SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Amendment to Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal quarter ended August 3, 2002.
FEDERATED DEPARTMENT STORES, INC.
7 West Seventh Street
Cincinnati, Ohio 45202
(513) 579-7000
and
151 West 34th Street
New York, New York 10001
(212) 494-1602
Delaware | 1-13536 | 13-3324058 | ||
(State of Incorporation) | (Commission File No.) | (I.R.S. Employer Identification Number) |
The Registrant has filed all reports required to be filed by Section 12, 13 or 15 (d) of the Act during the preceding 12 months and has been subject to such filing requirements for the past 90 days.
196,161,685 shares of the Registrants Common Stock, $.01 par value, were outstanding as of August 31, 2002.
Explanatory Note
This Amendment on Form 10-Q/A to the Companys Form 10-Q for its fiscal quarter ended August 3, 2002 (the Form 10-Q) amends and restates Part I and Item 6 of Part II of the Form 10-Q to provide incremental disclosure and to refile Exhibits 10.3 and 10.4 in html format. The changes to the Companys Consolidated Financial Statements set forth in Part I are limited to (i) the breakout of restructuring charges on the Companys Consolidated Statements of Income into asset impairment charges and restructuring charges, and (ii) the provision of incremental disclosure in the Notes to such Consolidated Financial Statements. Except as otherwise expressly stated or where the context requires otherwise, the information in this Amendment speaks of September 17, 2002, the date on which the Form 10-Q was filed with the Securities and Exchange Commission.
PART I FINANCIAL INFORMATION
FEDERATED DEPARTMENT STORES, INC.
Consolidated Statements of Income
(Unaudited)
(millions, except per share figures)
13 Weeks Ended | 26 Weeks Ended | |||||||||||||||||
August 3, | August 4, | August 3, | August 4, | |||||||||||||||
2002 | 2001 | 2002 | 2001 | |||||||||||||||
Net Sales |
$ | 3,486 | $ | 3,488 | $ | 6,939 | $ | 7,044 | ||||||||||
Cost of sales: |
||||||||||||||||||
Recurring |
2,051 | 2,128 | 4,129 | 4,286 | ||||||||||||||
Inventory valuation adjustments related
to Sterns closure |
| 7 | | 26 | ||||||||||||||
Total cost of sales |
2,051 | 2,135 | 4,129 | 4,312 | ||||||||||||||
Selling, general and administrative expenses |
1,135 | 1,113 | 2,289 | 2,288 | ||||||||||||||
Asset impairment charges |
| | | 4 | ||||||||||||||
Restructuring charges |
| 27 | | 49 | ||||||||||||||
Operating income |
300 | 213 | 521 | 391 | ||||||||||||||
Interest expense |
(83 | ) | (78 | ) | (161 | ) | (159 | ) | ||||||||||
Interest income |
5 | | 9 | 3 | ||||||||||||||
Income from continuing operations before
income taxes |
222 | 135 | 369 | 235 | ||||||||||||||
Federal, state and local income tax expense |
(89 | ) | (11 | ) | (147 | ) | (53 | ) | ||||||||||
Income from continuing operations |
133 | 124 | 222 | 182 | ||||||||||||||
Discontinued operations: |
||||||||||||||||||
Loss from discontinued operations, net of tax effect |
| (14 | ) | | (14 | ) | ||||||||||||
Income on disposal of discontinued operations,
net of tax effect |
149 | | 149 | | ||||||||||||||
Net Income |
$ | 282 | $ | 110 | $ | 371 | $ | 168 | ||||||||||
(Continued)
2
FEDERATED DEPARTMENT STORES, INC.
Consolidated Statements of Income (continued)
(Unaudited)
(millions, except per share figures)
13 Weeks Ended | 26 Weeks Ended | ||||||||||||||||
August 3, | August 4, | August 3, | August 4, | ||||||||||||||
2002 | 2001 | 2002 | 2001 | ||||||||||||||
Basic earnings (loss) per share: |
|||||||||||||||||
Income from continuing operations |
$ | .66 | $ | .63 | $ | 1.10 | $ | .93 | |||||||||
Income (loss) from discontinued operations |
.74 | (.07 | ) | .74 | (.08 | ) | |||||||||||
Net income |
$ | 1.40 | $ | .56 | $ | 1.84 | $ | .85 | |||||||||
Diluted earnings (loss) per share: |
|||||||||||||||||
Income from continuing operations |
$ | .66 | $ | .62 | $ | 1.09 | $ | .90 | |||||||||
Income (loss) from discontinued operations |
.73 | (.07 | ) | .73 | (.07 | ) | |||||||||||
Net income |
$ | 1.39 | $ | .55 | $ | 1.82 | $ | .83 | |||||||||
The accompanying notes are an integral part of these unaudited Consolidated Financial Statements.
3
FEDERATED DEPARTMENT STORES, INC.
Consolidated Balance Sheets
(Unaudited)
(millions)
August 3, | February 2, | August 4, | |||||||||||||
2002 | 2002 | 2001 | |||||||||||||
ASSETS: |
|||||||||||||||
Current Assets: |
|||||||||||||||
Cash |
$ | 1,398 | $ | 636 | $ | 257 | |||||||||
Accounts receivable |
2,676 | 2,379 | 2,153 | ||||||||||||
Merchandise inventories |
3,657 | 3,376 | 3,813 | ||||||||||||
Supplies and prepaid expenses |
135 | 124 | 140 | ||||||||||||
Deferred income tax assets |
16 | 21 | 26 | ||||||||||||
Assets of discontinued operations |
593 | 1,812 | 2,452 | ||||||||||||
Total Current Assets |
8,475 | 8,348 | 8,841 | ||||||||||||
Property and Equipment net |
6,389 | 6,506 | 6,541 | ||||||||||||
Goodwill |
305 | 305 | 289 | ||||||||||||
Other Intangible Assets net |
378 | 378 | 384 | ||||||||||||
Other Assets |
544 | 575 | 563 | ||||||||||||
Total Assets |
$ | 16,091 | $ | 16,112 | $ | 16,618 | |||||||||
LIABILITIES AND SHAREHOLDERS EQUITY: |
|||||||||||||||
Current Liabilities: |
|||||||||||||||
Short-term debt |
$ | 1,919 | $ | 1,012 | $ | 599 | |||||||||
Accounts payable and accrued liabilities |
2,731 | 2,645 | 2,698 | ||||||||||||
Income taxes |
42 | 57 | 116 | ||||||||||||
Liabilities of discontinued operations |
322 | 1,068 | 905 | ||||||||||||
Total Current Liabilities |
5,014 | 4,782 | 4,318 | ||||||||||||
Long-Term Debt |
3,402 | 3,859 | 4,713 | ||||||||||||
Deferred Income Taxes |
1,299 | 1,345 | 1,275 | ||||||||||||
Other Liabilities |
551 | 562 | 542 | ||||||||||||
Shareholders Equity |
5,825 | 5,564 | 5,770 | ||||||||||||
Total Liabilities and Shareholders Equity |
$ | 16,091 | $ | 16,112 | $ | 16,618 | |||||||||
The accompanying notes are an integral part of these unaudited Consolidated Financial Statements.
