UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549FORM 10-Q
(Mark One) [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended May 4, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITES EXCHANGE ACT OF 1934 For the transition period from __________ to __________. Commission file number 1-6140
DILLARD'S, INC.
(Exact name of registrant as specified in its charter) DELAWARE 71-0388071 (State or other jurisdiction (IRS Employer of incorporation or organization) Identification Number) 1600 CANTRELL ROAD, LITTLE ROCK, ARKANSAS 72201 (Address of principal executive office) (Zip Code) (501) 376-5200 (Registrant's telephone number, including area code) Indicate by checkmark 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 time that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No_ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. CLASS A COMMON STOCK as of May 4, 2002 80,341,567 CLASS B COMMON STOCK as of May 4, 2002 4,010,929
IndexDILLARD'S, INC.
Page Number
Part I. Financial Information
Item 1. Financial Statements (Unaudited): Consolidated Balance Sheets as of May 4, 2002, February 2, 2002 and May 5, 2001 3 Consolidated Statements of Income and Retained Earnings for the Three and Twelve Month Periods Ended May 4, 2002 and May 5, 2001 4 Consolidated Statements of Cash Flows for the Three Months Ended May 4, 2002 and May 5, 2001 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Quantitative and Qualitative Disclosure About Market Risk 14
Part II. Other Information
Item 1. Legal Proceedings 14 Item 2. Changes in Securities and Use of Proceeds 14 Item 3. Defaults Upon Senior Securities 15 Item 4. Submission of Matters to a Vote of Security Holders 15 Item 5. Other Information 15 Item 6. Exhibits and Reports on Form 8-K 15 Signatures 15
PART 1. FINANCIAL INFORMATION
ITEM 1. Financial Statements
DILLARD'S, INC.CONSOLIDATED BALANCE SHEETS(Unaudited)(In Thousands)
May 4, February 2, May 5, 2002 2002 2001 ------------------------------------------------- Assets Current Assets: Cash and cash equivalents $ 327,114 $ 152,960 $ 260,105 Accounts receivable, net 890,073 1,074,940 882,616 Merchandise inventories 1,903,154 1,561,863 2,126,225 Other current assets 23,948 24,747 35,968 ------------------------------------------------- Total current assets 3,144,289 2,814,510 3,304,914 Property and Equipment, net 3,428,478 3,455,715 3,492,298 Goodwill, net 569,545 569,545 581,248 Other Assets 228,653 234,789 271,029 ------------------------------------------------- Total Assets $ 7,370,965 $ 7,074,559 $ 7,649,489 ================================================= Liabilities and Stockholders' Equity Current Liabilities: Trade accounts payable and accrued expenses $ 1,012,664 $ 808,231 $ 1,140,823 Federal and state income taxes 22,915 19,354 5,940 Current portion of long-term debt 99,665 98,317 208,262 Current portion of capital lease obligations 1,993 2,169 2,336 ------------------------------------------------- Total current liabilities 1,137,237 928,071 1,357,361 Long-term Debt 2,155,240 2,124,577 2,333,405 Capital Lease Obligations 20,108 20,459 21,927 Other Liabilities 153,066 157,511 129,061 Deferred Income Taxes 647,745 643,965 638,604 Guaranteed Preferred Beneficial Interests in the Company's Subordinated Debentures 531,579 531,579 531,579 Stockholders' Equity: Common stock 1,163 1,158 1,156 Additional paid-in capital 701,949 699,104 696,412 Retained earnings 2,672,351 2,617,608 2,584,600 Less treasury stock (649,473) (649,473) (644,616) ------------------------------------------------- Total stockholders' equity 2,725,990 2,668,397 2,637,552 ------------------------------------------------- Total Liabilities and Stockholders' Equity $ 7,370,965 $ 7,074,559 $ 7,649,489 ================================================= See notes to consolidated financial statements.
