxes

     2,887       (40 )     —         —         2,847  

Changes in operating assets and liabilities

     186,115       (47,508 )     (152,295 )     10,691       (2,997 )
    


 


 


 


 


Net cash provided by (used in) operating activities

     215,481       (9,897 )     (135,341 )     (33,943 )       36,300  
    


 


 


 


 


Cash flows from investing activities

                                        

Purchases of property and equipment

     (1,121 )       (10,095 )       —         —         (11,216 )

Purchase of short-term investments

     —         (20,751 )     —         —         (20,751 )

Net activity in investment in subsidiaries

     (33,646 )     —         (297 )       33,943       —    
    


 


 


 


 


Net cash (used in) provided by investing activities

     (34,767 )     (30,846 )     (297 )     33,943       (31,967 )
    


 


 


 


 


Cash flows from financing activities

                                        

Payments on long-term debt

     (151,134 )     (167 )     —         —         (151,301 )

Proceeds from the exercise of stock options

     —         —         44       —         44  

Repayments of short-term bank borrowings

     —         (16 )     —         —         (16 )
    


 


 


 


 


Net cash provided by (used in) financing activities

     (151,134 )     (183 )     44       —         (151,273 )
    


 


 


 


 


Net increase (decrease) in cash

     29,580       (40,926 )     (135,594 )     —         (146,940 )

Cash and cash equivalents, beginning of period

     28,493       229,758       162,575       —         420,826  
    


 


 


 


 


Cash and cash equivalents, end of period

   $ 58,073     $ 188,832     $ 26,981     $ —       $ 273,886  
    


 


 


 


 


 

14


Condensed Consolidating Statements of Cash Flows

Three Months Ended June 30, 2002

 

    

Subsidiary
Issuer

(TH USA)


   

Non-

Guarantor

Subsidiaries


   

Parent

Company
Guarantor
(THC)


    Eliminations

    Total

 

Cash flows from operating activities

                                        

Net income (loss)

   $ (445,562 )       $ (426,388 )       $ (438,758 )       $ 871,950     $ (438,758 )

Adjustments to reconcile net income (loss) to net cash provided by operating activities

                                        

Cumulative effect of change in accounting principle

     —         430,026       —         —         430,026  

Depreciation and amortization

     6,132       16,186       —         —         22,318  

Deferred taxes

     7,182       4,176       —         —         11,358  

Changes in operating assets and liabilities

     17,050       27,930       (1,778 )     (709 )       42,493  
    


 


 


 


 


Net cash provided by (used in) operating activities

     (415,198 )     51,930       (440,536 )     871,241       67,437  
    


 


 


 


 


Cash flows from investing activities

                                        

Purchases of property and equipment

     (7,771 )     (15,045 )     —         —         (22,816 )

Net activity in investment in subsidiaries

     416,294       (2,500 )     457,447       (871,241 )     —    
    


 


 


 


 


Net cash (used in) provided by investing activities

     408,523       (17,545 )     457,447       (871,241 )     (22,816 )
    


 


 


 


 


Cash flows from financing activities

                                        

Payments on long-term debt

     (33,780 )     (187 )     —         —         (33,967 )

Proceeds from the exercise of stock options

     —         —         6,017       —         6,017  

Repayments of short-term bank borrowings

     —         (5,982 )     —         —         (5,982 )
    


 


 


 


 


Net cash provided by (used in) financing activities

     (33,780 )     (6,169 )     6,017       —         (33,932 )
    


 


 


 


 


Net increase (decrease) in cash

     (40,455 )     28,216       22,928       —         10,689  

Cash and cash equivalents, beginning of period

     135,729       135,143       116,375       —         387,247  
    


 


 


 


 


Cash and cash equivalents, end of period

   $ 95,274     $ 163,359     $ 139,303     $ —       $ 397,936  
    


 


 


 


 


 

 

Note 9—Segment Reporting

 

The Company has three reportable segments: Wholesale, Retail and Licensing. The Company’s reportable segments are business units that offer different products and services or similar products through different distribution channels. The Wholesale segment consists of the design and sourcing of men’s sportswear and jeanswear, women’s casualwear and jeanswear and childrenswear for wholesale distribution. The Retail segment reflects the operations of the Company’s outlet and specialty stores. The Licensing segment consists of the operations of licensing the Company’s trademarks for specified products in specified geographic areas and the operations of the Company’s Far East buying offices. The Company evaluates performance and allocates resources based on segment profits. The accounting policies of the reportable segments are the same as those described in Note 1 to the Consolidated Financial Statements included in the Form 10-K.

