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 December 31, 2001
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Commission File Number 1-11226
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TOMMY HILFIGER CORPORATION
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(Exact name of registrant as specified in its charter)
British Virgin Islands Not Applicable
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
11/F, Novel Industrial Building, 850-870 Lai Chi Kok Road, Cheung Sha Wan,
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Kowloon, Hong Kong
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(Address of principal executive offices)
852-2216-0668
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(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 ________
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Ordinary Shares, $0.01 par value per share, outstanding as of February 1,
2002: 89,781,686
TOMMY HILFIGER CORPORATION
INDEX TO FORM 10-Q
December 31, 2001
PART I - FINANCIAL INFORMATION Page
----
Item 1 Financial Statements
Condensed Consolidated Statements of Operations for the three and nine months
ended December 31, 2001 and 2000....................................................... 3
Condensed Consolidated Balance Sheets as of December 31, 2001 and March 31, 2001............. 4
Condensed Consolidated Statements of Cash Flows for the nine months ended
December 31, 2001 and 2000............................................................. 5
Condensed Consolidated Statements of Changes in Shareholders' Equity for the nine
months ended December 31, 2001 and the year ended March 31, 2001....................... 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................................... 22
PART II - OTHER INFORMATION
Item 1 Legal Proceedings............................................................................ 23
Item 6 Exhibits and Reports on Form 8-K............................................................. 23
Signatures................................................................................................ 24
2
PART I
ITEM 1 - FINANCIAL STATEMENTS
TOMMY HILFIGER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited) For the Nine Months Ended For the Three Months Ended
December 31, December 31,
--------------------------- -----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Net revenue................................................... $ 1,376,923 $ 1,408,938 $ 474,793 $ 475,759
Cost of goods sold............................................ 785,348 827,120 273,444 277,661
------------ ------------ ------------ ------------
Gross profit.................................................. 591,575 581,818 201,349 198,098
------------ ------------ ------------ ------------
Depreciation and amortization................................. 83,252 77,487 28,508 26,315
Other selling, general and administrative expenses............ 377,741 352,908 122,945 107,609
------------ ------------ ------------ ------------
Total operating expenses...................................... 460,993 430,395 151,453 133,924
------------ ------------ ------------ ------------
Income from operations........................................ 130,582 151,423 49,896 64,174
Interest expense.............................................. 29,447 31,560 10,583 10,374
Interest income............................................... 8,064 13,144 1,789 4,433
------------ ------------ ------------ ------------
Income before income taxes.................................... 109,199 133,007 41,102 58,233
Provision for income taxes.................................... 15,353 35,646 4,144 15,532
------------ ------------ ------------ ------------
Net income.................................................... $ 93,846 $ 97,361 $ 36,958 $ 42,701
============ ============ ============ ============
Earnings per share:
Basic earnings per share...................................... $ 1.05 $ 1.06 $ 0.41 $ 0.47
============ ============ ============ ============
Weighted average shares outstanding........................... 89,307 91,858 89,622 90,421
============ ============ ============ ============
Diluted earnings per share.................................... $ 1.04 $ 1.06 $ 0.41 $ 0.47
============ ============ ============ ============
Weighted average shares and share equivalents outstanding..... 89,834 92,020 90,105 90,699
============ ============ ============ ============
See Accompanying Notes to Condensed Consolidated Financial Statements
3
TOMMY HILFIGER CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(Unaudited) December 31, March 31,
2001 2001
------------ -----------
Assets
Current assets
Cash and cash equivalents ...................................... $ 451,098 $ 318,431
Accounts receivable ............................................ 136,068 237,414
Inventories .................................................... 235,800 205,446
Other current assets ........................................... 95,293 90,353
----------- -----------
Total current assets ..................................... 918,259 851,644
Property and equipment, at cost, less accumulated
depreciation and amortization ...................................... 305,635 281,682
Intangible assets, net of accumulated amortization ..................... 1,407,936 1,206,358
Other assets ........................................................... 7,994 2,872
----------- -----------
Total Assets ............................................. $ 2,639,824 $ 2,342,556
=========== ===========
Liabilities and Shareholders' Equity
Current liabilities
Short-term borrowings .......................................... $ 57,875 $ -
Current portion of long-term debt .............................. 60,700 50,000
Accounts payable ............................................... 22,985 38,628
Accrued expenses and other current liabilities ................. 223,297 171,640
----------- -----------
Total current liabilities ................................ 364,857 260,268
Long-term debt ......................................................... 600,447 529,495
Deferred tax liability ................................................. 209,925 202,123
Other liabilities ...................................................... 4,104 2,077
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 95,974,286 and 95,169,402 shares, respectively ........ 960 952
Capital in excess of par value ................................. 597,972 589,184
Retained earnings .............................................. 916,077 822,231
Accumulated other comprehensive income (loss) .................. 6,713 (2,543)
Treasury shares, at cost: 6,192,600 Ordinary Shares ............ (61,231) (61,231)
----------- -----------
Total shareholders' equity ............................... 1,460,491 1,348,593
----------- -----------
Commitments and contingencies
Total Liabilities and Shareholders' Equity ............... $ 2,639,824 $ 2,342,556
=========== ===========
See Accompanying Notes to Condensed Consolidated Financial Statements
4
TOMMY HILFIGER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
For the Nine Months Ended
December 31,
-----------------------------------------
2001 2000
--------------- ------------
Cash flows from operating activitities
Net income ................................................................... $ 93,846 $ 97,361
Adjustments to reconcile net income to net cash from operating activities
Depreciation and amortization ............................................... 84,082 78,176
Deferred taxes .............................................................. (4,719) (4,719)
Changes in operating assets and liabilities
Decrease (increase) in assets
Accounts receivable ................................................... 118,290 79,786
Inventories ........................................................... 188 (43,707)
Other assets .......................................................... 197 683
Increase (decrease) in liabilities
Accounts payable ...................................................... (21,608) (11,983)
Accrued expenses and other liabilities ................................ 41,943 (46,762)
---------- ----------
Net cash provided by operating activities ................................... 312,219 148,835
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Cash flows from investing activities
Purchases of property and equipment ........................................... (71,818) (40,836)
Acquisition of business, net of cash acquired ................................. (205,061) -
---------- ----------
Net cash used in investing activities ....................................... (276,879) (40,836)
---------- ----------
Cash flows from financing activities
Payments of long-term debt .................................................... (70,350) (37,500)
Proceeds from the issuance of long-term debt .................................. 145,074 -
Proceeds from the exercise of employee stock options .......................... 7,357 471