DILLARD'S, INC.CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS(Unaudited)(In Thousands, Except Per Share Data)
Three Months Ended Twelve Months Ended ------------------------------ ----------------------------- May 4, May 5, May 4, May 5, 2002 2001 2002 2001 ------------- --------------- -------------- -------------- Net Sales $1,910,879 $1,920,309 $8,145,481 $8,404,292 Service Charges, Interest and Other Income 61,962 57,276 238,114 245,330 ------------- --------------- -------------- -------------- 1,972,841 1,977,585 8,383,595 8,649,622 ------------- --------------- -------------- -------------- Cost of sales 1,226,428 1,253,007 5,481,123 5,685,959 Advertising, selling, administrative and general expenses 519,719 541,531 2,169,577 2,224,990 Depreciation and amortization 77,367 77,195 310,926 304,417 Rentals 15,222 15,798 72,207 75,735 Interest and debt expense 43,846 48,185 186,049 213,782 Asset impairment and store closing charges - - 3,752 51,396 ------------- --------------- -------------- -------------- 1,882,582 1,935,716 8,223,634 8,556,279 ------------- --------------- -------------- -------------- Income Before Income Taxes 90,259 41,869 159,961 93,343 Income Taxes 32,495 16,035 62,245 26,100 ------------- --------------- -------------- -------------- Income Before Extraordinary Item 57,764 25,834 97,716 67,243 Extraordinary gain on the extinguishment of debt, net of income taxes 348 3,159 3,201 30,470 ------------- --------------- -------------- -------------- Net Income 58,112 28,993 100,917 97,713 Retained Earnings at Beginning of Period 2,617,608 2,558,933 2,584,600 2,501,254 ------------- --------------- -------------- -------------- 2,675,720 2,587,926 2,685,517 2,598,967 Cash Dividends Declared (3,369) (3,326) (13,166) (14,367) ------------- --------------- -------------- -------------- Retained Earnings at End of Period $2,672,351 $2,584,600 $ 2,672,351 $2,584,600 ============= =============== ============== ============== Basic Earnings Per Share: Income Before Extraordinary Item $0.69 $ 0.30 $1.16 $0.76 Extraordinary Gain 0.00 0.04 0.04 0.34 ------------- --------------- -------------- -------------- Net Income $0.69 $0.34 $1.20 $1.10 ============= =============== ============== ============== Diluted Earnings Per Share: Income Before Extraordinary Item $0.68 $ 0.30 $1.16 $0.76 Extraordinary Gain 0.00 0.04 0.04 0.34 ------------- --------------- -------------- -------------- Net Income $0.68 $0.34 $1.20 $1.10 ============= =============== ============== ============== Cash Dividends Declared Per Common Share $0.04 $0.04 $0.16 $0.16 See notes to consolidated financial statements.
DILLARD'S, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)(In Thousands)
Three Months Ended -------------------------------- May 4, May 5, 2002 2001 -------------- --------------- Operating Activities: Net income $ 58,112 $ 28,993 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 78,087 77,891 Extraordinary gain on extinguishment of debt, net of taxes (348) (3,159) Changes in operating assets and liabilities: Decrease in trade accounts receivable, net 84,867 96,625 Increase in merchandise inventories and other current assets (340,492) (492,466) Decrease (increase) in other assets 5,416 (8,845) Increase in trade accounts payable and accrued expenses, other liabilities and income taxes 207,133 482,134 -------------- --------------- Net cash provided by operating activities 92,775 181,173 -------------- --------------- Investing Activities: Purchases of property and equipment (50,130) (57,260) -------------- --------------- Net cash used in investing activities (50,130) (57,260) -------------- --------------- Financing Activities: Principal payments on long-term debt and capital lease obligations (7,972) (36,994) Proceeds from issuance of long-term debt 40,000 - Proceeds from accounts receivable securitization 100,000 - Proceeds from issuance of common stock 2,850 - Cash dividends paid (3,369) (3,326) Purchase of treasury stock - (17,468) -------------- --------------- Net cash provided by (used in) financing activities 131,509 (57,788) -------------- --------------- Increase in Cash and Cash Equivalents 174,154 66,125 Cash and Cash Equivalents, Beginning of Period 152,960 193,980 -------------- --------------- Cash and Cash Equivalents, End of Period $ 327,114 $ 260,105 ============== =============== See notes to consolidated financial statements.
