This excerpt taken from the RL 10-Q filed Feb 10, 2005.
Liquidity and Capital Resources
Our primary ongoing cash requirements are to fund growth in working capital (primarily accounts receivable and inventory) for projected sales increases, retail store expansion, construction and renovation of shop-within-shops, investment in the technological upgrading of our information systems, acquisitions, dividends and other corporate activities. Sources of liquidity to fund ongoing and future cash requirements include cash flows from operations, cash and cash equivalents on hand, our credit facility and other potential sources of borrowings.
We expect that cash flow from operations will continue to be sufficient to fund our current level of operations, capital requirements, cash dividends and our stock repurchase plan. However, in the event of a material acquisition, material contingencies or material adverse business developments, we may need to draw on our credit facility or other potential sources of borrowing.
On February 1, 2005, the Board of Directors approved an additional stock repurchase plan which allows for the purchase of up to an additional $100 million in our stock in addition to the approximately $21 million of repurchase authority remaining under our original program which expires in 2006. The new repurchase plan does not have a termination date.
As described below, our ability to borrow under our credit facility is subject to our maintenance of financial and other covenants. As of January 1, 2005, we had no direct borrowings under the credit facility and were in compliance with our covenants.
With respect to pending litigation, the only matter which, if adversely determined, could have a material adverse effect on our liquidity and capital resources is the litigation with Jones Apparel Group, Inc., in which Jones is seeking, among other things, compensatory damages of $550 million and unspecified punitive damages. (See Part II, Item 1 Legal Proceedings.) We continue to believe that we are right on the merits and intend to continue to defend the case vigorously. We do not believe that this matter is likely to have a material adverse effect on our liquidity or capital resources or our ability to borrow under the credit facility.
As of January 1, 2005, we had $362.9 million in cash and cash equivalents and $308.0 million of debt outstanding compared to $337.7 million in cash and cash equivalents and $284.7 million of debt outstanding at December 27, 2003. This represents an increase in our cash net of debt position of $2.0 million, which was primarily attributable to cash flow from operations partially offset by the following factors: the appreciation of the Euro increased the dollar equivalent of our Euro denominated debt by $23.2 million and the use of $242.5 million cash to acquire certain assets net of certain assumed liabilities of RL Childrenswear Company LLC. As of January 1, 2005, we had $308.0 million outstanding in long-term Euro denominated debt, based on the Euro exchange rate at that date. Our capital expenditures were $124.9 million for the nine months ended January 1, 2005, compared to $69.7 million for the nine months ended December 27, 2003.
Accounts receivable increased to $334.3 million, or 14.4%, at January 1, 2005 compared to $292.2 million at December 27, 2003, primarily due to $28.0 million and $38.5 million of accounts receivables associated with Lauren and Childrenswear lines, respectively, and $6.8 million due to favorable impact of foreign currency exchange rate fluctuations on our European businesses accounts receivable, partially offset by decreases in accounts receivable in our other lines. Inventories increased to $425.1 million, or 0.7%, at January 1, 2005 compared to $422.2 million at December 27, 2003, which primarily reflects the addition of inventory for the new Lauren and Childrenswear lines in the amount of $40.1 million and $16.2 million, respectively, and a $11.4 million increase in our European inventory level due to foreign currency exchange rate fluctuations, partially offset by reduced inventory in our other wholesale lines due to inventory management efforts, as well as reductions in our domestic retail inventory as a result of inventory management efforts. Accounts payable and accrued expenses and other increased to a total of $457.6 million, or 7.8% at January 1, 2005 compared to
$424.2 million at December 27, 2003. This increase is primarily the result of the appreciation of the Euro and the addition of payables associated with the Lauren and childrens wholesale lines.
Net Cash Provided by Operating Activities. Net cash provided by operating activities increased to $360.0 million during the nine-month period ended January 1, 2005, compared to $182.7 million for the nine-month period ended December 27, 2003. This $177.3 million increase in cash flow was driven primarily by year-over-year changes in working capital described above and the increase in net income.
During Fiscal 2003, we completed a strategic review of our European operations and formalized our plans to centralize and more efficiently consolidate these operations. In connection with the implementation of this plan, we had total cash outlays of approximately $5.5 million during the nine months ended January 1, 2005. During Fiscal 2001, we implemented the 2001 Operational Plan, and total cash outlays related to this plan were $2.0 million during the nine months ended January 1, 2005. We expect that the remaining liabilities under these plans will be paid during Fiscal 2005 subject to applicable contract terms.
Net Cash Used in Investing Activities. Net cash used in investing activities was $368.7 million for the nine months ended January 1, 2005, as compared to $87.1 million for the nine months ended December 27, 2003. For the nine months ended January 1, 2005, net cash used also reflected $242.5 million for the acquisition of certain assets of RL Childrenswear, LLC. For both periods, net cash used reflected capital expenditures related to retail expansion and upgrading our systems and facilities, as well as shop-within-shop expenditures. Our anticipated capital expenditures for all of Fiscal 2005 approximate $143.5 million. The Fiscal 2005 and Fiscal 2004 amounts also include $1.3 million and $1.0 million, respectively for earn-out payments in connection with the P.R.L. Fashions of Europe SRL acquisition and $9.0 million in Fiscal 2004 related to the acquisition of our Japanese businesses.