Purchase of treasury shares ................................................... - (50,116)
Short-term bank borrowings (repayments) ....................................... 15,246 (523)
---------- ----------
Net cash used in financing activities ....................................... 97,327 (87,668)
---------- ----------
Net increase (decrease) in cash ............................................. 132,667 20,331
Cash and cash equivalents, beginning of period ................................. 318,431 309,397
---------- ----------
Cash and cash equivalents, end of period ....................................... $ 451,098 $ 329,728
========== ==========
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)
Capital in Accumulated
Ordinary Shares excess other
---------------------------- of par Retained comprehensive
Outstanding Amount value earnings income (loss)
----------------- --------- ----------- ---------- ----------------
Balance, March 31, 2000 .............................. 94,830,638 $ 948 $ 584,920 $ 691,270 $ 576
Net income ....................................... - - 130,961 -
Foreign currency translation ..................... - - - - (3,119)
Exercise of employee stock options ............... 338,764 4 3,706 - -
Tax benefits from exercise of stock
options ........................................ - - 558 - -
Purchase of treasury shares ...................... (6,192,600) - - - -
----------------- --------- ----------- ---------- ----------------
Balance, March 31, 2001 .............................. 88,976,802 952 589,184 822,231 (2,543)
Net income ....................................... - - - 93,846 -
Foreign currency translation ..................... - - - - 9,263
Change in fair value of hedging instruments ...... - - - - (7)
Exercise of employee stock options ............... 804,884 8 7,349 - -
Tax benefits from exercise of stock
options ........................................ - - 1,439 - -
----------------- --------- ----------- ---------- ----------------
Balance, December 31, 2001 (Unaudited) 89,781,686 $ 960 $ 597,972 $ 916,077 $ 6,713
================= ========= =========== ========== ================
Total
Treasury shareholders'
shares equity
---------- --------------
Balance, March 31, 2000 .............................. $ - $ 1,277,714
Net income ....................................... - 130,961
Foreign currency translation ..................... - (3,119)
Exercise of employee stock options ............... - 3,710
Tax benefits from exercise of stock
options ........................................ - 558
Purchase of treasury shares ...................... (61,231) (61,231)
---------- --------------
Balance, March 31, 2001 .............................. (61,231) 1,348,593
Net income ....................................... - 93,846
Foreign currency translation ..................... - 9,263
Change in fair value of hedging instruments ...... - (7)
Exercise of employee stock options ............... - 7,357
Tax benefits from exercise of stock
options ........................................ - 1,439
---------- --------------
Balance, December 31, 2001 (Unaudited)................ $ (61,231) $ 1,460,491
========== ==============
Comprehensive income consists of net income, foreign currency translation
and unrealized gains and losses on hedging instruments and totaled $103,102 for
the nine months ended December 31, 2001 and $127,842 for the fiscal year ended
March 31, 2001.
See Accompanying Notes to Condensed Consolidated Financial Statements
6
TOMMY HILFIGER CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands)
Note 1 - Basis of Presentation
The accompanying unaudited 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 for the fiscal year ended March 31, 2001, 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, 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.
Operating results for the nine-month and three-month periods ended December
31, 2001 are not necessarily indicative of the results that may be expected for
the fiscal year ending March 31, 2002, 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 as of and for the nine-month and three-month
periods ended December 31, 2001 and 2000 are unaudited. The Condensed
Consolidated Balance Sheet as of March 31, 2001, as presented, has been derived
from the Consolidated Balance Sheet as of March 31, 2001 included in the Form
10-K.
Note 2 - Acquisition of European Licensee
On June 29, 2001, THC and Tommy Hilfiger (Eastern Hemisphere) Limited, a
wholly owned subsidiary of THC ("THEH"), entered into a stock purchase agreement
with TH Europe Holdings Limited, a related party ("TH Europe Holdings"),
pursuant to which THEH agreed to acquire from TH Europe Holdings all of the
issued and outstanding shares of capital stock of T.H. International N.V., the
owner of Tommy Hilfiger Europe B.V. ("TH Europe"), the Company's European
licensee, for a cash purchase price of $200,000 (such transaction being referred
to herein as the "TH Europe Acquisition"). The TH Europe Acquisition was
completed on July 5, 2001 and was funded using available cash.
The TH Europe Acquisition is expected to create long-term value for the
Company's shareholders through TH Europe's expected contribution to revenues and
net income beginning with the year of acquisition. The acquisition is also
expected to further the Company's evolution as a premier global lifestyle brand
and to provide the Company with distribution channel as well as geographic
diversification. The purchase price paid reflected the current profitability and
cash flow generation of TH Europe, as well as the rapid rate of growth in its
projected revenues, net income and cash flows.
The TH Europe Acquisition has been accounted for under the purchase method
of accounting and, accordingly, the operating results of the acquired companies
are included in the consolidated results of the Company from the date of the
acquisition. The purchase price, including transaction costs, has been allocated
as follows:
Cash $ 1,728
Accounts receivable 16,944
Inventories 30,540
Other current assets 6,769
Property, plant and equipment 15,508
Indefinite lived intangible assets, including goodwill 216,426
Other assets 94
Short-term bank borrowings (42,629)
Accounts payable (5,965)
Accrued expenses and other current liabilities (17,478)
Long-term debt (1,273)
Deferred tax liability (11,925)
Other liabilities (1,950)
-------------
Total Purchase Price $ 206,789
=============
7
The Company has applied the provisions of FASB Statement No. 141, "Business
Combinations", and certain provisions of FASB Statement No. 142, "Goodwill and
Other Intangible Assets", to the TH Europe Acquisition. See Note 9 below.
Note 3 - Credit Facilities
The Company's principal credit facilities consist of $250,000 of 6.50%
notes maturing on June 1, 2003 (the "2003 Notes"), $200,000 of 6.85% notes
maturing on June 1, 2008 (the "2008 Notes"), $150,000 of 9% bonds maturing on
December 1, 2031 which were issued in December 2001 (the "2031 Bonds") and term
and revolving credit facilities which expire on March 31, 2003 (the "Credit
Facilities"). The 2003 Notes, the 2008 Notes and the 2031 Bonds (collectively,
the "Notes") were issued by Tommy Hilfiger U.S.A., Inc. ("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.
The Credit Facilities, which are guaranteed by THC, consist of an unsecured
$250,000 TH USA five-year revolving credit facility, of which up to $150,000 may
be used for direct borrowings, and an unsecured $200,000 five-year term credit
facility, of which $60,000 remained outstanding as of December 31, 2001. The
revolving credit facility is available for letters of credit, working capital
and other general corporate purposes. As of December 31, 2001, $103,205 of the
available borrowings under the revolving credit facility had been used to open
letters of credit. There were no borrowings outstanding under the revolving
credit facility at December 31, 2001. Borrowings under the Credit Facilities
bear interest at variable rates which, on a weighted average annual basis,
amounted to 2.85% and 4.51% as of, and for the nine-month period ended, December
31, 2001, respectively, and 7.36% and 7.16% as of, and for the nine-month period
ended, December 31, 2000, respectively.
In January 2002, the Company paid the remaining balance of direct
borrowings of $60,000 outstanding under the term credit facility.
The Credit Facilities contain 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 Facilities also restrict the ability of THC to
create liens on assets or enter into certain sale and leaseback transactions.
Under the Credit Facilities, 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, 1998, less certain deductions. In addition, under
the Credit Facilities, THC and TH USA are required to comply with and maintain
specified financial ratios and tests (based on the Company's consolidated
financial results), including, without limitation, an interest expense 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 Facilities as of, and for the twelve-month period ended, December
31, 2001.