 

15


Excluded from segment profits, however, are the vast majority of executive compensation expenses, certain marketing costs, amortization of intangibles, special items, interest costs, other corporate overhead, provision for income taxes and the cumulative effect of a change in accounting principle. Financial information for the Company’s reportable segments is as follows:

 

     Wholesale

    Retail

    Licensing

    Total

Three Months Ended June 30, 2003

                              

Total segment revenue

   $ 263,968        $ 89,438        $ 28,632        $ 382,038

Segment profits

     6,893       6,852       20,317       34,062

Depreciation and amortization included in segment profits.

     12,756       3,330       140       16,226

Three Months Ended June 30, 2002

                              

Total segment revenue

   $ 266,574     $ 86,684     $ 27,904     $ 381,162

Segment profits

     6,988       6,387       17,224       30,599

Depreciation and amortization included in segment profits.

     12,655       3,893       144       16,692

 

A reconciliation of total segment revenue to consolidated net revenue is as follows:

 

    

Three Months

Ended June 30,


 
     2003

    2002

 

Total segment revenue

   $ 382,038     $ 381,162  

Intercompany revenue

     (14,830 )       (14,832 )
    


 


Consolidated net revenue

   $ 367,208     $ 366,330  
    


 


 

Intercompany revenue represents buying agency commissions from consolidated subsidiaries, which is classified under Licensing for segment reporting purposes.

 

A reconciliation of total segment profits to consolidated income before income taxes and cumulative effect of change in accounting principle is as follows:

 

    

Three Months

Ended June 30,


 
     2003

    2002

 

Segment profits

   $ 34,062     $ 30,599  

Corporate expenses not allocated

     (14,071 )       (16,735 )

Special item

     11,000       —    

Interest expense, net

     (7,505 )     (10,673 )
    


 


Consolidated income before income taxes and cumulative effect of change in accounting principle

   $ 23,486     $ 3,191  
    


 


 

The Company does not disaggregate assets on a segment basis for internal management reporting and, therefore, such information is not presented.

 

 

Note 10—Earnings Per Share

 

Basic earnings per share were computed by dividing net income by the average number of the Company’s Ordinary Shares, par value $0.01 per share (the “Ordinary Shares”), outstanding during the respective period. Diluted earnings per share have been computed by dividing net income by the average number of Ordinary Shares outstanding plus the incremental shares that would have been outstanding assuming the exercise of stock options.

 

16


A reconciliation of shares used for basic earnings per share and those used for diluted earnings per share is as follows:

 

    

Three Months

Ended June 30,


     2003

    2002

Weighted average shares outstanding

   90,580,000        89,898,000

Net effect of dilutive stock options based on the treasury stock method using average market price

   87,000     —  
    

 

Weighted average share and share equivalents outstanding

   90,667,000     89,898,000
    

 

 

Ordinary Shares on assumed exercise of stock options amounting to 883,000 shares for the three months ended June 30, 2002 were not included in the computation of diluted earnings per share since they would be anti-dilutive. Options to purchase 7,137,887 shares at June 30, 2003 and 3,504,360 shares at June 30, 2002 were not included in the computation of diluted earnings per share because their exercise prices were greater than the average market price of the Ordinary Shares.

 

17


ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

OF OPERATIONS

(dollar amounts in thousands, except per share amounts)

 

General

 

The following discussion and analysis should be read in conjunction with the Company’s Condensed Consolidated Financial Statements and related notes thereto in Item 1 above. All references to years relate to the fiscal year ended March 31 of such year.

 

 

Results of Operations

 

The following table sets forth the Condensed Consolidated Statements of Operations data as a percentage of net revenue.

 

    

Three Months

Ended June 30,


 
     2003

    2002

 

Net revenue

   100.0 %       100.0 %

Cost of goods sold

   54.1     55.4  
    

 

Gross profit

   45.9     44.6  

Depreciation and amortization

   5.2     6.0  

Special item

   (3.0 )   —    

Other SG&A expenses

   35.3     34.8  
    

 

Total SG&A expenses

   37.5     40.8  
    

 

Income from operations

   8.4     3.8  

Interest and other expense, net

   2.0     2.9  
    

 

Income before taxes and cumulative effect of change in accounting principle

   6.4     0.9  

Provision for income taxes

   1.8     3.3  
    

 

Income (loss) before cumulative effect of change in accounting principle

   4.6     (2.4 )

Cumulative effect of change in accounting principle

   —       (117.4 )
    

 

Net income (loss)

   4.6     (119.8 )
    

 

 

 

Items Affecting Comparability

 

In June 2003, the Company settled its trademark counterfeiting and infringement litigation with Goody’s Family Clothing, Inc. and received a payment of $11,000 on August 1, 2003, in connection with the settlement. The Company recorded this settlement as a special item, which reduced selling, general and administrative expenses during the first quarter of fiscal 2004.