4
FEDERATED DEPARTMENT STORES, INC.
Consolidated Statements of Cash Flows
(Unaudited)
(millions)
26 Weeks Ended | 26 Weeks Ended | |||||||||||
August 3, 2002 | August 4, 2001 | |||||||||||
Cash flows from continuing operating activities: |
||||||||||||
Net income |
$ | 371 | $ | 168 | ||||||||
Adjustments to reconcile net income to net cash
provided by continuing operating activities: |
||||||||||||
(Income) loss from discontinued operations |
(149 | ) | 14 | |||||||||
Depreciation and amortization |
331 | 321 | ||||||||||
Amortization of intangible assets |
| 14 | ||||||||||
Amortization of financing costs |
4 | 3 | ||||||||||
Amortization of unearned restricted stock |
2 | 2 | ||||||||||
Asset impairment and restructuring charges |
| 79 | ||||||||||
Changes in assets and liabilities: |
||||||||||||
Decrease in accounts receivable |
308 | 309 | ||||||||||
Increase in merchandise inventories |
(281 | ) | (130 | ) | ||||||||
Increase in supplies and prepaid expenses |
(11 | ) | (17 | ) | ||||||||
Increase in other assets not separately identified |
(27 | ) | (36 | ) | ||||||||
Increase (decrease) in accounts payable and
accrued liabilities not separately identified |
75 | (105 | ) | |||||||||
Decrease in current income taxes |
(15 | ) | (128 | ) | ||||||||
Decrease in deferred income taxes |
(41 | ) | (72 | ) | ||||||||
Increase (decrease) in other liabilities
not separately identified |
(11 | ) | 1 | |||||||||
Net cash provided by continuing operating activities |
556 | 423 | ||||||||||
Cash flows from continuing investing activities: |
||||||||||||
Purchase of property and equipment |
(219 | ) | (221 | ) | ||||||||
Capitalized software |
(23 | ) | (32 | ) | ||||||||
Increase in note receivable |
(39 | ) | | |||||||||
Acquisition of Liberty House, Inc., net of cash acquired |
| (173 | ) | |||||||||
Disposition of property and equipment |
| 27 | ||||||||||
Net cash used by continuing investing activities |
(281 | ) | (399 | ) | ||||||||
Cash flows from continuing financing activities: |
||||||||||||
Debt issued |
| 672 | ||||||||||
Financing costs |
| (10 | ) | |||||||||
Debt repaid |
(35 | ) | (353 | ) | ||||||||
Increase in outstanding checks |
13 | 49 | ||||||||||
Acquisition of treasury stock |
(139 | ) | (270 | ) | ||||||||
Issuance of common stock |
26 | 48 | ||||||||||
Net cash provided (used) by continuing
financing activities |
(135 | ) | 136 | |||||||||
(Continued)
5
FEDERATED DEPARTMENT STORES, INC.
Consolidated Statements of Cash Flows (continued)
(Unaudited)
(millions)
26 Weeks Ended | 26 Weeks Ended | ||||||||
August 3, 2002 | August 4, 2001 | ||||||||
Net cash provided by continuing operations |
140 | 160 | |||||||
Net cash provided (used) by discontinued operations |
622 | (125 | ) | ||||||
Net increase in cash |
762 | 35 | |||||||
Cash at beginning of period |
636 | 222 | |||||||
Cash at end of period |
$ | 1,398 | $ | 257 | |||||
Supplemental cash flow information: |
|||||||||
Interest paid |
$ | 175 | $ | 174 | |||||
Interest received |
9 | 3 | |||||||
Income taxes paid (net of refunds received) |
55 | 219 | |||||||
Schedule of non cash investing and financing activities: |
|||||||||
Consolidation of assets and debt of previously
unconsolidated subsidiary |
479 | | |||||||
Debt assumed in acquisition |
| 17 |
The accompanying notes are an integral part of these unaudited Consolidated Financial Statements.
6
FEDERATED DEPARTMENT STORES, INC.