Certain of the Company's non-U.S. subsidiaries have separate credit
facilities for working capital or trade financing purposes. In addition to
short-term borrowings of $57,875, as of December 31, 2001 these subsidiaries
were contingently liable for unexpired bank letters of credit of $20,555 related
to commitments of these subsidiaries to suppliers for the purchase of inventory.
Borrowings under these credit facilities bear interest at variable rates which,
on a weighted average annual basis, amounted to 4.58% and 5.70% as of, and for
the nine-month period ended, December 31, 2001, respectively.
Note 4 - Condensed Consolidating Financial Information
The Notes discussed in Note 3 were issued by TH USA and are fully and
unconditionally guaranteed by THC. Accordingly, condensed consolidating balance
sheets as of December 31, 2001 and March 31, 2001, and the related condensed
consolidating statements of operations and cash flows for each of the nine-month
periods ended December 31, 2001 and 2000 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, including amortization of intangibles (including goodwill). 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 $918,967 and $956,383 for
the nine-month periods ended December 31, 2001 and 2000, 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.
8
Condensed Consolidating Statements of Operations
Nine Months Ended December 31, 2001
Parent
Subsidiary Company
Issuer Non-Guarantor Guarantor
(TH USA) Subsidiaries (THC) Eliminations Total
------------- ----------------- ------------- -------------- --------------
Net revenue $ 420,055 $ 1,056,382 $ - $ (99,514) $ 1,376,923
Cost of goods sold 287,969 538,513 - (41,134) 785,348
------------- ----------------- ------------- -------------- --------------
Gross profit 132,086 517,869 - (58,380) 591,575
------------- ----------------- ------------- -------------- --------------
Depreciation and amortization 47,173 36,079 - - 83,252
Other operating expenses 121,628 318,266 (4,497) (57,656) 377,741
------------- ----------------- ------------- -------------- --------------
Total operating expenses 168,801 354,345 (4,497) (57,656) 460,993
------------- ----------------- ------------- -------------- --------------
Income / (loss) from operations (36,715) 163,524 4,497 (724) 130,582
Interest expense 27,672 1,775 - - 29,447
Interest income 2,620 4,004 1,442 (2) 8,064
Intercompany interest expense / (income) 68,660 (12,728) (55,930) (2) -
------------- ----------------- ------------- -------------- --------------
Income / (loss) before taxes (130,427) 178,481 61,869 (724) 109,199
Provision / (benefit) for income taxes (38,867) 48,932 5,289 (1) 15,353
Equity in net earnings of
unconsolidated subsidiaries 94,796 - 33,984 (128,780) -
------------- ----------------- ------------- -------------- --------------
Net income / (loss) $ 3,236 $ 129,549 $ 90,564 $(129,503) $ 93,846
============= ================= ============= ============== ==============
9
Condensed Consolidating Statements of Operations
Nine Months Ended December 31, 2000
Parent
Subsidiary Company
Issuer Non-Guarantor Guarantor
(TH USA) Subsidiaries (THC) Eliminations Total
-------------- ----------------- ------------ -------------- ----------------
Net revenue $ 511,885 $ 1,009,322 $ - $ (112,269) $1,408,938
Cost of goods sold 331,400 547,268 - (51,548) 827,120
-------------- ----------------- ------------ -------------- ----------------
Gross profit 180,485 462,054 - (60,721) 581,818
Depreciation and amortization 48,251 29,235 - 1 77,487
Other operating expenses 141,576 277,344 (5,504) (60,508) 352,908
-------------- ----------------- ------------ -------------- ----------------
Total operating expenses 189,827 306,579 (5,504) (60,507) 430,395
Income / (loss) from operations (9,342) 155,475 5,504 (214) 151,423
Interest expense 31,539 21 - - 31,560
Interest income 2,252 5,700 5,195 (3) 13,144
Intercompany interest expense / (income) 66,404 (6,859) (59,542) (3) -
-------------- ----------------- ------------ -------------- ----------------
Income / (loss) before taxes (105,033) 168,013 70,241 (214) 133,007
Provision / (benefit) for income taxes (20,586) 50,544 5,688 - 35,646
Equity in net earnings of
unconsolidated subsidiaries 85,217 - 33,589 (118,806) -
-------------- ----------------- ------------ -------------- ----------------
Net income / (loss) $ 770 $ 117,469 $ 98,142 $ (119,020) $ 97,361
============== ================= ============ ============== ================
10
Condensed Consolidating Balance Sheets
December 31, 2001
Parent
Subsidiary Company
Issuer Non-Guarantor Guarantor
(TH USA) Subsidiaries (THC) Eliminations Total
--------------- -------------- ------------- --------------- ---------------
Assets
Current Assets
Cash and cash equivalents $ 274,892 $ 120,475 $ 55,731 $ - $ 451,098
Accounts receivable 41,427 94,641 - - 136,068
Inventories 68,614 173,557 - (6,371) 235,800
Other current assets 13,190 80,763 1,247 93 95,293
--------------- -------------- ------------- --------------- ---------------
Total current assets 398,123 469,436 56,978 (6,278) 918,259
Property, plant and equipment, at cost, less
accumulated depreciation and amortization 154,939 150,697 - (1) 305,635
Intangible assets, net of accumulated amortization 1,156,005 251,681 - 250 1,407,936
Investment in subsidiaries 528,482 206,789 414,017 (1,149,288) -
Other assets 5,434 2,560 - - 7,994
--------------- -------------- ------------- --------------- ---------------
Total Assets $ 2,242,983 $1,081,163 $ 470,995 $(1,155,317) $2,639,824
=============== ============== ============= =============== ===============
Liabilities and Shareholders' Equity
Current liabilities
Short-term borrowings $ - $ 57,875 $ - $ - $ 57,875
Current portion of long-term debt 60,000 700 - - 60,700
Accounts payable 2,024 20,962 - (1) 22,985
Accrued expenses and other current liabilities 87,528 134,744 783 242 223,297
Intercompany payable / (receivable) 1,105,221 (279,131) (825,075) (1,015) -
--------------- -------------- ------------- --------------- ---------------
Total current liabilities 1,254,773 (64,850) (824,292) (774) 364,857
Long-term debt 599,589 858 - - 600,447
Deferred tax liability 209,276 649 - - 209,925
Other liabilities 32 4,071 - 1 4,104
Shareholders' equity 179,313 1,140,435 1,295,287 (1,154,544) 1,460,491
--------------- -------------- ------------- --------------- ---------------
Total Liabilities and Shareholders' Equity $ 2,242,983 $1,081,163 $ 470,995 $(1,155,317) $2,639,824