DILLARD'S, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)May 4, 2002
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Dillard’s, Inc. (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. Certain prior period balances have been reclassified to conform with current period presentation. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and twelve month periods ended May 4, 2002 are not necessarily indicative of the results that may be expected for the fiscal year ending February 1, 2003 due to the seasonal nature of the business. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the fiscal year ended February 2, 2002.
Note 2. Earnings Per Share Data
The following table sets forth the computation of basic and diluted earnings per share ("EPS") for the periods indicated (in thousands, except per share data). Three Months Ended Twelve Months Ended May 4, May 5, May 4, May 5, 2002 2001 2002 2001 ------------------------ ------------------------ Basic: Income before extraordinary item $ 57,764 $ 25,834 $97,716 $ 67,243 Extraordinary gain 348 3,159 3,201 30,470 ------------------------ ------------------------ Net income available for per-share calculations $ 58,112 $28,993 $100,917 $ 97,713 ======================== ======================== Average shares of common stock outstanding 84,100 84,834 83,836 88,468 ======================== ======================== Per Share of Common Stock Income before extraordinary item $ 0.69 $ 0.30 $ 1.16 $ 0 .76 Extraordinary gain - 0.04 0.04 0.34 ------------------------ ------------------------ Net Income $ 0.69 $ 0.34 $ 1.20 $ 1.10 ======================== ========================Three Months Ended Twelve Months Ended May 4, May 5, May 4, May 5, 2002 2001 2002 2001 ----------------------- ------------------------ Diluted: Income before extraordinary item $ 57,764 $ 25,834 $97,716 $67,243 Extraordinary gain 348 3,159 3,201 30,470 ----------------------- ------------------------ Net income available for per-share calculations $ 58,112 $28,993 $100,917 $97,713 ======================= ======================== Average shares of common stock outstanding 84,100 84,834 83,836 88,468 Stock options 887 610 536 180 ----------------------- ------------------------ Total average equivalent shares 84,987 85,444 84,372 88,648 ======================= ======================== Per Share of Common Stock Income before extraordinary item $ 0.68 $ 0.30 $ 1.16 $ 0.76 Extraordinary gain - 0.04 0.04 0.34 ----------------------- ------------------------ Net Income $ 0.68 $ 0.34 $ 1.20 $ 1.10 ======================= ======================== Options to purchase 6,479,416 and 6,961,233 shares of Class A common stock at prices ranging from $25.13 to $40.22 per share were outstanding at May 4, 2002 and May 5, 2001, respectively, but were not included in the computation of diluted earnings per share because they would be antidilutive.
Note 3. Note Repurchase and Mortgage
During the quarter ended May 4, 2002, the Company repurchased $6.1 million of its outstanding unsecured notes prior to their related maturity dates. Interest rates on the repurchased securities ranged from 6.4% to 9.1%. Maturity dates ranged from 2004 to 2023. In connection with these transactions, the Company recorded after tax extraordinary gains during the quarter ended May 4, 2002 of $348,000 (net of income taxes of $196,000). During the quarter ended May 4, 2002, a joint venture of the Company borrowed $40 million. . The mortgage note is non-recourse with building, land and improvements of Sunrise Mall in Brownsville, Texas pledged as collateral. The variable rate mortgage note pays interest only at the one month LIBOR plus 3% on a monthly basis with the entire unpaid principal balance due and payable on May 4, 2004.
Note 4. Revolving Credit Agreement
The Company completed the documentation process and closed on a new $400 million revolving credit facility with Fleet Retail Finance Inc. (“Fleet”) on May 9, 2002. Borrowings under the facility will be at Fleet’s Base Rate or the Eurodollar Rate plus 1.75%. The line of credit agreement is secured by inventory of certain Company stores. The agreement will expire on May 9, 2005.
Note 5. Accounts Receivable Securitization
The Company sold an additional $100 million in accounts receivable securitization bringing the total accounts receivable securitizations sold and excluded from the balance sheet at May 4, 2002 to $400 million.