Notes to Consolidated Financial Statements
(Unaudited)
1. Summary of Significant Accounting Policies
A description of the Companys significant accounting policies is included in the Companys Annual Report on Form 10-K for the fiscal year ended February 2, 2002 (the 2001 10-K). The accompanying Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto in the 2001 10-K. |
Because of the seasonal nature of the retail business, the results of operations for the 13 and 26 weeks ended August 3, 2002 and August 4, 2001 (which do not include the Christmas season) are not necessarily indicative of such results for the fiscal year. |
The Consolidated Financial Statements for the 13 and 26 weeks ended August 3, 2002 and August 4, 2001, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) considered necessary to present fairly, in all material respects, the consolidated financial position and results of operations of the Company and its subsidiaries. |
Certain reclassifications were made to prior years amounts to conform with the classifications of such amounts for the most recent year. |
In April 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. This statement rescinds or amends existing authoritative pronouncements to make various technical corrections, clarify meanings or describe their applicability under changed conditions. SFAS No. 145 is effective for transactions occurring after May 15, 2002. The adoption of this statement did not have a material impact on the Companys consolidated financial position, results of operations or cash flows. |
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This statement nullifies Emerging Issues Task Force Issue No. 94-3, Liability Recognition for certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring), and clarifies the requirements for recognition of a liability for a cost associated with an exit or disposal activity. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002. Management does not anticipate that the adoption of this statement will have a material impact on the Companys consolidated financial position, results of operations or cash flows. |
2. Discontinued Operations
On January 16, 2002, the Companys Board of Directors approved a plan to dispose of the operations of Fingerhut Companies, Inc. (Fingerhut), including the Arizona Mail Order, Figis and Popular Club Plan businesses conducted by Fingerhuts subsidiaries, which were acquired by the Company on March 18, 1999. The results of the Fingerhut operations (including the Arizona Mail Order, Figis and Popular Club Plan businesses |
7
FEDERATED DEPARTMENT STORES, INC.
Notes to Consolidated Financial Statements
(Unaudited)
conducted by Fingerhuts subsidiaries) have been classified as discontinued operations and prior periods have been restated. |
A loss on disposal of the Fingerhut operations was recorded in the fourth quarter of fiscal 2001. This loss included significant estimates for the wind-down of the operations of Fingerhut, the wind-down of the Fingerhut accounts receivable portfolio, losses on the sale of inventory and property and equipment, severance and retention costs and losses on the sale of subsidiary catalog businesses. As sales transactions are consummated and estimates are revised, additional income or losses are recorded within the discontinued operations line on the income statement and the amount the Company expects to realize from the net assets of discontinued operations is adjusted accordingly. |
During July 2002, the Company completed the sale of Fingerhuts core catalog accounts receivable portfolio, with the buyer assuming $450 million of receivables-backed debt, and in a separate transaction completed the sale of various other Fingerhut assets, including two distribution centers, the corporate headquarters, a data center, existing inventory, the Fingerhut name, customer lists and other miscellaneous property and equipment. Proceeds from these sales and collections on customer accounts receivable prior to the sale, net of operating expenses, exceeded the amount estimated to be received through wind-down of the portfolio and liquidation of the assets, resulting in an adjustment to the loss on disposal of discontinued operations totaling $236 million of income before income taxes, or $149 million after income taxes. |
The Company is currently in negotiations with third parties to sell as ongoing businesses Arizona Mail Order, Figis and Popular Club Plan. However, there can be no assurance that these negotiations will lead to consummated transactions. |
Effective February 3, 2002, the Company adopted SFAS No. 144, Accounting for the Impairment and Disposal of Long-Term Assets. Upon adoption, the Company changed the presentation of the net assets of discontinued operations to a gross presentation. All periods have been reclassified to reflect this statement. |
The net assets of Fingerhut included within discontinued operations are as follows: |
August 3, 2002 | February 2, 2002 | August 4, 2001 | ||||||||||
(millions) | ||||||||||||
Current assets |
$ | 556 | $ | 1,715 | $ | 1,894 | ||||||
Other assets |
37 | 97 | 558 | |||||||||
Current liabilities |
(322 | ) | (539 | ) | (252 | ) | ||||||
Total debt |
| (529 | ) | (653 | ) | |||||||
$ | 271 | $ | 744 | $ | 1,547 | |||||||
The Company originally estimated operating losses during the phase-out period of $292 million, net of tax effect. Actual operating losses for the 26 weeks ended August 3, 2002 were approximately $27 million, net of tax effect, and are currently anticipated to be approximately $17 million, net of tax effect, for the remainder of fiscal 2002. The difference between the originally estimated operating loss and the |
8
FEDERATED DEPARTMENT STORES, INC.
Notes to Consolidated Financial Statements
(Unaudited)
current estimate, resulted from the earlier than planned disposition of Fingerhut assets and is reflected in the $149 million adjustment to the loss on disposal of discontinued operations discussed above. |
Discontinued operations included Fingerhut sales which totaled $244 million for the 13 weeks ended August 4, 2001 and $510 million for the 26 weeks ended August 4, 2001. Estimated interest expense has been allocated to discontinued operations based upon the debt balances attributable to those operations. Interest expense allocated to discontinued operations was $21 million and $41 million for the 13 and 26 weeks ended August 4, 2001, respectively. For the 13 and 26 weeks ended August 4, 2001, the loss from discontinued operations was $23 million before income taxes and the associated tax benefit was $9 million. |
3. Acquisition
On July 9, 2001, the Company completed its acquisition of Liberty House, Inc. (Liberty House), a department store retailer operating 11 department stores and seven resort and specialty stores in Hawaii and one department store in Guam. The total purchase price of the Liberty House acquisition was approximately $200 million, consisting of approximately $183 million of cash and the assumption of $17 million of borrowed indebtedness. The acquisition was accounted for under the purchase method of accounting and, accordingly, the results of operations of Liberty House have been included in the Companys results of operations from the date of acquisition and the purchase price has been allocated to Liberty Houses assets and liabilities based on their estimated fair values as of that date. The amount of goodwill and other identified intangibles related to the Liberty House acquisition amounted to $95 million. |
4. Asset Impairment and Restructuring Charges
The Company recorded $79 million of asset impairment and restructuring charges during 2001, primarily related to the closure of the Sterns department store division, including $26 million of inventory valuation adjustments as a part of cost of sales. These inventory valuation adjustments consist of markdowns on merchandise that was sold at Sterns and that would not continue to be sold following the conversion of the Sterns stores to Macys and Bloomingdales stores. The Company recorded $4 million of asset impairment charges during 2001 related to an investment write-down as a result of the Companys determination, based on uncertain financing alternatives and a comparison to market values of similar publicly traded businesses, that this equity investment was impaired on an other than temporary basis. The remaining $49 million of restructuring charges includes $15 million of costs associated with converting the Sterns stores to Macys stores (including advertising, credit card issuance and promotion and other name change expenses), $10 million of costs to close and sell certain Sterns stores (including lease obligations and other store closing expenses), $9 million of duplicate central office costs and $15 million of severance costs related to the Sterns closure. |
9
FEDERATED DEPARTMENT STORES, INC.