=============== ============== ============= =============== ===============
11
Condensed Consolidating Balance Sheets
March 31, 2001
Parent
Subsidiary Company
Issuer Non-Guarantor Guarantor
(TH USA) Subsidiaries (THC) Eliminations Total
--------------- ---------------- ------------- ------------- ---------------
Assets
Current Assets
Cash and cash equivalents $ 45,001 $ 173,171 $ 100,259 $ - $ 318,431
Accounts receivable 105,716 131,698 - - 237,414
Inventories 76,511 133,720 - (4,785) 205,446
Other current assets 14,715 74,157 1,579 (98) 90,353
--------------- ---------------- ------------- ------------- ---------------
Total current assets 241,943 512,746 101,838 (4,883) 851,644
Property, plant and equipment, at cost, less
accumulated depreciation and amortization 170,398 111,284 - - 281,682
Intangible assets, net of accumulated amortization 1,181,259 24,849 - 250 1,206,358
Investment in subsidiaries 433,686 - 380,033 (813,719) -
Other assets 469 2,397 - 6 2,872
--------------- ---------------- ------------- ------------- ---------------
Total Assets $2,027,755 $ 651,276 $ 481,871 $(818,346) $2,342,556
=============== ================ ============= ============= ===============
Liabilities and Shareholders' Equity
Current liabilities
Current portion of long-term debt $ 50,000 $ - $ - $ - $ 50,000
Accounts payable 20,813 17,815 - - 38,628
Accrued expenses and other current liabilities 56,334 114,511 821 (26) 171,640
Intercompany payable / (receivable) 982,480 (266,097) (716,316) (67) -
--------------- ---------------- ------------- ------------- ---------------
Total current liabilities 1,109,627 (133,771) (715,495) (93) 260,268
Long-term debt 529,495 - - - 529,495
Deferred tax liability 213,995 (11,872) - - 202,123
Other liabilities - 2,078 - (1) 2,077
Shareholders' equity 174,638 794,841 1,197,366 (818,252) 1,348,593
--------------- ---------------- ------------- ------------- ---------------
Total Liabilities and Shareholders' Equity $2,027,755 $ 651,276 $ 481,871 $(818,346) $2,342,556
=============== ================ ============= ============= ===============
12
Condensed Consolidating Statements of Cash Flows
Nine Months Ended December 31, 2001
Parent
Subsidiary Company
Issuer Non-Guarantor Guarantor
(TH USA) Subsidiaries (THC) Eliminations Total
------------- -------------- ----------- ------------- ----------
Cash flows from operating activities
Net income / (loss) $ 3,236 $ 129,549 $ 90,564 $ (129,503) $ 93,846
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization 53,869 30,213 - - 84,082
Deferred taxes (4,719) - - - (4,719)
Changes in operating assets and liabilities 213,508 33,244 (108,465) 723 139,010
------------- ------------ ----------- ------------- ----------
Net cash provided by / (used in) operating
activities 265,894 193,006 (17,901) (128,780) 312,219
------------- ------------ ----------- ------------- ----------
Cash flows from investing activities
Purchases of property and equipment (16,281) (55,537) - - (71,818)
Acquisition of businesses, net of cash acquired - (205,061) - - (205,061)
Net activity in investment in subsidiaries (94,796) - (33,984) 128,780 -
------------- ------------ ----------- ------------- ----------
Net cash (used in) / provided by investing
activities (111,077) (260,598) (33,984) 128,780 (276,879)
------------- ------------ ----------- ------------- ----------
Cash flows from financing activities
Payments on long-term debt (70,000) (350) - - (70,350)
Proceeds from the issuance of long-term debt 145,074 - - - 145,074
Proceeds from the exercise of stock options - - 7,357 - 7,357
Short-term bank borrowings - 15,246 - - 15,246
------------- ------------ ----------- ------------- ----------
Net cash provided by / (used in) financing
activities 75,074 14,896 7,357 - 97,327
------------- ------------ ----------- ------------- ----------
Net increase / (decrease) in cash 229,891 (52,696) (44,528) - 132,667
Cash and cash equivalents, beginning of period 45,001 173,171 100,259 - 318,431
------------- ------------ ----------- ------------- ----------
Cash and cash equivalents, end of period $ 274,892 $ 120,475 $ 55,731 $ - $ 451,098
============= ============ =========== ============= ==========
13
Condensed Consolidating Statements of Cash Flows
Nine Months Ended December 31, 2000
Parent
Subsidiary Company
Issuer Non-Guarantor Guarantor
(TH USA) Subsidiaries (THC) Eliminations Total
------------- ------------ ------------ ------------ -----------
Cash flows from operating activities
Net income / (loss) $ 770 $ 117,469 $ 98,142 $(119,020) $ 97,361
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization 53,626 24,550 - - 78,176
Deferred taxes (4,719) - - - (4,719)
Changes in operating assets and liabilities 73,715 (73,583) (22,329) 214 (21,983)
--------- --------- --------- --------- ---------
Net cash provided by operating activities 123,392 68,436 75,813 (118,806) 148,835
--------- --------- --------- --------- ---------
Cash flows from investing activities
Purchases of property and equipment (13,175) (27,661) - - (40,836)
Net activity in investment in subsidiaries (85,217) - (33,589) 118,806 -
--------- --------- --------- --------- ---------
Net cash (used in) / provided by investing
activities (98,392) (27,661) (33,589) 118,806 (40,836)
--------- --------- --------- --------- ---------
Cash flows from financing activities
Payments on long-term debt (37,500) - - - (37,500)
Proceeds from the exercise of stock options - - 471 - 471
Purchase of treasury shares - - (50,116) - (50,116)
Repayments of short-term bank borrowings - (523) - - (523)
Capital contribution 90,000 - (90,000) - -
--------- --------- --------- --------- ---------
Net cash used in financing activities 52,500 (523) (139,645) - (87,668)
--------- --------- --------- --------- ---------
Net decrease in cash 77,500 40,252 (97,421) - 20,331
Cash and cash equivalents, beginning of period 25,500 115,756 168,141 - 309,397
--------- --------- --------- --------- ---------
Cash and cash equivalents, end of period $ 103,000 $ 156,008 $ 70,720 $ - $ 329,728
========= ========= ========= ========= =========
Note 5 - 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, and the flagship stores through February
2001 (see Note 6 below). The Licensing segment consists of the operations of
licensing the Company's trademarks for specified products in specified
geographic areas. 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, "Summary of Significant Accounting
Policies", to the Consolidated Financial Statements included in the Form 10-K.