 

During the first quarter of fiscal 2004, the Company reevaluated the level of price adjustments it previously provided for its retailers and reduced its estimated accrual for such price adjustments, increasing income before income taxes and the cumulative effect of change in accounting principle by approximately $9,000.

 

Effective April 1, 2002, the Company adopted Financial Accounting Standards Board Statement No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). The adoption of SFAS 142 resulted in a non-cash charge related to the impairment of goodwill in the first quarter of fiscal 2003 of $430,026. This charge was recorded as a cumulative effect of a change in accounting principle in the Condensed Consolidated Statements of Operations.

 

Prior to April 1, 2002, the Company recorded deferred tax liabilities relating to the difference in the book and tax basis of intangible assets, principally trademark rights. As a result of adopting SFAS 142, those deferred tax liabilities will no longer be used to support the

 

18


realization of certain deferred tax assets. Accordingly, the Company recorded a one-time, non-cash, deferred tax charge totaling $11,358, in the first quarter of fiscal 2003, in order to establish a valuation allowance against those deferred tax assets.

 

Three Months Ended June 30, 2003 Compared to Three Months Ended June 30, 2002

 

Overview

 

The Company’s net revenue increased 0.2% to $367,208 in the first quarter of fiscal 2004 compared to $366,330 in the first quarter last year. Consolidated net revenue included revenue from the Company’s European subsidiary, Tommy Hilfiger Europe B.V. (“TH Europe”) of approximately $36,800 in the first quarter of fiscal 2004 and $19,600 in the first quarter of fiscal 2003. This increase from the prior year included approximately $7,000 resulting from the translation of the stronger euro in fiscal 2004. Increases in net revenue in the Retail and Licensing segments, both volume driven, were offset by a decrease in the Wholesale segment resulting from lower average prices. Within the Retail segment, net revenue from stores opened since June 30, 2002 was offset, partially, by a decrease in sales due to the closing of 37 U.S. specialty stores. The increase in Licensing segment net revenue was due to increased licensing royalties. Within the Company’s Wholesale segment, an increase in revenue in both the men’s and women’s components, due entirely to the growth in Europe, was offset by a decline in the childrenswear component. The fluctuations in revenue of each of the Company’s segments are further described below in the Segment Operations section. Net revenue by segment (after elimination of intersegment revenue) was as follows:

 

     Three Months Ended June 30,

     2003

    2002

    % Increase
(Decrease)


Wholesale

   $ 263,968          $ 266,574      (1.0)%

Retail

     89,438       86,684     3.2%

Licensing

     13,802       13,072     5.6%
    


 


   

Total

   $ 367,208     $ 366,330     0.2%
    


 


   

 

Gross profit as a percentage of net revenue increased to 45.9% for the three months ended June 30, 2003 from 44.6% in the corresponding period last year. The improvement in gross margin was due to an improvement in the gross margin of the Company’s Wholesale segment as well as a higher contribution of the Licensing segment, which generates a higher gross margin than the Company’s consolidated gross margin, to total net revenue. During the first quarter of fiscal 2004, the Company continued its efforts to bring supply and demand into balance in the United States. As part of this process, the Company reevaluated the level of price adjustments it previously provided for its retailers and reduced its estimated accrual for such price adjustments, increasing gross profit by approximately $9,000. In addition, gross margin benefited from a higher contribution of TH Europe, in the first quarter of fiscal 2004 as compared to the same period in fiscal 2003. TH Europe generates a higher gross margin than the Company’s domestic components. Partially offsetting these improvements was a lower gross margin in the Retail segment, reflecting higher markdowns compared to a year ago. The Company’s gross margins may not be directly comparable to those of its competitors, as income statement classifications of certain expenses may vary by company.

 

Selling, general and administrative expenses for the first quarter of fiscal 2004 decreased to $137,494, or 37.5% of net revenue, from $149,409, or 40.8% of net revenue, in the first quarter of fiscal 2003. This decrease was mainly due to the recording of the legal settlement of $11,000, described above, as a reduction of selling, general and administrative expenses in the first quarter of fiscal 2004. Excluding this special item, selling, general and administrative expenses decreased to $148,494, or 40.4%, of net revenue in the first quarter of fiscal 2004, from $149,409, or 40.8% of net revenue in the same period last year. This decrease was mainly due to decreased expenses in the Company’s Retail segment, partially offset by an increase in the Company’s Wholesale segment. The decrease in the Retail segment was primarily due to closing 37 U.S. specialty stores since June 30, 2002, including 18 stores prior to the beginning of the quarter. The increase in Wholesale segment expenses was due to increased expenses in the Europe wholesale division, incurred to support its growth, partially offset by reduced expenses in the U.S. wholesale and corporate divisions.