Note 6. Goodwill
The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets" effective February 3, 2002. It changes the accounting for goodwill from an amortization method to an "impairment only" approach. Under SFAS No. 142, goodwill is no longer amortized but reviewed for impairment annually or more frequently if certain indicators arise. The Company is required to complete the initial step of a transitional impairment test within six months of adoption of SFAS No. 142. The application of the nonamortization provisions of this statement resulted in an increase in net income of approximately $3.9 million ($.05 per fully diluted share) during the 13 weeks ended May 4, 2002. Application of the nonamortization provisions of this statement is expected to result in an increase in net income of approximately $15.6 million ($.18 per fully diluted share) during the 52 weeks ended February 1, 2003. The Company will test goodwill for impairment using the two-step process prescribed in SFAS No. 142. The Company expects to complete the required impairment tests of goodwill in the second quarter of 2002. Based on steps the Company has taken to prepare for the adoption of SFAS No. 142, it is likely that a portion of the goodwill will be impaired using the impairment test required by the statement. The Company will restate its May 4, 2002 quarterly results to reflect the loss as a cumulative effect of a change in accounting principle, as required by SFAS No. 142. The following pro forma financial information is presented as if the statement was adopted at February 2, 2001(in thousands, except per share amounts): Three Months Ended Twelve Months Ended May 4, 2002 May 5, 2001 May 4, 2002 May 5, 2001 (Unaudited) (Unaudited) Reported net income $58,112 $28,993 $100,917 $97,713 Add back: Goodwill amortization 3,901 11,703 15,795 Pro forma net income $58,112 $32,894 $112,620 $113,508 Earnings per share reported - basic $0.69 $0.34 $1.20 $1.10 Goodwill amortization 0.05 0.14 0.18 Pro forma earnings per share - basic $0.69 $0.39 $1.34 $1.28 Earnings per share reported -- diluted $0.68 $0.34 $1.20 $1.10 Goodwill amortization 0.05 0.14 0.18 Pro forma earnings per share - diluted $0.68 $0.39 $1.34 $1.28
Note 7. Recently Issued Accounting Standards
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses the accounting and reporting for the impairment or disposal of long-lived assets. The statement provides a single accounting model for long-lived assets to be disposed of. New criteria must be met to classify the asset as an asset held-for-sale. This statement also focuses on reporting the effects of a disposal of a segment of a business. This statement is effective for fiscal years beginning after December 15, 2001. The Company has determined that the adoption of SFAS No. 144 will not have a material impact on the Company's financial position or results of operations.
Note 8. New Accounting Standards
In April 2002, SFAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections” (“SFAS 145”) was issued. SFAS 145 rescinds SFAS 4 and 64, which required gains and losses from extinguishments of debt to be classified as extraordinary items. SFAS 145 rescinds SFAS 44 since the provisions of the Motor Carrier Act of 1980 are complete. SFAS 145 also amends SFAS 13 eliminating inconsistencies in certain sale-leaseback transactions. The provisions of SFAS 145 are effective for fiscal years beginning after May 15, 2002. Any gain or loss on extinguishement of debt that was classified as an extraordinary item in prior periods presented shall be reclassified. The Company does not expect that the adoption of SFAS 145 will have a material effect on the Company’s financial position or results of operations.