Segment profits are comprised of segment net revenue less cost of goods sold and
selling, general and administrative expenses. Excluded from segment profits,
however, are the vast majority of executive compensation, marketing, brand image
marketing costs associated with its flagship stores (through February 2001),
amortization of intangibles (including goodwill) and interest costs. Financial
information for the Company's reportable segments is as follows:
14
Wholesale Retail Licensing Total
---------- ---------- ---------- ----------
Nine Months Ended December 31, 2001
-----------------------------------
Total segment revenue .............. $1,031,799 $ 303,886 $ 83,137 $1,418,822
Segment profits .................... 93,034 58,669 49,364 201,067
Depreciation and amortization
included in segment profits ...... 38,605 8,573 748 47,926
Nine Months Ended December 31, 2000
-----------------------------------
Total segment revenue .............. $1,086,267 $ 274,852 $ 90,961 $1,452,080
Segment profits .................... 120,962 58,374 54,214 233,550
Depreciation and amortization
included in segment profits ...... 38,561 5,459 745 44,765
Wholesale Retail Licensing Total
---------- ---------- ---------- ----------
Three Months Ended December 31, 2001
------------------------------------
Total segment revenue .............. $ 334,288 $ 127,797 $ 25,713 $ 487,798
Segment profits .................... 25,791 24,541 14,658 64,990
Depreciation and amortization
included in segment profits ...... 12,735 3,381 327 16,443
Three Months Ended December 31, 2000
------------------------------------
Total segment revenue .............. $ 349,585 $ 109,707 $ 28,274 $ 487,566
Segment profits .................... 42,657 22,541 17,226 82,424
Depreciation and amortization
included in segment profits ...... 13,516 1,826 243 15,585
A reconciliation of total segment revenue to consolidated net revenue is as
follows:
Nine Months Ended December 31, Three Months Ended December 31,
------------------------------- -------------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Total segment revenue ........ $ 1,418,822 $ 1,452,080 $ 487,798 $ 487,566
Intercompany revenue ......... (41,899) (43,142) (13,005) (11,807)
----------- ----------- ----------- -----------
Consolidated net revenue...... $ 1,376,923 $ 1,408,938 $ 474,793 $ 475,759
=========== =========== =========== ===========
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 is as follows:
Nine Months Ended December 31, Three Months Ended December 31,
------------------------------- -------------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Segment profits .......................... $201,067 $233,550 $ 64,990 $ 82,424
Corporate expenses not allocated ......... 70,485 82,127 15,094 18,250
Interest expense, net .................... 21,383 18,416 8,794 5,941
-------- -------- -------- --------
Consolidated income before income taxes... $109,199 $133,007 $ 41,102 $ 58,233
======== ======== ======== ========
15
Note 6 - Special Charges
During the quarter ended March 31, 2000, the Company recorded a special
charge of $62,153, before income taxes, principally related to the following: a
redirection of the Company's full-price retail store program, which includes the
closure of its flagship stores in Beverly Hills, California and London, England;
the postponement of the launch of a new women's dress-up division; and the
consolidation of the junior sportswear and junior jeans divisions. This charge
consisted of provisions of $44,857 for the write-off of fixed assets and
operating leases of the Company's flagship stores and the write-off of fixed
assets related to the dress-up and junior sportswear divisions, $11,700 for
inventory of the junior sportswear division and, to a lesser extent, the
flagship stores, and $5,596 for severance and other costs. Inventory provisions
were included in cost of sales in fiscal year 2000. As of December 31, 2001, the
balance in the accrued special charge liability was $541, primarily related to
liabilities of closing the Company's flagship store in Beverly Hills.
Note 7 - Share Repurchase Program
On April 7, 2000 the Company announced that its Board of Directors
authorized the repurchase of up to $150,000 of its outstanding shares over a
period of up to 18 months using available cash. Under this share repurchase
program, the Company repurchased 6,192,600 shares at an aggregate cost of
$61,231. In connection with the TH Europe Acquisition (as defined in Note 2
above), the Company's Board of Directors terminated the remaining portion of the
share repurchase program, effective June 28, 2001.
Note 8 - Earnings Per Share
Basic earnings per share were computed by dividing net income by the
average number of Ordinary Shares outstanding during the respective period, as
required by the Financial Accounting Standards Board ("FASB") Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share". 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.
A reconciliation of shares used for basic earnings per share and those used
for diluted earnings per share is as follows:
Nine Months Ended December 31, Three Months Ended December 31,
--------------------------------- ---------------------------------
2001 2000 2001 2000
-------------- ------------- ------------- --------------
Weighted average shares outstanding ................... 89,307,000 91,858,000 89,622,000 90,421,000
Net effect of dilutive stock options based on the
treasury stock method using average market price .. 527,000 162,000 483,000 278,000
-------------- ------------- ------------- --------------
Weighted average share and share equivalents
outstanding ....................................... 89,834,000 92,020,000 90,105,000 90,699,000
============== ============= ============= ==============
Options to purchase 3,868,860 shares at December 31, 2001 and 7,692,230
shares at December 31, 2000 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.
Note 9 - Recently Issued Accounting Standards
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative and
Hedging Activities" ("SFAS 133"). This statement became effective for the
Company beginning in fiscal 2002. SFAS 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as part of
a hedge transaction and, if it is, the type of hedge transaction.
The Company seeks to protect against adverse movements in foreign currency
which might affect certain firm commitments or anticipated cash flows. These
include the purchase of inventory and capital expenditures, and the collection
of foreign royalty payments. 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. Forward contracts used for the
purchase of inventory and capital expenditures are designated as fair value
hedging instruments and forward contracts used in the collection of foreign
royalty payments are designated as cash flow hedging instruments. The Company
does not use financial instruments for speculative or trading purposes. At
December 31, 2001, the Company had contracts to exchange foreign currencies,
principally, the Japanese yen, the Canadian dollar, the Euro and the Pound
Sterling having a total notional amount of $36,013. The unrealized loss
associated with these contracts at December 31, 2001 was de minimus. 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. Because the Company
only enters into fair value hedges and cash flow hedges and due to the limited
use of derivative instruments, the adoption of SFAS 133 did not have a
significant effect on the Company's results of operations or its financial
position.
16
In May 2001, the FASB's Emerging Issues Task Force ("EITF") reached
consensus on EITF 00-25, "Vendor Income Statement Characterizations of
Consideration from a Vendor to a Retailer"("EITF 00-25"). This issue addresses
when consideration from a vendor to a retailer (i) in connection with the
retailer's purchase of the vendor's products or (ii) to promote sales of the
vendor's products by the retailer should be classified in the vendor's income
statement as a reduction of revenue. EITF 00-25 is applicable for fiscal
quarters beginning after December 15, 2001 and under certain circumstances may
require reclassification of prior periods. The Company's accounting policy is
consistent with this consensus and, accordingly, the consensus will have no
impact on the Company's statement of operations.
In late July 2001, the FASB released SFAS No. 141, "Business Combinations"
("SFAS 141"). This statement is effective for all business combinations
completed after June 30, 2001. SFAS 141 prohibits the pooling-of-interests
method of accounting for business combinations and prescribes criteria for the
initial recognition and measurement of goodwill and other intangible assets,
accounting for negative goodwill and the required disclosures in respect of
business combinations.