 

The Company reflects shipping and handling costs as a component of selling, general and administrative expenses in its condensed consolidated statements of operations. Shipping and handling costs approximated $10,670 and $11,545 for the three months ended June 30, 2003 and 2002, respectively. Amounts billed to customers that relate to shipping and handling on related sales transactions are de minimus.

 

Interest and other expense decreased from $12,569 in the first quarter of fiscal 2003 to $8,638 in the first quarter of fiscal 2004. This decrease was primarily due to the repayment, upon maturity, of $151,091 principal amount in June 2003 of the 2003 Notes. The Company also had a lower level of average short-term borrowings under the Company’s credit facilities during the first quarter of fiscal 2004 as compared to the same period last year.

 

        Interest income decreased from $1,896 in the first quarter of fiscal 2003 to $1,133 in the first quarter of fiscal 2004. The decrease from the first quarter of fiscal 2003 was due to lower interest rates earned on invested cash balances, offset in part by higher average invested cash

 

19


balances. Interest rates earned on invested cash balances for the three-month periods ended June 30, 2003 and 2002 were 1.12% and 1.71%, respectively.

 

In the first quarter of fiscal 2004, the Company recorded a provision for income taxes of $6,532 on income before taxes of $23,486 compared to a provision for income taxes of $11,923 on income before taxes and the cumulative effect of a change in accounting principle of $3,191 in the same period last year. The fiscal 2004 provision reflects the special item recorded in the first quarter while the provision in the fiscal 2003 first quarter reflects a deferred tax charge related to the adoption of SFAS 142.

 

The provision for income taxes, before the non-recurring items described above, for the first quarter of fiscal 2004 increased to 21.5% of income before taxes and the cumulative effect of the change in accounting principle from 17.7% in the corresponding period last year. This increase was primarily attributable to the relative level of earnings in the various taxing jurisdictions to which the Company’s earnings are subject.

 

 

Segment Operations

 

The Company has three reportable segments: Wholesale, Retail and Licensing. The Company’s reportable segments are business units that offer different products and services or similar products through different distribution channels. The Wholesale segment consists of the design and sourcing of men’s sportswear and jeanswear, women’s casualwear and jeanswear and childrenswear for wholesale distribution. The Retail segment is comprised of the operations of the Company’s outlet and specialty stores. The Licensing segment consists of the operations of licensing the Company’s trademarks for specified products in specified geographic areas and the operations of the Company’s Far East buying offices. Segment revenue is presented before the elimination of intercompany transactions (see Note 9 to the Condensed Consolidated Financial Statements for a reconciliation of total segment revenue to consolidated net revenue).

 

Excluded from segment profits, however, are the vast majority of executive compensation expenses, certain marketing costs, amortization of intangibles, special items, interest costs, other corporate overhead, provision for income taxes and the cumulative effect of a change in accounting principle. The Company evaluates performance and allocates resources based on segment profits. Financial information for the Company’s reportable segments is as follows:

 

     Wholesale

    Retail

    Licensing

    Total

 

Three Months Ended June 30, 2003

                                

Total segment revenue

   $ 263,968     $ 89,438     $ 28,632     $ 382,038  

Segment profits

     6,893       6,852       20,317       34,062  

Segment profit %

     2.6 %         7.7 %         71.0 %         8.9 %

Three Months Ended June 30, 2002

                                

Total segment revenue

   $ 266,574     $ 86,684     $ 27,904     $ 381,162  

Segment profits

     6,988       6,387       17,224       30,599  

Segment profit %

     2.6 %     7.4 %     61.7 %     8.0 %

 

Wholesale Segment. Wholesale segment net revenue decreased by $2,606, or 1.0%, from the first quarter of fiscal 2003 to the first quarter of fiscal 2004. Within the Wholesale segment, net revenue by component was as follows:

 

    

Three Months

Ended June 30,


     2003

    2002

Menswear

   $ 102,207        $ 100,831

Womenswear

     109,558       106,975

Childrenswear

     52,203       58,768
    


 

     $ 263,968     $ 266,574
    


 

 

Net revenue in the Wholesale segment decreased due to lower average unit prices in the U.S. during the first quarter of fiscal 2004 compared to the prior year. The lower average unit prices were driven by a higher percentage of sales through the Company’s normal off-price channels. Partially offsetting this decrease was an increase in net revenue of TH Europe which benefited from growth in each of its components, particularly menswear and womenswear, and the effect of currency translation.