ITEM 2. Management's Discussion And Analysis Of FinancialCondition And Results Of Operations
General
Net Sales. Net sales include sales of comparable stores, non-comparable stores and lease income on leased departments. Comparable store sales include sales for those stores which were in operation for a full period in both the current month and the corresponding month for the prior year. Non-comparable store sales include sales in the current fiscal year from stores opened during the previous fiscal year before they are considered comparable stores, new stores opened in the current fiscal year and sales in the previous fiscal year for stores that were closed in the current fiscal year. Service charges, interest and other income. Service charges, interest and other income include interest and service charges, net of service charge write-offs, related to the Company's proprietary credit card sales offset by interest expense on off-balance sheet accounts receivable securitizations. Other income relates to joint ventures accounted for by the equity method and gains (losses) on the sale of property and equipment. Cost of sales. Cost of sales includes the cost of merchandise, bank card fees, freight to the distribution center, employee and promotional discounts and payroll for salon personnel. Advertising, selling, administrative and general expenses. Advertising, selling, administrative and general expenses include buying and occupancy, selling, distribution, warehousing, store management and corporate expenses, including payroll and employee benefits, insurance, employment taxes, advertising, management information systems, legal, bad debt costs and other corporate level expenses. Buying expenses consist of payroll, employee benefits and travel for design, buying and merchandising personnel. Depreciation and amortization. Depreciation and amortization expenses include depreciation on property and equipment and amortization of goodwill. Rentals. Rentals include expenses for store leases and data processing equipment rentals. Interest and debt expense. Interest and debt expense includes interest relating to the Company's unsecured notes, mortgage notes, the Guaranteed Beneficial Interests in the Company's Subordinated Debentures, amortization of financing intangibles and interest on capital lease obligations.Asset impairment and store closing charges. Asset impairment and store closing charges consist of write downs to fair value of under-performing stores including property and equipment and goodwill and exit costs associated with the closure of certain stores. Exit costs include future rent, taxes and common area maintenance expenses from the time the stores are closed. Extraordinary gain. Extraordinary gain consists of gains on the repurchase of outstanding unsecured notes prior to their related maturity dates net of the write-off of unamortized deferred financing costs relating thereto.
Critical Accounting Policies and Estimates
The Company's accounting policies are more fully described in Note 1of Notes to Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the fiscal year ended February 2, 2002. As disclosed in Note 1 of Notes to Consolidated Financial Statements, the preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions about future events that affect the amounts reported in the consolidated financial statements and accompanying notes. Since future events and their effects cannot be determined with absolute certainty, actual results will differ from those estimates. The Company evaluates its estimates and judgments on an on-going basis and predicates those estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these under different assumptions or conditions. Management of the Company believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in preparation of the Consolidated Financial Statements. Merchandise inventory. Approximately 97% of the inventories are valued at lower of cost or market using the retail last-in, first-out ("LIFO") inventory method. Under the retail inventory method ("RIM"), the valuation of inventories at cost and the resulting gross margins are calculated by applying a calculated cost to retail ratio to the retail value of inventories. RIM is an averaging method that has been widely used in the retail industry due to its practicality. Additionally, it is recognized that the use of RIM will result in valuing inventories at the lower of cost or market if markdowns are currently taken as a reduction of the retail value of inventories. Inherent in the RIM calculation are certain significant management judgments and estimates including, among others, merchandise markon, markups, and markdowns, which significantly impact the ending inventory valuation at cost as well as the resulting gross margins. Management believes that the Company's RIM and application of LIFO provide an inventory valuation which results in a carrying value at the lower of cost or market. The remaining 3% of the inventories are valued by the specific identified cost method. Allowance for doubtful accounts. The accounts receivable from the Company's proprietary credit card sales are subject to credit losses. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The adequacy of the allowance is based on historical experience with similar customers and current macroeconomic conditions. Long-lived assets and joint ventures. In evaluation of the fair value and future benefits of long-lived assets, the Company performs an analysis of the anticipated undiscounted future net cash flows of the related long-lived assets. If the carrying value of the related asset exceeds the undiscounted cash flows, the Company reduces the carrying value to its fair value, which is generally calculated using discounted cash flows. Various factors including future sales growth and profit margins are included in this analysis. To the extent these future projections or the Company's strategies change, the conclusion regarding impairment may differ from the Company's current estimates. The Company's joint ventures are evaluated based on operating cash flows of the respective malls. Future adverse changes to the Company's joint ventures, from changes in real estate values, demographics, or the introduction of similar retail outlets into the joint ventures market, could result in losses or an inability to recover the carrying value of the malls, thereby possibly causing an impairment charge in the future.