In late July 2001, the FASB also released SFAS No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"). This statement is effective for fiscal years
beginning after December 15, 2001 and may not be retroactively applied to
financial statements of prior periods. The Company has applied certain
provisions of SFAS 142 as it pertains to business combinations for which the
acquisition date is after June 30, 2001. Accordingly, the goodwill and
indefinite lived intangible assets associated with the TH Europe Acquisition
will not be amortized. The Company will continue to amortize goodwill and
intangible assets that existed prior to June 30, 2001 until the full adoption of
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 least annually. Additionally, SFAS 142
provides new criteria for performing impairment tests on goodwill and intangible
assets with indefinite useful lives. The impairment test for indefinite lived
intangibles must be performed within three months of adoption. The impairment
test for goodwill is a two-step process. SFAS 142 introduces the concept of
assessing goodwill impairment at the reporting unit level. Within six months of
adoption of SFAS 142, the Company must complete the first step of the
transitional impairment test, which consists of comparing the carrying amount of
the net assets of a reporting unit to its fair value. If the carrying amount
exceeds the fair value, the second step of the goodwill impairment test must be
completed as soon as possible, but no later than the end of the year of
adoption. The second step of the impairment test consists of the comparison of
the implied fair value of the reporting unit's goodwill to the carrying amount
of such goodwill.
The Company has applied the provisions of SFAS 141 to the TH Europe
Acquisition, since it was completed after June 30, 2001. Under this statement,
approximately $165,458 of goodwill and $61,763 of indefinite lived intangibles,
consisting of the acquired trademark rights, will not be amortized and will
continue to be evaluated for impairment under SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", or
APB 17, "Intangible Assets", until the date that SFAS 142 is fully adopted. The
Company plans to adopt SFAS 142 on April 1, 2002, as required.
Goodwill and intangible assets acquired in business combinations completed
before July 1, 2001 will continue to be amortized until the full adoption of
SFAS 142. With respect to the Company's acquisition of its womenswear, jeanswear
and Canadian licensees on May 8, 1998, the Company expects to have unamortized
goodwill and other intangibles of approximately $611,290 and $560,536,
respectively, and deferred tax liabilities of $230,837, at the date of such
adoption. Such intangibles will be subject to the provisions of SFAS 142.
Amortization expense related to goodwill and other intangibles was $12,731 and
$13,168, respectively, for the nine months ended December 31, 2001. Upon
adoption, the Company will no longer amortize existing goodwill or trademark
rights, which are classified as indefinite life assets or related deferred tax
liabilities. The combined effect of these adjustments is expected to be a
reduction in operating expenses of approximately $32,000 per year and an
increase in income tax expense of approximately $6,000 per year. Any impairment
loss recognized as a result of adopting this standard would be recorded as a
cumulative effect of a change in accounting principle in the Company's
statements of operations for the fiscal year ending March 31, 2003 and would be
a non-cash and non-operating charge. Because of the complexity involved in
adopting certain provisions of SFAS 142, it is not practicable to reasonably
estimate the impact of adopting these statements on the Company's financial
statements at the date of this report, including whether any transitional
impairment losses will be required to be recognized. However, any such loss
could materially decrease the Company's reported results of net income and
earnings per share or result in a net loss for fiscal year 2003.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(dollar amounts in thousands)
General
The following discussion and analysis should be read in conjunction with
the Company's Condensed Consolidated Financial Statements and related notes
thereto which are included herein.
Results of Operations
The following table sets forth the Condensed Consolidated Statements of
Operations data as a percentage of net revenue.
Nine Months Ended December 31, Three Months Ended December 31,
---------------------------------------- ----------------------------------------
2001 2000 2001 2000
--------------- --------------- --------------- ---------------
Net revenue .......................... 100.0 % 100.0 % 100.0 % 100.0 %
Cost of goods sold ................... 57.0 58.7 57.6 58.4
--------------- --------------- --------------- ---------------
Gross profit ......................... 43.0 41.3 42.4 41.6
Depreciation and amortization ........ 6.0 5.5 6.0 5.5
Other SG&A expenses .................. 27.5 25.1 25.9 22.6
--------------- --------------- --------------- ---------------
Total operating expenses ............. 33.5 30.6 31.9 28.1
--------------- --------------- --------------- ---------------
Income from operations ............... 9.5 10.7 10.6 13.5
Interest expense, net ................ 1.6 1.3 1.9 1.3
--------------- --------------- --------------- ---------------
Income before taxes .................. 7.9 9.4 8.7 12.2
Provision for income taxes ........... 1.1 2.5 0.9 3.2
--------------- --------------- --------------- ---------------
Net income ........................... 6.8 6.9 7.8 9.0
=============== =============== =============== ===============
On July 5, 2001, the Company acquired TH Europe, its European licensee, for
a purchase price of $200,000, funded using available cash. The acquisition has
been accounted for using the purchase method of accounting and, accordingly, the
operating results of TH Europe are included in the consolidated results of the
Company from the date of the acquisition. The TH Europe Acquisition is expected
to create long-term value for the Company's shareholders through TH Europe's
expected contribution to revenues and net income beginning with the year of
acquisition. The acquisition is also expected to further the Company's evolution
as a premier global lifestyle brand and to provide the Company with distribution
channel as well as geographic diversification. The purchase price paid reflected
the current profitability and cash flow generation of TH Europe, as well as the
rapid rate of growth in its projected revenues, net income and cash flows.
The business of TH Europe includes both wholesale distribution as well as
the operation of retail stores. In addition, this acquisition results in a
reduction in licensing segment revenue as the Company's royalties from TH Europe
are eliminated in consolidation subsequent to the acquisition.
Nine Months Ended December 31, 2001 Compared to Nine Months Ended December
31, 2000
Net revenue decreased 2.3% to $1,376,923 in the nine months ended December
31, 2001 from $1,408,938 in the corresponding period in fiscal 2001. This
decrease was due to decreases in the Company's Wholesale and Licensing segments
offset, in part, by an increase in the Retail segment, as outlined below.
Nine Months Ended December 31,
----------------------------------
% Increase
2001 2000 /(Decrease)
--------------- -------------- ----------
Wholesale ............ $ 1,031,799 $ 1,086,267 (5.0)%
Retail ............... 303,886 274,852 10.6 %
Licensing ............ 41,238 47,819 (13.8)%
--------------- -------------- ----------
Total ................ $ 1,376,923 $ 1,408,938 (2.3)%
=============== ============== ==========
18
Within the Wholesale segment, menswear sales decreased 7.8% (to $458,581
from $497,511) and childrenswear sales decreased 15.9% (to $199,198 from
$236,790). These decreases were partially offset by an increase in womenswear
sales of 6.3% (to $374,021 from $351,966). Each of the Wholesale divisions
benefited from the addition of TH Europe in the second and third quarters of
fiscal year 2002. The decline in Wholesale revenue was entirely due to volume
reductions in the U.S., reflecting the Company's efforts to balance supply and
demand.
The improvement in the Company's Retail segment was due to an increase in
the number of stores and the expansion of certain stores into larger formats
offset, in part, by a decrease in sales at existing stores. Management believes
that the decrease at existing stores was due to reduced customer traffic and
softer economic conditions. At December 31, 2001, the Company operated 160
retail stores, including 13 at TH Europe, as compared to 100 stores at December
31, 2000. Retail stores opened or acquired since December 31, 2000 contributed
$46,096 of net revenue during the nine months ended December 31, 2001.