Notes to Consolidated Financial Statements
(Unaudited)
In general, the Company recorded restructuring charges as expenses when they were incurred. The only costs that were accrued at the time management committed to the store closure and conversion plans were severance costs and lease obligations related to the Sterns closure, pursuant to Emerging Issues Task Force Abstract Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). |
The following tables show the activity associated with the Sterns restructuring accruals: |
February 2, | Restructuring | August 3, | ||||||||||||||
2002 | Charges | Payments | 2002 | |||||||||||||
(millions) | ||||||||||||||||
Long-term lease obligations |
$ | 18 | $ | | $ | (3 | ) | $ | 15 | |||||||
Severance |
$ | 2 | $ | | $ | (2 | ) | $ | |
The $15 million reserve that the Company still expects to pay out relates to liabilities associated with the disposition of Sterns properties. |
February 3, | Restructuring | August 4, | ||||||||||||||
2001 | Charges | Payments | 2001 | |||||||||||||
(millions) | ||||||||||||||||
Long-term lease obligations |
$ | 6 | $ | 3 | $ | | $ | 9 | ||||||||
Severance |
$ | | $ | 15 | $ | (14 | ) | $ | 1 |
The $9 million reserve that the Company expected to pay out related to liabilities associated with the disposition of Sterns properties. The 2001 restructuring charge for severance covered approximately 2,250 people and the remaining accrual at August 4, 2001 related to approximately 5 people. |
10
FEDERATED DEPARTMENT STORES, INC.
Notes to Consolidated Financial Statements
(Unaudited)
5. Taxes
In connection with the Sterns restructuring, income tax expense for the 13 and 26 weeks ended August 4, 2001 reflects a $44 million benefit related to the recognition of the effect of the difference between the financial reporting and tax bases of the Companys investment in Sterns Department Stores, Inc. upon disposition. |
6. Financing
During July 2002, in connection with the extension of the financing arrangement related to the Companys non-proprietary credit card receivables, the Company took certain actions which resulted in the consolidation of the Prime Credit Card Master Trust II (the Trust) for financial reporting purposes. In particular, the documentation governing the arrangement was amended to provide the Companys special purpose entity the ability to unilaterally remove specific transferred assets from the trust. Under SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, this amendment disqualified the arrangement for sale treatment and requires secured borrowing treatment for all sales of the Companys non-proprietary credit card receivables pursuant to this arrangement. The Company chose to take this action because it determined that off-balance sheet financing of its non-proprietary credit card receivables was no longer necessary to facilitate comparisons with its principal competitors and as a result of negative public sentiment toward off-balance sheet arrangements generally. The principal assets and liabilities of the Trust consist of non-proprietary credit card receivables transferred by the Company to the Trust in transactions previously accounted for as sales under SFAS 140 and the related debt issued by the Trust. As a result of the Companys actions, the transfer of receivables and debt are being treated as secured borrowings as of and subsequent to July 5, 2002. These actions increased the Companys consolidated assets and debt by $479 million at July 5, 2002 and $457 million at August 3, 2002. |
7. Goodwill and Other Intangible Assets
Effective February 3, 2002, the Company adopted SFAS No. 142,Goodwill and Other Intangible Assets. Upon adoption, the Company discontinued the practice of amortizing goodwill and indefinite lived intangible assets and determined that an impairment loss was not present. Impairment will be examined on an annual basis and more frequently if certain indicators are encountered. Intangible assets with determinable useful lives will continue to be amortized over their estimated useful lives. |
11
FEDERATED DEPARTMENT STORES, INC.
Notes to Consolidated Financial Statements
(Unaudited)
The following summarizes the Companys goodwill and other intangible assets and amortization expense: |
August 3, | February 2, | August 4, | |||||||||||
2002 | 2002 | 2001 | |||||||||||
(millions) | |||||||||||||
Amortizing intangible assets |
|||||||||||||
Customer lists |
$ | 2 | $ | 2 | $ | 2 | |||||||
Less accumulated amortization |
| | | ||||||||||
$ | 2 | $ | 2 | $ | 2 | ||||||||
Non-amortizing intangible assets |
|||||||||||||
Goodwill |
$ | 305 | $ | 305 | $ | 289 | |||||||
Tradenames |
376 | 376 | 382 | ||||||||||
$ | 681 | $ | 681 | $ | 671 | ||||||||
13 Weeks Ended | 26 Weeks Ended | ||||||||||||||||
August 3, | August 4, | August 3, | August 4, | ||||||||||||||
2002 | 2001 | 2002 | 2001 | ||||||||||||||
(millions) | |||||||||||||||||
Amortization expense |
|||||||||||||||||
Continuing operations |
$ | | $ | 7 | $ | | $ | 14 | |||||||||
Discontinued operations |
| 6 | | 11 | |||||||||||||
$ | | $ | 13 | $ | | $ | 25 | ||||||||||
The customer lists are being amortized over their estimated useful life of 7 years. |
12
FEDERATED DEPARTMENT STORES, INC.