Results of Operations
The following table sets forth the results of operations, expressed as a percentage of net sales, for the periods indicated: Three Months Ended Twelve Months Ended May 4, May 5, May 4, May 5, 2002 2001 2002 2001 ----------- ---------- ----------- ----------- Net sales 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales 64.2 65.2 67.3 67.7 ----------- ---------- ----------- ----------- Gross profit 35.8 34.8 32.7 32.3 Advertising, selling, administrative and general expenses 27.2 28.2 26.6 26.5 Depreciation and amortization 4.1 4.0 3.8 3.6 Rentals 0.8 0.9 0.9 0.9 Interest and debt expense 2.3 2.5 2.3 2.5 Asset impairment and store closing charges - - - 0.6 ----------- ---------- ----------- ----------- Total operating expenses 34.4 35.6 33.6 34.1 Service charges, interest and other 3.3 3.0 2.9 2.9 income ----------- ---------- ----------- ----------- Income before income taxes 4.7 2.2 2.0 1.1 Income taxes 1.7 0.9 0.8 0.3 ----------- ---------- ----------- ----------- Income before extraordinary item 1.3 1.2 0.8 3.0 Extraordinary gain - 0.2 - 0.4 ----------- ---------- ----------- ----------- Net income 3.0 % 1.5 % 1.2 % 1.2 % =========== ========== =========== ===========
Net Sales
Net sales were relatively flat on a total basis for the three month period ended May 4, 2002, compared to the three month period ended May 5, 2001. Sales in comparable stores decreased 1%. Sales declined slightly in all merchandising categories with the exception of cosmetics and women's and juniors clothing. Cosmetics increased 1% with women's and junior clothing being flat compared to the prior period. Net sales decreased 3% for the twelve month period ended May 4, 2002 compared to the same period in 2001. These decreases were primarily due to decreases in comparable store sales.
Cost of Sales
Cost of sales, as a percent of net sales, was 64.2% and 67.3% for the three and twelve month periods ended May 4, 2002 compared to 65.2% and 67.7% for the three and twelve month periods ended May 5, 2001. The reduction of 100 basis points in cost of sales for the three months ended May 4, 2002, is attributable to a higher level of initial markups, partially offset by a higher level of markdowns. The gross margin improvement is also attributable to recent inventory reduction measures and the ongoing execution of key merchandising initiatives. Comparable store inventories decreased 11% from last year's first quarter levels.
Advertising, Selling, Administrative and General Expenses
Advertising, selling, administrative and general expenses (“SG&A expenses”) for the three months ended May 4, 2002 decreased $22 million compared with May 5, 2001. SG&A expenses, as a percentage of net sales, were 27.2% and 26.6% for the three and twelve month periods ended May 4, 2002 compared to 28.2% and 26.5% for the comparable 2001 periods. The decrease in SG&A expenses, as a percent of net sales, for the three month period ended May 4, 2002 is primarily attributable to savings of $11 million in payroll and $9 million in certain occupancy costs and contracted services.
Depreciation and Amortization Expense
Depreciation and amortization expense increased $172,000 and $6.5 million for the three and twelve month periods ended May 4, 2002 compared to similar periods in 2001, due primarily to new asset additions as well as increased expenditures in technology, which is depreciated at a more rapid rate. The three and twelve month periods ended May 5, 2001 contained an additional $3.9 million in goodwill amortization. Goodwill is no longer amortized subsequent to the adoption of SFAS No. 142 on February 3, 2002.
Rentals
Rental expense, as a percent of net sales, remained relatively flat for the three and twelve month periods ended May 4, 2002 at .8% and .9%, respectively, compared to .9% and .9%, respectively, for the three and twelve month periods ended May 5, 2001.
Interest and Debt Expense
Interest and debt expense for the three months ended May 4, 2002 decreased to $43.8 million or 2.3% of net sales compared to $48.2 million or 2.5% of net sales for the three months ended May 5, 2001. This reduction is due primarily to a decrease of approximately $323 million in the average amount of outstanding debt in the first quarter of 2002 compared to the first quarter of 2001 and to a reduction in short term interest rates from last year's first quarter. Interest and debt expense, as a percent of net sales, was 2.3% in the twelve month period ended May 4, 2002, compared to 2.5% in the similar period in 2001.