Revenue from the Licensing segment consists of third party licensing
royalties and buying agency commissions. Licensing segment revenue decreased in
the first nine months of fiscal 2002 due principally to the elimination of
royalties and buying agency commissions from TH Europe since the date of the TH
Europe Acquisition. New products introduced under licenses entered into since
December 31, 2000 contributed $632 of net revenue during the first nine months
of fiscal year 2002.
Gross profit as a percentage of net revenue increased to 43.0% in the first
nine months of fiscal 2002 from 41.3% in the first nine months of fiscal 2001.
The increase was mainly due to the contribution of TH Europe, which operates at
a higher gross margin than the Company's overall Wholesale segment, an improved
gross margin in the Company's Retail segment and an increase in the contribution
to total revenue of the Retail segment, which generates a higher gross margin
than the Wholesale segment, from 19.5% to 22.1%.
Operating expenses increased to $460,993, or 33.5% of net revenue, in the
first nine months of fiscal 2002 from $430,395, or 30.6% of net revenue, in the
corresponding period of fiscal 2001. This increase was due to increased expenses
of $53,653 related to the expansion of the Company's business through its
acquisition of TH Europe and the growth in the Retail segment, which opened or
acquired 60 stores and expanded other stores since December 31, 2000. Partially
offsetting this increase were savings of $23,055 due to the Company's continuing
efforts to reduce expenses through divisional consolidations and other
streamlining efforts. The Company expects these savings to continue for the
foreseeable future.
Interest expense, net of interest income, increased to $21,383 in the first
nine months of fiscal year 2002 from $18,416 in the corresponding period last
year. The increase from 2001 to 2002 was primarily due to lower interest rates
on invested cash balances in fiscal year 2002 as compared to the first nine
months of fiscal year 2001 and the interest expense associated of the issuance
of the 2031 Bonds. This increase was partially offset by lower rates on, and a
lower average principal balance under, the Credit Facilities.
The provision for income taxes decreased to 14.1% of income before taxes in
the nine-month period ended December 31, 2001 from 26.8% in the corresponding
period last year. This decrease was primarily attributable to the relative level
of earnings in the various taxing jurisdictions to which the Company's earnings
are subject. The Company continues to refine its estimate of the annual
effective tax rate at various points during the fiscal year and adjusts
accordingly. The Company's expected rate for the full fiscal year 2002 is
approximately 13.0%.
Three Months Ended December 31, 2001 Compared to Three Months Ended
December 31, 2000
Net revenue decreased 0.2% to $474,793 in the three months ended December
31, 2001 from $475,759 in the corresponding period in fiscal 2001. This decrease
was due to decreases in the Company's Licensing and Wholesale segments offset,
in part, by an increase in the Retail segment, as outlined below.
Three Months Ended December 31,
------------------------------
% Increase
2001 2000 /(Decrease)
------------- ------------- ----------
Wholesale ................ $ 334,288 $ 349,585 (4.4)%
Retail ................... 127,797 109,707 16.4 %
Licensing ................ 12,708 16,467 (22.9)%
------------- ------------- ----------
Total .................... $ 474,793 $ 475,759 (0.2)%
============= ============= ==========
The decrease in Wholesale segment sales was due primarily to decreases in
menswear sales of 6.1% (to $139,569 from $148,565) and childrenswear sales of
11.7% (to $61,543 from $69,705). This was partially offset by an increase in
womenswear sales of 1.4% (to $133,176 from $131,315). Each of the wholesale
divisions benefited from the addition of TH Europe in the third quarter of
fiscal year 2002, which partially offset the effect of volume reductions in the
U.S., reflecting the Company's efforts to balance supply and demand.
19
The improvement in the Company's Retail segment was due to an increase in
the number of stores and the expansion of certain stores into larger formats
offset, in part, by a decrease in sales at existing stores. Management believes
that the decrease at existing stores was due to reduced customer traffic and
softer economic conditions. At December 31, 2001, the Company operated 160
retail stores, including 13 at TH Europe, as compared to 100 stores at December
31, 2000. Retail stores opened or acquired since December 31, 2000 contributed
$27,030 of net revenue during the quarter ended December 31, 2001.
Revenue from the Licensing segment consists of third party licensing
royalties and buying agency commissions. Licensing segment revenue decreased in
the third quarter of fiscal 2002 compared to the same period last year due
principally to the elimination of royalties and buying agency commissions from
TH Europe in the fiscal 2002 quarter. New products introduced under licenses
entered into since December 31, 2000 contributed $418 of net revenue in the
third quarter of fiscal year 2002.
Gross profit as a percentage of net revenue increased to 42.4% in the third
quarter of fiscal 2002 from 41.6% in the third quarter of fiscal 2001. The
increase was mainly due to significantly higher gross margins in the Company's
Retail segment and a higher contribution to total revenue of the Retail segment,
which generates a higher gross margin than the Wholesale segment. Gross margins
in our Wholesale segment were slightly better than those of a year ago due
entirely to the contribution of TH Europe, which operates at a higher gross
margin than the Company's overall Wholesale segment.
Operating expenses increased to $151,453, or 31.9% of net revenue, in the
third quarter of fiscal 2002 from $133,924, or 28.1% of net revenue, in the
third quarter of fiscal 2001. This increase was due to increased expenses of
$23,253 related to the expansion of the Company's business through its
acquisition of TH Europe and the growth in the Retail segment, which opened or
acquired 60 stores and expanded other stores since December 31, 2000. Partially
offsetting this increase were savings of $5,724 due to the Company's continuing
efforts to reduce expenses through divisional consolidations and other
streamlining efforts. The Company expects these savings to continue for the
forseeable future.
Interest expense, net of interest income, increased to $8,794 in the third
quarter of fiscal year 2002 from $5,941 in the corresponding quarter last year.
The increase from 2001 to 2002 was primarily due to lower interest rates on
invested cash balances in fiscal year 2002 as compared to the third quarter of
fiscal year 2001 and the interest expenses associated with the issuance of the
2031 Bonds. This increase was partially offset by lower rates on, and a lower
average principal balance under, the Credit Facilities.
The provision for income taxes decreased to 10.1% of income before taxes in
the quarter ended December 31, 2001 from 26.7% in the corresponding quarter last
year. This decrease was primarily attributable to the relative level of earnings
in the various taxing jurisdictions to which the Company's earnings are subject.
The Company continues to refine its estimate of the annual effective tax rate at
various points during the fiscal year and adjusts accordingly. The Company's
expected rate for the full fiscal year 2002 is approximately 13.0%.
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 increased from $318,431 at
March 31, 2001 to $451,098 at December 31, 2001. As described in Note 3 to the
Condensed Consolidated Financial Statements, the Company issued the 2031 Bonds
in December 2001. In addition, the Company generated cash from operations in
excess of capital expenditures and scheduled debt repayments. Partially
offsetting this increase, as described in Note 2 to the Condensed Consolidated
Financial Statements, on July 5, 2001 the Company completed the TH Europe
Acquisition for $200,000 funded from existing cash. A detailed analysis of the
changes in cash and cash equivalents is presented in the Condensed Consolidated
Statements of Cash Flows.