 

The Company expects Wholesale segment net revenue for fiscal 2004 to be approximately 5% to 10% below fiscal 2003 net revenue, with decreases in each of the menswear, womenswear and childrenswear components, caused by lower receipt plans by major retail customers in the U.S., offset somewhat by increases in the European business.

 

20


Wholesale segment profits decreased by 1.4%, from the first quarter of fiscal 2003 to the first quarter of fiscal 2004. As a percentage of segment revenue, Wholesale segment profits were unchanged at 2.6% for the first quarter of fiscal 2004 and 2003. Within the Wholesale segment, an increase in operating expenses in the TH Europe wholesale division incurred to support its growth and a decrease in U.S. wholesale division net revenue was partially offset by a decrease in the U.S. wholesale division operating expense, as well as an increase in gross margin, both in the Europe and U.S. wholesale divisions. Gross margin in the U.S. wholesale division benefited from the reduced level of price adjustments to retailers mentioned above.

 

Retail Segment. Retail segment net revenue increased $2,754, or 3.2%, from the first quarter of fiscal 2003 to the first quarter of fiscal 2004. The improvement in the current period was due to net revenue from stores opened since June 30, 2002, partially offset by the closing of 37 U.S. specialty stores since June 30, 2002. Retail stores opened since June 30, 2002 contributed net revenue of $8,546 during the quarter ended June 30, 2003. Revenue generated from the 37 U.S. specialty retail stores that were closed amounted to $657 and $8,075 during the three months ended June 30, 2003 and June 30, 2002, respectively. At June 30, 2003, the Company operated 157 retail stores, consisting of 122 outlet stores and 35 specialty stores, compared to 111 outlets and 61 specialty stores a year ago.

 

Net revenue in the Retail segment for fiscal 2004 is expected to be 5% to 10% higher than fiscal 2003, with increases in net revenue from stores opened in Canada and Europe offset by lower volume in the U.S. stores due mainly to the closing of 37 U.S. specialty stores since June 30, 2002.

 

Retail segment profits increased $465, or 7.3%, from the first quarter of fiscal 2003 to the first quarter of fiscal 2004. As a percentage of segment revenue, Retail segment profits were 7.7% and 7.4% for the first quarter of fiscal 2004 and 2003, respectively. Segment profits and segment profits as a percentage of segment revenue increased from the first quarter of fiscal 2003 to the first quarter of fiscal 2004 due to reduced operating losses in the Company’s U.S. specialty retail division following the store closings mentioned above. These stores generated operating losses of $945 and $3,108 for the three-month periods ended June 30, 2003 and June 30, 2002, respectively. Partially offsetting this benefit was a decrease in segment profits in the U.S. outlet division resulting from higher markdowns experienced during the first quarter of fiscal 2004 as compared to fiscal 2003.

 

Licensing Segment. Licensing segment net revenue increased $728, or 2.6%, from the first quarter of fiscal 2003 to the first quarter of fiscal 2004. The increase was primarily due to higher royalty revenue, particularly in licenses for home furnishings, watches and the Company’s geographic license for Japan. New products introduced under licenses entered into during the first quarter of fiscal 2004 and 2003 contributed a de minimus amount of revenue during those respective periods.

 

The Company expects Licensing segment net revenue for fiscal 2004 to be 5% to 10% below fiscal 2003, due, in part, to movement of its underwear business in-house effective June 1, 2003.

 

Licensing segment profits increased by $3,093, or 18.0%, from the first quarter of fiscal 2003 to the first quarter of fiscal 2004. As a percentage of segment revenue, Licensing segment profits were 71.0% and 61.7% for the quarter ended June 30, 2003 and 2002, respectively. These increases were principally due to reduced operating expenses at the Company’s Far East buying offices and the increase in segment revenue discussed above.

 

 

Forward Outlook

 

For the full fiscal year 2004, the Company expects net revenue to be below that of fiscal 2003, in the 5% to 10% range. Net revenue is expected to decline up to 5% in the second quarter, in the 15% to 20% range in the third quarter and in the 3% to 7% range in the fourth quarter. The Company expects second quarter earnings per share in the range of $0.55 to $0.59. Third quarter results are expected to be affected by order reductions in the U.S. without the offsetting benefit of growth in Europe due to seasonal shipping patterns. As a result, the Company believes that reasonable per share estimates for fiscal third quarter would be in the range of $0.10 to $0.14. Fiscal fourth quarter earnings per share are expected to be between $0.35 and $0.39. These estimates assume 91,000,000 shares and share equivalents outstanding in each of the second, third and fourth quarters.