Net Cash Provided by Financing Activities. Net cash provided by financing activities was $24.9 million for the nine months ended January 1, 2005, compared to $93.2 million used in the nine months ended December 27, 2003. Cash provided by financing activities during the nine months ended January 1, 2005 consists of $42.2 million received from the exercise of stock options, which was partially offset by the payment of $15.1 million of dividends. Cash used in financing activities during the nine months ended December 27, 2003, consisted primarily of the net repayment of short-term borrowings of $100.9 million.
Prior to October 6, 2004, we had a credit facility with a syndicate of banks and consisting of a $300.0 million revolving line of credit, subject to increase to $375.0 million, which was available for direct borrowings and the issuance of letters of credit. It was scheduled to mature on November 18, 2005.
On October 6, 2004, we, in substance, expanded and extended this credit facility by entering into a new Credit Agreement, dated as of that date, with JPMorgan Chase Bank, as Administrative Agent, The Bank of New York, Fleet National Bank, SunTrust Bank and Wachovia Bank National Association, as Syndication Agents, J.P. Morgan Securities Inc., as sole Bookrunner and Sole Lead Arranger, and a syndicate of lending banks that included each of the lending banks under the prior credit agreement.
The current credit facility, which is otherwise substantially on the same terms as the prior credit facility, provides for a $450.0 million revolving line of credit, subject to increase to $525.0 million, which is available for direct borrowings and the issuance of letters of credit. It will mature on October 6, 2009. As of January 1, 2005, we had no direct borrowings outstanding under the credit facility. Direct borrowings under the credit facility bear interest, at our option, at a rate equal to (i) the higher of (x) the weighted average overnight Federal funds rate, as published by the Federal Reserve Bank of New York, plus one-half of one percent, and (y) the prime commercial lending rate of JPMorgan Chase Bank in effect from time to time, or (ii) the LIBO Rate (as defined in the credit facility) in effect from time to time, as adjusted for the Federal Reserve Boards Eurocurrency Liabilities maximum reserve percentage, and a margin based on our then current credit ratings.
The credit facility requires us to maintain certain covenants:
The credit facility also contains covenants that, subject to specified exceptions, restrict our ability to:
Upon the occurrence of an event of default under the credit facility, the lenders may cease making loans, terminate the credit facility, and declare all amounts outstanding to be immediately due and payable. The credit facility specifies a number of events of default (many of which are subject to applicable grace periods), including, among others, the failure to make timely principal and interest payments or to satisfy the covenants, including the financial covenants described above. Additionally, the credit facility provides that an event of default will occur if Mr. Ralph Lauren and related entities fail to maintain a specified minimum percentage of the voting power of our common stock.
At January 1, 2005, we were contingently liable for $34.9 million in outstanding letters of credit related primarily to commitments for the purchase of inventory. We incur a financing charge of ten basis points per month on the average monthly balance of these outstanding letters of credit.
Fiscal 2005 dividends of $0.05 per outstanding share declared to stockholders of record at the close of business on July 2, 2004, October 1, 2004 and December 20, 2004, were paid on July 16, 2004 and October 15, 2004 and January 14, 2005, respectively.
Derivative Instruments. In May 2003, we entered into an interest rate swap that will terminate in November 2006. The interest rate swap is being used to convert 105.2 million, 6.125% fixed rate borrowings into 105.2 million, EURIBOR minus 1.55% variable rate borrowings. On April 6, 2004 and October 4, 2004 the Company executed interest rate swaps to convert the fixed interest rate on a total of 100 million of the Eurobonds to a EURIBOR plus 3.14% variable rate borrowing. After the execution of these swaps, approximately 22 million of the Eurobonds remained at a fixed interest rate. We entered into the interest rate swaps to minimize the impact of changes in the fair value of the Euro debt due to changes in EURIBOR, the benchmark interest rate. The swaps have been designated as fair value hedges under SFAS No. 133. Hedge ineffectiveness is measured as the difference between the respective gains or losses recognized resulting from changes in the benchmark interest rate, and were immaterial in Fiscal 2004 and for the nine months ended January 1, 2005. In addition, we have designated all of the principal of the Euro debt as a hedge of our net investment in certain foreign subsidiaries. As a result, the changes in the fair value of the Euro debt resulting from changes in the Euro rate are reported net of income taxes in accumulated other comprehensive income in the consolidated financial statements as an unrealized gain or loss on foreign currency hedges.
We enter into forward foreign exchange contracts as hedges relating to identifiable currency positions to reduce our risk from exchange rate fluctuations on inventory and intercompany royalty payments. Gains and losses on these contracts are deferred and recognized as adjustments to either the basis of those assets or foreign exchange gains/losses, as applicable. At January 1, 2005, we had the following foreign exchange
contracts outstanding: (i) to deliver 116.3 million in exchange for $151.3 million through Fiscal 2006 and (ii) to deliver ¥8,248 million in exchange for $71.0 million through Fiscal 2008. At January 1, 2005, the fair value of these contracts resulted in unrealized losses net of tax of $4.5 million and $10.2 million for the Euro forward contracts and Japanese Yen forward contracts, respectively.