Notes to Consolidated Financial Statements
(Unaudited)
The following is an illustration of the impact on income from continuing operations and net income, including discontinued operations, as if SFAS No. 142 was effective beginning February 4, 2001: |
13 Weeks Ended | 26 Weeks Ended | ||||||||||||||||
August 3, | August 4, | August 3, | August 4, | ||||||||||||||
2002 | 2001 | 2002 | 2001 | ||||||||||||||
(millions, except per share figures) | |||||||||||||||||
Income from continuing operations |
|||||||||||||||||
Reported income from continuing operations |
$ | 133 | $ | 124 | $ | 222 | $ | 182 | |||||||||
Intangible asset and goodwill amortization |
| 6 | | 12 | |||||||||||||
Adjusted income from continuing operations |
$ | 133 | $ | 130 | $ | 222 | $ | 194 | |||||||||
Basic earnings per share: |
|||||||||||||||||
Reported income from continuing operations |
$ | .66 | $ | .63 | $ | 1.10 | $ | .93 | |||||||||
Intangible asset and goodwill amortization |
| .03 | | .06 | |||||||||||||
Adjusted income from continuing operations |
$ | .66 | $ | .66 | $ | 1.10 | $ | .99 | |||||||||
Diluted earnings per share: |
|||||||||||||||||
Reported income from continuing operations |
$ | .66 | $ | .62 | $ | 1.09 | $ | .90 | |||||||||
Intangible asset and goodwill amortization |
| .03 | | .06 | |||||||||||||
Adjusted income from continuing operations |
$ | .66 | $ | .65 | $ | 1.09 | $ | .96 | |||||||||
Net income |
|||||||||||||||||
Reported net income |
$ | 282 | $ | 110 | $ | 371 | $ | 168 | |||||||||
Intangible asset and goodwill amortization |
| 9 | | 18 | |||||||||||||
Adjusted net income |
$ | 282 | $ | 119 | $ | 371 | $ | 186 | |||||||||
Basic earnings per share: |
|||||||||||||||||
Reported net income |
$ | 1.40 | $ | .56 | $ | 1.84 | $ | .85 | |||||||||
Intangible asset and goodwill amortization |
| .05 | | .10 | |||||||||||||
Adjusted net income |
$ | 1.40 | $ | .61 | $ | 1.84 | $ | .95 | |||||||||
Diluted earnings per share: |
|||||||||||||||||
Reported net income |
$ | 1.39 | $ | .55 | $ | 1.82 | $ | .83 | |||||||||
Intangible asset and goodwill amortization |
| .04 | | .09 | |||||||||||||
Adjusted net income |
$ | 1.39 | $ | .59 | $ | 1.82 | $ | .92 | |||||||||
13
FEDERATED DEPARTMENT STORES, INC.
Notes to Consolidated Financial Statements
(Unaudited)
8. Earnings Per Share
The following tables set forth the computation of basic and diluted earnings per share from continuing operations: |
13 Weeks Ended | |||||||||||||||||||||||||
August 3, 2002 | August 4, 2001 | ||||||||||||||||||||||||
Income | Shares | Income | Shares | ||||||||||||||||||||||
(millions, except per share figures) |
|||||||||||||||||||||||||
Income from continuing operations and average number of shares outstanding |
$ | 133 | 200.9 | $ | 124 | 194.0 | |||||||||||||||||||
Shares to be issued under deferred
compensation plans |
| .6 | | .6 | |||||||||||||||||||||
$ | 133 | 201.5 | $ | 124 | 194.6 | ||||||||||||||||||||
Basic earnings per share |
$ | .66 | $ | .63 | |||||||||||||||||||||
Effect of dilutive securities: |
|||||||||||||||||||||||||
Warrants |
| | | 2.5 | |||||||||||||||||||||
Stock options |
| 2.0 | | 2.5 | |||||||||||||||||||||
$ | 133 | 203.5 | $ | 124 | 199.6 | ||||||||||||||||||||
Diluted earnings per share |
$ | .66 | $ | .62 | |||||||||||||||||||||
26 Weeks Ended | |||||||||||||||||||||||||
August 3, 2002 | August 4, 2001 | ||||||||||||||||||||||||
Income | Shares | Income | Shares | ||||||||||||||||||||||
(millions, except per share figures) |
|||||||||||||||||||||||||
Income from continuing operations and average number of shares outstanding operations and average number |
$ | 222 | 201.0 | $ | 182 | 195.7 | |||||||||||||||||||
Shares to be issued under deferred
compensation plans |
| .6 | | .6 | |||||||||||||||||||||
$ | 222 | 201.6 | $ | 182 | 196.3 | ||||||||||||||||||||
Basic earnings per share |
$ | 1.10 | $ | .93 | |||||||||||||||||||||
Effect of dilutive securities: |
|||||||||||||||||||||||||
Warrants |
| | | 2.7 | |||||||||||||||||||||
Stock options |
| 2.1 | | 2.8 | |||||||||||||||||||||
$ | 222 | 203.7 | $ | 182 | 201.8 | ||||||||||||||||||||
Diluted earnings per share |
$ | 1.09 | $ | .90 | |||||||||||||||||||||
14
FEDERATED DEPARTMENT STORES, INC.
Notes to Consolidated Financial Statements
(Unaudited)
In addition to the warrants and stock options reflected in the foregoing table, stock options to purchase 13.8 million and 10.1 million shares of common stock at prices ranging from $40.44 to $79.44 per share were outstanding at August 3, 2002 and August 4, 2001, respectively, but were not included in the computation of diluted earnings per share because the exercise price thereof exceeded the average market price and their inclusion would have been antidilutive. |
15
FEDERATED DEPARTMENT STORES, INC.