Capital expenditures were $71,818 during the nine months ended December 31,
2001. Capital expenditures were made principally in support of the Company's
retail store openings, as well as on existing facilities and selected in-store
shops and fixtured areas.
There were no significant committed capital expenditures at December 31,
2001. The Company expects fiscal 2002 capital expenditures to approximate
$95,000 to $100,000, primarily related to the construction of additional retail
stores as well as maintenance or selective expansion of the Company's in-store
shop and fixtured area program.
At December 31, 2001, accrued expenses and other current liabilities
included $34,617 of open letters of credit for inventory purchased.
Additionally, at December 31, 2001, TH USA was contingently liable for unexpired
bank letters of credit of $68,588 related to commitments of TH USA to suppliers
for the purchase of inventories.
20
The Company's principal credit facilities consist of $250,000 of the 2003
Notes, $200,000 of the 2008 Notes, $150,000 of the 2031 Bonds and the Credit
Facilities. The Notes were issued by TH USA and are fully and unconditionally
guaranteed by THC. The indenture under which the Notes were issued contains
restrictive covenants that are described in Note 3 to the Condensed Consolidated
Financial Statements.
The Credit Facilities, which are guaranteed by THC, consist of an unsecured
$250,000 TH USA five-year revolving credit facility, of which up to $150,000 may
be used for direct borrowings, and an unsecured $200,000 five-year term credit
facility, of which $60,000 remained outstanding as of December 31, 2001. The
revolving credit facility is available for letters of credit, working capital
and other general corporate purposes. As of December 31, 2001, $103,205 of the
available borrowings under the revolving credit facility had been used to open
letters of credit. There were no borrowings outstanding under the revolving
credit facility at December 31, 2001. Borrowings under the Credit Facilities
bear interest at variable rates which, on a weighted average annual basis,
amounted to 2.85% and 4.51% as of, and for the nine-month period ended, December
31, 2001, respectively, and 7.36% and 7.16% as of, and for the nine-month period
ended, December 31, 2000, respectively.
In January 2002, the Company paid the remaining balance of direct
borrowings of $60,000 outstanding under the term credit facility.
Under the Credit Facilities, 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, 1998, less certain deductions. The Credit
Facilities contain a number of other restrictive and financial covenants that
are described in Note 3 to the Condensed Consolidated Financial Statements.
The Company was in compliance with all covenants in respect of the Notes
and the Credit Facilities as of, and for the twelve-month period ended, December
31, 2001.
Certain of the Company's non-U.S. subsidiaries have separate credit
facilities for working capital or trade financing purposes. In addition to
short-term borrowings of $57,875, as of December 31, 2001 these subsidiaries
were contingently liable for unexpired bank letters of credit of $20,555 related
to commitments of these subsidiaries to suppliers for the purchase of inventory.
Borrowings under these credit facilities bear interest at variable rates which,
on a weighted average annual basis, amounted to 4.58% and 5.70% as of, and for
the nine months ended, December 31, 2001, respectively.
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
flexibility remains available in the form of additional borrowing capacity, 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 December 31, 2001.
The Company intends to fund its cash requirements for the balance of fiscal
2002 and future years from available cash balances, internally generated funds
and borrowings available under the Credit Facilities. The Company believes that
these resources will be sufficient to fund its cash requirements for such
periods.
Seasonality
The Company's business is impacted by the general seasonal trends
characteristic of the apparel and retail industries. The Company's Wholesale
revenues, particularly those from its European operations, are 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.
Inflation
The Company believes that inflation has not had a material effect on its
net revenue or profitability.
21
Exchange Rates
The Company receives United States dollars for approximately 90% 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 and the
collection of foreign royalty payments. 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 December 31, 2001,
the Company had contracts to exchange foreign currencies, principally, the
Japanese yen, the Canadian dollar, the Euro and the Pound Sterling having a
total notional amount of $36,013. The unrealized loss associated with these
contracts at December 31, 2001 was de minimus. 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
A discussion of the effects of recently issued accounting standards appears
in Note 9 to the Condensed Consolidated Financial Statements in Item 1 above.
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 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 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
for the fiscal year ended March 31, 2001. 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.
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.
22
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, which allegedly supply
product to the Company and other co-defendants, engage in unlawful practices
relating to the recruitment and employment of foreign workers. One action,
brought in San Francisco Superior Court (the "State Action"), was filed by a
union and three public interest groups alleging unfair competition and false
advertising by the Company and others. It seeks equitable relief, restitution
and disgorgement of profits relating to the allegedly wrongful conduct, as well
as interest and an award of fees to the plaintiffs' attorneys. The other, an
action seeking class action status initially filed in Federal Court for the
Central District of California and subsequently transferred to the Federal Court
in the District of Hawaii (the "Federal Action"), was brought on behalf of an
alleged class consisting of the Saipanese factory workers. The defendants
include both companies selling goods purchased from factories located on the
island of Saipan and the factories themselves. This complaint alleges claims
under RICO, the Alien Tort Claims Act, federal anti-peonage and indentured
servitude statutes and state and international law. It seeks equitable relief
and damages, including treble and punitive damages, interest and an award of
fees to the plaintiffs' attorneys.
In addition, the same law firm that filed the State Action and the
Federal Action has filed an action seeking class action status in the Federal
Court in Saipan. This action is brought on behalf of Saipanese garment factory
workers against the Saipanese factories and alleges violation of federal and
Saipanese wage and employment laws. The Company is not a defendant in this
action.
The Company has entered into settlement agreements with the plaintiffs
in the Federal Action and in the State Action. As part of these agreements, the
Company specifically denies any wrongdoing or any liability with regard to the
claims made in the Federal Action and the State Action. The settlement agreement
provides for a monetary payment, in an amount which is not material to the
Company's financial position, results of operations or cash flows, to a class of
plaintiffs in the Federal Action, as well as the creation of a monitoring
program for factories in Saipan. The settlement must be approved by the Federal
Court, and a class of plaintiffs certified. The Federal Action has been
transferred to the federal judge in Saipan. Plaintiffs are presently challenging
the transfer order. The judge in Saipan has scheduled the hearing on settlement
approval and preliminary class certification for February 14, 2002.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11. Computation of Net Income Per Ordinary Share
(b) Reports on Form 8-K
During the quarter ended December 31, 2001, the Company filed a Current
Report on Form 8-K dated November 28, 2001 reporting matters under Item 5
thereof.
23
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: February 11, 2002 By: /s/ Joel J. Horowitz
--------------------------
Joel J. Horowitz
Chief Executive Officer and President
Tommy Hilfiger Corporation
Date: February 11, 2002 By: /s/ Joseph Scirocco
--------------------------
Joseph Scirocco
Principal Accounting Officer
Tommy Hilfiger Corporation
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EXHIBIT INDEX
Exhibit
Number Description
------- -----------
11. Computation of Net Income Per Ordinary Share
25