 

The Company believes that fiscal 2004 capital expenditures will be approximately $75,000 to $80,000. The Company’s effective tax rate for the remainder of fiscal 2004 is expected to be approximately 21% to 23%.

 

 

Liquidity and Capital Resources

 

Cash provided by operations continues to be the Company’s primary source of funds to finance operating needs, capital expenditures and debt service. Capital expenditures primarily relate to construction of additional retail stores as well as maintenance or selective expansion of the Company’s in-store shop and fixtured area program. The Company’s sources of liquidity are cash on hand, cash from operations and the Company’s available credit.

 

The Company’s cash and cash equivalents balance decreased $146,940 from $420,826 at March 31, 2003 to $273,886 at June 30, 2003. This decrease was principally due to the repayment of the 2003 Notes, upon maturity. In the first three months of fiscal 2004, the Company generated net cash from operating activities of $36,300 consisting of $39,297 of net income before non-cash items, partially offset by $2,997

 

21


of changes in working capital, primarily as a result of an increase in inventory and a decrease in accounts payable, offset, in part, by a decrease in accounts receivable. Cash used in investing activities related to capital expenditures of $11,216 which were made principally in support of the expansion of the European business, as well as the Company’s retail store openings and the purchase of short-term investments of $20,751. Cash used in financing activities primarily related to the repayment of $151,091 principal amount of the 2003 Notes. A more detailed analysis of the changes in cash equivalents is presented in the Condensed Consolidated Statements of Cash Flows.

 

As of June 30, 2003, the Company’s principal debt facilities consisted of $200,000 of the 2008 Notes, $150,000 of the 2031 Bonds and the Credit Facility. The Notes were issued by TH USA and are fully and unconditionally guaranteed by THC. The indenture under which the Notes were issued contains covenants that, among other things, restrict the ability of subsidiaries of THC to incur additional indebtedness, restrict the ability of THC and its subsidiaries to incur indebtedness secured by liens or enter into certain sale and leaseback transactions and restrict the ability of THC and TH USA to engage in mergers or consolidations.

 

In June 2003, upon maturity, the Company repaid $151,091 principal amount of the 2003 Notes.

 

The Credit Facility, which is guaranteed by THC, consists of an unsecured $300,000 TH USA three-year revolving credit facility, of which up to $175,000 may be used for direct borrowings. The Credit Facility is available for letters of credit, working capital and other general corporate purposes. As of June 30, 2003, $116,075 of the available borrowings under the Credit Facility had been used to open letters of credit, including $26,337 for inventory purchased that are included in current liabilities and $89,738 related to commitments to purchase inventory. There were no direct borrowings outstanding under the Credit Facility as of June 30, 2003.

 

The Credit Facility contains a number of covenants that, among other things, restrict the ability of subsidiaries of THC to dispose of assets, incur additional indebtedness, create liens on assets, pay dividends or make other payments in respect of capital stock, make investments, loans and advances, engage in transactions with affiliates, enter into certain sale and leaseback transactions, engage in mergers or consolidations or change the businesses conducted by them. The Credit Facility also restricts the ability of THC to create liens on assets or enter into certain sale and leaseback transactions. Under the Credit Facility, subsidiaries of THC may not pay dividends or make other payments in respect of capital stock to THC that, in the aggregate, exceed 33% of the Company’s cumulative consolidated net income, commencing with the fiscal year ended March 31, 2002 plus $125,000, less certain deductions. In addition, under the Credit Facility, THC and TH USA are required to comply with and maintain specified financial ratios and meet certain tests (based on the Company’s consolidated financial results excluding the effects of changes in accounting principles generally accepted in the United States), including, without limitation, a minimum fixed charge coverage ratio, a maximum leverage ratio and a minimum consolidated net worth test.

 

The Company was in compliance with all covenants in respect of the Notes and the Credit Facility as of, and for the twelve-month period ended, June 30, 2003.

 

Certain of the Company’s non-U.S. subsidiaries have separate credit facilities, totaling approximately $105,000 at June 30, 2003, for working capital or trade financing purposes. In addition to short-term borrowings of $20,373, as of June 30, 2003, $37,372 of available borrowings under these facilities had been used to open letters of credit, including $4,415 for inventory purchased that is included in current liabilities and $32,957 related to commitments to purchase inventory. Borrowings under these credit facilities bear interest at variable rates which, on a weighted average annual basis, amounted to 3.58% and 3.69% as of, and for the three-month period ended, June 30, 2003, respectively.