Managements Discussion and Analysis
of Financial Condition and Results of Operations
For purposes of the following discussion, all references to second quarter of 2002 and second quarter of 2001 are to the Companys 13-week fiscal periods ended August 3, 2002 and August 4, 2001, respectively, and all references to 2002 and 2001 are to the Companys 26-week fiscal periods ended August 3, 2002 and August 4, 2001, respectively. |
On January 16, 2002, the Companys Board of Directors approved a plan to dispose of the operations of Fingerhut Companies, Inc. (Fingerhut), including the Arizona Mail Order, Figis and Popular Club Plan businesses conducted by Fingerhuts subsidiaries, which were acquired by the Company on March 18, 1999. The decision to dispose of Fingerhut was based on managements determination that there was no longer any strategic value to Federated in retaining the Fingerhut operations and there was no expectation, based on Fingerhuts historical earnings and future prospects, that this business would contribute meaningfully to the Companys future financial performance. The plan of disposition approved by the Companys board of directors contemplated a disposal by liquidation of the Fingerhut core catalog operations and a disposal by sale of Fingerhuts three catalog subsidiaries, Arizona Mail Order, Figis and Popular Club Plan. |
The Companys Consolidated Financial Statements for all periods account for Fingerhut as a discontinued operation, as a result of the Companys decision to dispose of the Fingerhut operations. Unless otherwise indicated, the following discussion relates to the Companys continuing operations. |
On February 2, 2001, the Company decided to close its Sterns department store division, and to convert most of its Sterns stores to Macys and Bloomingdales stores, in order to expand and strengthen Macys and Bloomingdales. |
On July 9, 2001, the Company completed its acquisition of Liberty House, a department store retailer operating 11 department stores and seven resort and specialty stores in Hawaii and one department store in Guam. The total purchase price of the Liberty House acquisition was approximately $200 million, consisting of approximately $183 million of cash and the assumption of approximately $17 million of indebtedness. The acquisition was accounted for under the purchase method of accounting and, accordingly, the results of operations of Liberty House have been included in the Companys results of operations from the date of acquisition and the purchase price has been allocated to Liberty Houses assets and liabilities based on their estimated fair values as of that date. All Liberty House stores were converted to Macys stores in 2001. |
Results of Operations
Comparison of the 13 Weeks Ended August 3, 2002 and August 4, 2001
Net income for the second quarter of 2002 totaled $282 million compared to $110 million for the second quarter of 2001. |
Net sales for the second quarter of 2002 totaled $3,486 million, relatively flat compared to net sales of $3,488 million for the second quarter of 2001. The overall sales trend in the second quarter of 2002 was disappointing and negatively impacted by weaker economic conditions and below normal levels |
16
FEDERATED DEPARTMENT STORES, INC.
Managements Discussion and Analysis
of Financial Condition and Results of Operations
of clearance merchandise in the stores. Sales were relatively strong in private brands, furniture, jewelry and young mens. On a comparable store basis (sales from stores in operation throughout 2001 and 2002), net sales for the second quarter of 2002 decreased 2.8% compared to the second quarter of 2001. |
Cost of sales was 58.8% of net sales for the second quarter of 2002, compared to 61.2% for the second quarter of 2001. Cost of sales for the second quarter of 2001, excluding the $7 million Sterns inventory valuation adjustments, was 61.0%. In the second quarter of 2002, the cost of sales rate and corresponding gross margin rate benefited from lower markdowns and lower shortage resulting from the lower inventory levels throughout the quarter. The valuation of merchandise inventories on the last-in, first-out basis did not impact cost of sales in either period. |
Selling, general and administrative (SG&A) expenses were 32.6% of net sales for the second quarter of 2002 compared to 31.9% for the second quarter of 2001. SG&A expenses increased 2.0% in actual dollars compared to the second quarter of 2001, reflecting the impact of higher occupancy related expenses, such as depreciation, rent, taxes and insurance. SG&A expenses in the second quarter of 2002 benefited from lower goodwill and intangible amortization as a result of the adoption of Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. Effective February 3, 2002, the Company ceased amortizing goodwill and indefinite lived intangible assets. SG&A expenses in the second quarter of 2001 included amortization expense of $7 million, 0.2% of net sales, related to goodwill and indefinite lived intangible assets. |
The Company recorded $34 million of restructuring costs during the second quarter of 2001 primarily related to the closure of the Sterns department store division, including $7 million of inventory valuation adjustments as a part of cost of sales. These inventory valuation adjustments consist of markdowns on merchandise that was sold at Sterns and that would not continue to be sold following the conversion of the Sterns stores to Macys and Bloomingdales stores. The remaining $27 million of restructuring charges includes $9 million of costs associated with converting the Sterns stores to Macys stores (including advertising, credit card issuance and promotion and other name change expenses), $10 million of costs to close and sell certain Sterns stores (including lease obligations and other store closing expenses), $1 million of duplicate central office costs and $7 million of severance related to the Sterns closure. |
Net interest expense was $78 million for the second quarter of 2002 and for the second quarter of 2001. |
The Companys effective income tax rate of 39.6% for the second quarter of 2002 differs from the federal income tax statutory rate of 35.0% principally because of the effect of state and local income taxes. The Companys effective income tax rate of 8.0% for the second quarter of 2001 differs from the federal income tax statutory rate of 35.0% principally because of the effect of the disposition of its Sterns subsidiary, state and local income taxes and permanent differences arising from the amortization of intangible assets. Income tax expense for the second quarter of 2001 reflects a $44 million benefit related to the recognition of the effect of the difference between the financial reporting and tax bases of the Companys investment in Sterns Department Stores, Inc. upon disposition. |
17
FEDERATED DEPARTMENT STORES, INC.
Managements Discussion and Analysis
of Financial Condition and Results of Operations
During July 2002, the Company completed the sale of Fingerhuts core catalog accounts receivable portfolio, with the buyer assuming $450 million of receivables-backed debt, and in a separate transaction completed the sale of various other Fingerhut assets, including two distribution centers, the corporate headquarters, a data center, existing inventory, the Fingerhut name, customer lists and other miscellaneous property and equipment. Proceeds from these sales and collections on customer accounts receivable prior to the sale, net of operating expenses, exceeded the amount estimated to be received through wind-down of the portfolio and liquidation of the assets, resulting in an adjustment to the loss on disposal of discontinued operations totaling $236 million of income before income taxes, or $149 million after income taxes. |
Comparison of the 26 Weeks Ended August 3, 2002 and August 4, 2001
Net income for 2002 totaled $371 million compared to $168 million for 2001.
Net sales for 2002 totaled $6,939 million, compared to net sales of $7,044 million for 2001, a decrease of 1.5%. The overall sales trend in 2002 was disappointing and negatively impacted by weaker economic conditions, however, sales were relatively strong in private brands, furniture, jewelry and young mens. On a comparable store basis (sales from stores in operation throughout 2001 and 2002), net sales decreased 2.9% compared to 2001. |
Cost of sales was 59.5% of net sales for 2002, compared to 61.2% for 2001. Cost of sales as a percent of net sales for department stores, excluding $26 million Sterns restructuring charges, was 60.8% in 2001. The cost of sales rate in 2002 benefited from lower markdowns resulting from the lower inventory levels throughout 2002. The valuation of department store merchandise inventories on the last-in, first-out basis did not impact cost of sales in either period. |
SG&A expenses were 33.0% of net sales for 2002 compared to 32.5% for 2001. SG&A expenses in actual dollars for 2002 were relatively flat compared to 2001; however, due to the lower sales level, SG&A expenses increased 0.5 percentage points as a percent of net sales. SG&A expenses in 2002 benefited from lower goodwill and intangible amortization as a result of the adoption of SFAS No. 142, Goodwill and Other Intangible Assets. Effective February 3, 2002, the Company ceased amortizing goodwill and indefinite lived intangible assets. SG&A expenses in 2001 included amortization expense of $14 million, 0.2% of net sales, related to goodwill and indefinite lived intangible assets. The effect of the non-amortization provisions of SFAS No. 142 were offset by the impact of higher occupancy related expenses, such as depreciation, rent, taxes and insurance. |
The Company recorded $79 million of asset impairment and restructuring charges during 2001, primarily related to the closure of the Sterns department store division, including $26 million of inventory valuation adjustments as part of cost of sales. These inventory valuation adjustments consist of markdowns on merchandise that was sold at Sterns and that would not continue to be sold following the conversion of the Sterns stores to Macys and Bloomingdales stores. The Company recorded $4 million of asset impairment charges during 2001 related to an investment write-down as a result of the Companys determination, based on uncertain financing alternatives and a comparison to market values of similar publicly traded businesses, that this equity investment was impaired on an other than temporary basis. The remaining $49 million of restructuring charges includes $15 |
18
FEDERATED DEPARTMENT STORES, INC.
Managements Discussion and Analysis
of Financial Condition and Results of Operations
million of costs associated with converting Sterns stores to Macys stores (including advertising, credit card issuance and promotion and other name change expenses), $10 million of costs to close and sell certain Sterns stores (including lease obligations and other store closing expenses), $9 million of duplicate central office costs and $15 million of severance costs related to the Sterns closure. |
Net interest expense was $152 million for 2002, compared to $156 million for 2001, primarily due to lower levels of borrowings. |
The Companys effective income tax rate of 39.7% for 2002 differs from the federal income tax statutory rate of 35.0% principally because of the effect of state and local income taxes. The Companys effective income tax rate of 22.4% for 2001 differs from the federal income tax statutory rate of 35.0% principally because of the effect of the disposition of its Sterns subsidiary, state and local income taxes and permanent differences arising from the amortization of intangible assets. Income tax expense for 2001 reflects a $44 million benefit related to the recognition of the effect of the difference between the financial reporting and tax bases of the Companys investment in Sterns Department Stores, Inc. upon disposition. |
During July 2002, the Company completed the sale of Fingerhuts core catalog accounts receivable portfolio, with the buyer assuming $450 million of receivables-backed debt, and in a separate transaction completed the sale of various other Fingerhut assets, including two distribution centers, the corporate headquarters, a data center, existing inventory, the Fingerhut name, customer lists and other miscellaneous property and equipment. Proceeds from these sales and collections on customer accounts receivable prior to the sale, net of operating expenses, exceeded the amount estimated to be received through wind-down of the portfolio and liquidation of the assets, resulting in an adjustment to the loss on disposal of discontinued operations totaling $236 million of income before income taxes, or $149 million after income taxes. |
Liquidity and Capital Resources
The Companys principal sources of liquidity are cash from operations, cash on hand and available credit facilities. |
Net cash provided by continuing operating activities in 2002 was $556 million, compared to the $423 million provided in 2001, reflecting higher income from continuing operations, a smaller decrease in income tax liabilities, a greater increase in merchandise inventories and an increase in accounts payable and other accrued liabilities in 2002 versus a decrease in 2001. |
Net cash used by continuing investing activities was $281 million for 2002. Investing activities for 2002 included purchases of property and equipment totaling $219 million, capitalized software of $23 million and the acceptance of a $39 million note receivable related to the sale of certain Fingerhut assets. Investing activities for 2001 included the acquisition of Liberty House, purchases of property and equipment totaling $221 million and capitalized software of $32 million. The Company opened seven new department stores and a furniture gallery during 2002 and plans to open six additional department stores and two home stores during the remainder of 2002. |
19
FEDERATED DEPARTMENT STORES, INC.
Managements Discussion and Analysis
of Financial Condition and Results of Operations
Net cash used by the Company for all continuing financing activities was $135 million for 2002. The Company purchased 3.8 million shares of its Common Stock under its stock repurchase program during 2002 at an approximate cost of $139 million. As of August 3, 2002, the Company had approximately $460 million of the $1,500 million authorized for its stock repurchase program remaining. The Company may continue or, from time to time, suspend repurchases of shares under its stock repurchase program, depending on prevailing market conditions, alternate uses of capital and other factors. |
Net cash provided to the Company by discontinued operations was $622 million for 2002, primarily due to the sale of Fingerhuts core catalog accounts receivable portfolio and the sale of various other Fingerhut assets. |
During July 2002, in connection with the extension of the financing arrangement related to the Companys non-proprietary credit card receivables, the Company took certain actions which resulted in the consolidation of the Prime Credit Card Master Trust II (the Trust) for financial reporting purposes. In particular, the documentation governing the arrangement was amended to provide the Companys special purpose entity the ability to unilaterally remove specific transferred assets from the Trust. Under SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, this amendment disqualified the arrangement for sale treatment and requires secured borrowing treatment for all sales of the Companys non-proprietary credit card receivables pursuant to this arrangement. The Company chose to take this action because it determined that off-balance sheet financing of its non-proprietary credit card receivables was no longer necessary to facilitate comparisons with its principal competitors and as a result of negative public sentiment toward off-balance sheet arrangements generally. The principal assets and liabilities of the Trust consist of non-proprietary credit card receivables transferred by the Company to the Trust in transactions previously accounted for as sales under SFAS No. 140 and the related debt issued by the Trust. As a result of the Companys actions, the transfer of receivables and debt are being treated as secured borrowings as of and subsequent to July 5, 2002. These actions increased the Companys consolidated assets and debt by $479 million at July 5, 2002 and $457 million at August 3, 2002. |
Management believes that, with respect to the Companys current operations, cash on hand and funds from operations, together with its credit facilities and other capital resources, will be sufficient to cover its reasonably foreseeable working capital, capital expenditure and debt service requirements in both the near term and over the longer term. The Companys ability to generate funds from operations may be affected by numerous factors, including general economic conditions and levels of consumer confidence and demand; however, the Company expects to be able to manage its working capital levels and capital expenditure amounts so as to maintain its liquidity levels. Depending upon conditions in the capital markets and other factors, the Company may from time to time consider the issuance of debt or other securities, or other possible capital markets transactions, the proceeds of which could be used to refinance existing indebtedness or for other corporate purposes. |
20
FEDERATED DEPARTMENT STORES, INC.