 

The Company’s credit facilities provide for the issuance of letters of credit without restriction on cash balances.

 

The Company attempts to mitigate the risks associated with adverse movements in interest rates by establishing and maintaining a favorable balance of fixed and floating rate debt and cash on hand. Management also believes that significant flexibility remains available in the form of additional borrowing capacity and the ability to prepay long-term debt, if so desired, in response to changing conditions in the debt markets. Because such flexibility exists, the Company does not normally enter into specific hedging transactions to further mitigate interest rate risks, except in the case of specific, material borrowing transactions. No interest rate hedging contracts were in place as of June 30, 2003.

 

The Company expects to fund its cash requirements for current operations for fiscal 2004 and the foreseeable future from available cash balances, internally generated funds and borrowings available under the Company’s credit facilities. The Company believes that these resources will be sufficient to fund its cash requirements for such periods.

 

There were no significant committed capital expenditures at June 30, 2003. The Company expects fiscal 2004 capital expenditures to be approximately $75,000 to $80,000.

 

 

Seasonality

 

        The Company’s business is impacted by the general seasonal trends characteristic of the apparel and retail industries. The Company’s Wholesale revenue, particularly from its European operations, is generally highest during the second and fourth fiscal quarters, while the Company’s Retail segment generally contributes its highest levels of revenue during the third fiscal quarter. As the timing of Wholesale product shipments and other events affecting the retail business may vary, results for any particular quarter might not be indicative of results for the full year.

 

22


Inflation

 

The Company believes that inflation has not had a material effect on its net revenue or profitability in recent years.

 

 

Exchange Rates

 

The Company receives United States dollars for approximately 85% of its product sales. Substantially all inventory purchases from contract manufacturers throughout the world are also denominated in United States dollars; however, purchase prices for the Company’s products may be impacted by fluctuations in the exchange rate between the United States dollar and the local currencies of the contract manufacturers, which may have the effect of increasing the Company’s cost of goods in the future. During the last three fiscal years, exchange rate fluctuations have not had a material impact on the Company’s inventory costs; however, due to the number of currencies involved and the fact that not all foreign currencies react in the same manner against the United States dollar, the Company cannot quantify in any meaningful way the potential effect of such fluctuations on future income. The Company does not engage in hedging activities with respect to such exchange rate risk.

 

The Company does, however, seek to protect against adverse movements in foreign currency which might affect certain firm commitments or anticipated cash flows. These include the purchase of inventory, capital expenditures, collection of foreign royalty payments and certain intercompany commitments. The Company enters into forward contracts, generally with maturities of up to 15 months, to sell or purchase foreign currency in order to hedge against such risks. The Company does not use financial instruments for speculative or trading purposes. At June 30, 2003, the Company had contracts to exchange foreign currencies, principally the Japanese yen, the Canadian dollar and the euro having a total notional amount of $107,813. The unrealized loss associated with these contracts at June 30, 2003 was $2,506. Gains or losses on such forward contracts are recognized in other comprehensive income on a mark-to-market basis and, ultimately, in earnings at the time the underlying hedge transaction is completed or recognized in earnings.

 

 

Recently Issued Accounting Standards

 

There were no recently issued accounting standards that the Company believes will have a material effect on its financial position, its results of operations or its cash flows.

 

 

Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995

 

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements are indicated by words or phrases such as “anticipate,” “estimate,” “project,” “expect,” “believe” and similar words or phrases. Such statements are based on current expectations and are subject to certain risks and uncertainties, including, but not limited to, the overall level of consumer spending on apparel, the financial strength of the retail industry generally and the Company’s customers, distributors, licensees and franchisees in particular, changes in trends in the market segments and geographic areas in which the Company competes, the level of demand for the Company’s products, actions by our major customers or existing or new competitors, changes in currency and interest rates, changes in applicable tax laws, regulations and treaties and changes in economic or political conditions or trade regulations in the markets where the Company sells or sources its products, as well as other risks and uncertainties set forth in the Company’s publicly-filed documents, including its Annual Report on Form 10-K, as amended, for the fiscal year ended March 31, 2003. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. The Company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

23


ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

See the sections entitled “Liquidity and Capital Resources” and “Exchange Rates” in Item 2 above, which sections are incorporated herein by reference.