Managements Discussion and Analysis
of Financial Condition and Results of Operations
Management believes the department store business and other retail businesses will continue to consolidate. Accordingly, the Company intends from time to time to consider additional acquisitions of, and investments in, department stores and other complementary assets and companies. Acquisition transactions, if any, are expected to be financed through a combination of cash on hand and from operations and the possible issuance from time to time of long-term debt or other securities. |
Outlook
The Company expects to achieve earnings per share from continuing operations of $.35 to $.45 a share in the third quarter and $2.05 to $2.20 for the fourth quarter, which is consistent with the Companys prior guidance. The Company now expects a comparable store sales increase of 1 to 3 percent for the third and fourth quarters of 2002, given the current weakness in the economy and the Companys recent lower-than-anticipated sales trend. This compares to prior guidance of 3 to 3.5 percent for the same periods. In estimating comparable store sales and earnings per share, the Company assumed that general economic conditions and consumer confidence and demand would be such that sales would increase by the forecasted amounts. Additionally, the Company is assuming improvements in the gross margin rates for the third and fourth quarters, benefiting from lower inventory levels throughout the third and fourth quarters, with the year-end comparable store inventory levels expected to be relatively flat compared to the prior year. SG&A expenses are expected to increase by 1 to 3 percent in each quarter; however, the SG&A rate as a percent to net sales is expected to improve compared to last year in both the third and fourth quarters. The accuracy of these assumptions and of the resulting forecasts is subject to uncertainties and circumstances beyond the Companys control. Consequently, actual results could differ materially from the forecasted results. See Forward-Looking Statements for a discussion of matters that could cause actual results to vary from the Companys expectations. |
21
PART II OTHER INFORMATION
FEDERATED DEPARTMENT STORES, INC.
22
PART II OTHER INFORMATION
FEDERATED DEPARTMENT STORES, INC.
Item 6. Exhibits and Reports on Form 8-K
(a) | Exhibits |
10.1 | Amended and Restated 364-Day Credit Agreement, dated as of June 28, 2002, by and among the Company, as Borrower, the Initial Lenders Named Herein, as Initial Lenders, Citibank, N.A., as Administrative Agent and as Paying Agent, JPMorgan Chase Bank, as Administrative Agent, Fleet National Bank, as Syndication Agent, Bank of America, N.A., Credit Suisse First Boston and U.S. Bank National Association, as Documentation Agents, and Salomon Smith Barney, Inc. and J.P. Morgan Securities, Inc., as lead arrangers and bookrunners. |
23
PART II OTHER INFORMATION
FEDERATED DEPARTMENT STORES, INC.
10.2 | First Amendment to Pooling and Servicing Agreement, dated as of July 5, 2002, by and among Prime II Receivables Corporation, as Transferor, FDS Bank, as Servicer, and JPMorgan Chase Bank, as Trustee. | |
10.3 | Third Amendment to Class A Certificate Purchase Agreement, dated as of July 30, 2002, by and among Prime II Receivables Corporation, as Transferor, FDS Bank, as Servicer, Market Street Funding Corporation, as Class A Purchaser, and PNC Bank, National Association, as Agent. | |
10.4 | Third Amendment to Class B Certificate Purchase Agreement, dated as of July 30, 2002, by and among Prime II Receivables Corporation, as Transferor, FDS Bank, as Servicer, Market Street Funding Corporation, as Class B Purchaser, and PNC Bank, National Association, as Agent. | |
10.5 | Second Amendment to Series 1997-1 Variable Funding Supplement, dated as of July 5, 2002, by and among Prime II Receivables Corporation, as Transferor, FDS Bank, as Servicer, and JPMorgan Chase Bank, as Trustee. | |
10.6 | Second Amendment to Series 1999-1 Variable Funding Supplement, dated as of July 5, 2002, by and among Prime II Receivables Corporation, as Transferor, FDS Bank, as Servicer, and JPMorgan Chase Bank, as Trustee. |
(b) | Reports on Form 8-K | ||
No reports were filed on Form 8-K during the quarter ended August 3, 2002. |
24
FEDERATED DEPARTMENT STORES, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
FEDERATED DEPARTMENT STORES, INC. | ||||
Dated: | November 15, 2002 | By: /S/ DENNIS J. BRODERICK Name: Dennis J. Broderick Title: Senior Vice President, General Counsel and Secretary |
||
By: /S/ JOEL A. BELSKY Name: Joel A. Belsky Title: Vice President and Controller (Principal Accounting Officer) |
25
CERTIFICATIONS
I, James M. Zimmerman, Chief Executive Officer of Federated Department Stores, Inc., certify that:
1. | I have reviewed this quarterly report on Form 10-Q of Federated Department Stores, Inc.; | ||
2. | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and | ||
3. | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. |
November 15, 2002 |
/S/ JAMES M. ZIMMERMAN James M. Zimmerman |
I, Karen M. Hoguet, Chief Financial Officer of Federated Department Stores, Inc., certify that:
1. | I have reviewed this quarterly report on Form 10-Q of Federated Department Stores, Inc.; | ||
2. | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and | ||
3. | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. |
November 15, 2002 |
/S/ KAREN M. HOGUET Karen M. Hoguet |
26