 

 

ITEM 4.   CONTROLS AND PROCEDURES

 

Based on their evaluation as of June 30, 2003, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures (as defined in Sections 240.13a-15(e) and 240.15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

24


PART II

 

ITEM 1.   LEGAL PROCEEDINGS

 

Saipan Litigation.    On January 13, 1999, two actions were filed against the Company and other garment manufacturers and retailers asserting claims that garment factories located on the island of Saipan engaged in unlawful practices relating to the recruitment and employment of foreign workers. One action, brought in San Francisco Superior Court, was filed by a union and three public interest groups alleging unfair competition and false advertising. The other, an action seeking class action status filed in Federal Court for the Central District of California and subsequently transferred to the Federal Court in Saipan, was brought on behalf of an alleged class consisting of the Saipanese factory workers. The Company has entered into settlement agreements with the plaintiffs in both actions. As part of these agreements, the Company specifically denies any wrongdoing or liability with regard to the claims made in the actions. The settlement provides for a monetary payment, in an amount that is not material to the Company’s financial position, results of operations or cash flows, to a class of plaintiffs in the Federal action. On April 23, 2003, the Court issued an order and final judgment approving the settlement and dismissing the actions with prejudice.

 

The Company and its subsidiaries are from time to time involved in routine legal matters incidental to their businesses. In the opinion of the Company’s management, based on advice of counsel, the resolution of these matters will not have a material effect on its financial position, its results of operations or its cash flows.

 

 

ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K

 

(a)   Exhibits

 

  3.   Amendment to the Articles of Association, as amended, of Tommy Hilfiger Corporation

 

  10.1   Amendment No. 2 to the Tommy Hilfiger U.S.A., Inc. Amended and Restated Supplemental Executive Retirement Plan

 

  10.2   Employment Agreement between Tommy Hilfiger Corporation, Tommy Hilfiger U.S.A., Inc. and David F. Dyer, dated August 3, 2003

 

  10.3   Amendment, dated August 3, 2003, to the Employment Agreement, as amended, between Joel J. Horowitz and Tommy Hilfiger U.S.A., Inc.

 

  11.   Computation of Net Income Per Ordinary Share

 

  31.1   Certification of the principal executive officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)

 

  31.2   Certification of the principal financial officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act

 

  32.1   Certification of the principal executive officer pursuant to 18 U.S.C. Section 1350

 

  32.2   Certification of the principal financial officer pursuant to 18 U.S.C. Section 1350

 

(b)   Reports on Form 8-K

 

During the quarter ended June 30, 2003, the Company submitted the following Current Reports on Form 8-K with the Securities and Exchange Commission:

 

  (1)   The Company submitted a Current Report on Form 8-K, dated May 9, 2003, describing its updated expectations for its financial results for the fourth quarter and full year ended March 31, 2003.

 

  (2)   The Company submitted a Current Report on Form 8-K, dated June 5, 2003, describing its financial results for the fourth quarter and full year ended March 31, 2003.

 

  (3)   The Company submitted a Current Report on Form 8-K, dated June 30, 2003, announcing the settlement of its trademark counterfeiting and infringement litigation with Goody’s Family Clothing, Inc.

 

25


SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized:

 

 

    TOMMY HILFIGER CORPORATION

Date: August 12, 2003

  By:    /S/   JOEL J. HOROWITZ
       
        Joel J. Horowitz
        Chairman of the Board
        Tommy Hilfiger Corporation

Date: August 12, 2003

  By:    /S/   JOSEPH SCIROCCO
       
        Joseph Scirocco
        Chief Financial Officer, Senior Vice President and Treasurer
       

(Principal Financial Officer)

Tommy Hilfiger Corporation

 

26


 

EXHIBIT INDEX

 

Exhibit
Number


  

Description


    3.

   Amendment to the Articles of Association, as amended, of Tommy Hilfiger Corporation

  10.1

   Amendment No. 2 to the Tommy Hilfiger U.S.A., Inc. Amended and Restated Supplemental Executive Retirement Plan

  10.2

   Employment Agreement between Tommy Hilfiger Corporation, Tommy Hilfiger U.S.A., Inc. and David F. Dyer, dated August 3, 2003

  10.3

   Amendment, dated August 3, 2003, to the Employment Agreement, as amended, between Joel J. Horowitz and Tommy Hilfiger U.S.A., Inc.

  11.

   Computation of Net Income Per Ordinary Share

  31.1

   Certification of the principal executive officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)

  31.2

   Certification of the principal financial officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act

  32.1

   Certification of the principal executive officer pursuant to 18 U.S.C. Section 1350

  32.2

   Certification of the principal financial officer pursuant to 18 U.S.C. Section 1350

 

27