Service Charges, Interest and Other Income
Service charges, interest and other income for the three months ended May 4, 2002 increased to $62.0 million or 3.3% of net sales compared to $57.3 million or 3.0% of net sales for the three months ended May 5, 2001. This increase is due to a $106 million increase in the average amount of outstanding accounts receivable in the first quarter of 2002 compared to the first quarter of 2001.
Income Taxes
The actual federal and state income tax rate for the three month periods ended May 4, 2002 and May 5, 2001 was 36%, exclusive of the nondeductible goodwill amortization in 2001. The Company's actual federal and state income tax rate (exclusive of the effect of nondeductible goodwill amortization) was reduced from 37% in fiscal 1999 to 36% in fiscal 2000. The effect of the reduced rate on the Company's deferred income taxes was to reduce the income tax provision by $16 million for the twelve month period ended May 5, 2001.
Financial Condition
Cash provided by operating activities totaled $92.8 million and $181.2 million for the three months ended May 4, 2002 and May 5, 2001, respectively. The decrease in operating cash flow for the three months in 2002 is due to a smaller increase in the amount of accounts payable from year end levels partially offset by a smaller increase in inventories from year end levels. Comparable store inventories decreased 11% from last year's first quarter levels.The Company invested $50.1 million in capital expenditures for the three months ended May 4, 2002 compared to $57.3 million for the three months ended May 5, 2001. During the three months ended May 4, 2002, the Company opened its newly constructed 98,000 square foot location at Prescott Gateway in Prescott, Arizona. The Company anticipates opening an additional five new stores in 2002, resulting in an addition of approximately 579,000 square feet of retail space net of replaced square footage. In addition, the Company opened two former Montgomery Ward store locations during the quarter and anticipates opening two more locations in fiscal 2002. The Company closed one store location during the quarter and has announced the upcoming second quarter closing of an additional store. Cash provided by financing activities for the three months ended May 4, 2002 totaled $131.5 million compared to cash used of $57.8 million for the three months ended May 5, 2001. During the three months ended May 4, 2002, the Company issued $40 million of variable rate mortgage notes due 2004. The Company sold an additional $100 million in accounts receivable securitization bringing the total accounts receivable securitizations sold and excluded from the balance sheet at May 4, 2002 to $400 million. During the quarter ended May 4, 2002, the Company repurchased $6.1 million of its outstanding unsecured notes prior to their related maturity dates and paid down another $2.4 million. During the three months ended May 5, 2001, the Company reduced its level of outstanding debt by $41.4 million. During the three months ended May 5, 2001, the Company repurchased approximately 1.0 million Class A Common Shares for approximately $17.5 million under its existing $200 million share repurchase authorization. Approximately $75 million in share repurchase authorization remained under this open-ended plan at May 4, 2002. Management of the Company anticipates that it will be necessary to incur short term borrowings of up to $445 million during periods of peak working capital demand in the fourth quarter of 2002. Although the Company has an unused committed line of credit in the amount of $400 million, management expects to accomplish these borrowings through the securitization of accounts receivable. Other than peak working capital requirements management believes that cash generated from operations will be sufficient to cover its reasonably foreseeable working capital, capital expenditure, stock repurchase and debt service requirements. Depending on conditions in the capital markets and other factors, the Company will from time to time consider the issuance of debt or other securities, or other possible capital market transactions, the proceeds of which could be used to refinance current indebtedness or other corporate purposes.
New Accounting Standards
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses the accounting and reporting for the impairment or disposal of long-lived assets. The statement provides a single accounting model for long-lived assets to be disposed of. New criteria must be met to classify the asset as an asset held-for-sale. This statement also focuses on reporting the effects of a disposal of a segment of a business. This statement is effective for fiscal years beginning after December 15, 2001. The Company has determined that the adoption of SFAS No. 144 will not have a material impact on the Company's financial position or results of operations. In April 2002, Statement of Financial Accounting Standards No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections" ("SFAS 145") was issued. SFAS 145 rescinds SFAS 4 and 64, which required gains and losses from extinguishments of debt to be classified as extraordinary items. SFAS 145 rescinds SFAS 44 since the provisions of the Motor Carrier Act of 1980 are complete. SFAS 145 also amends SFAS 13 eliminating inconsistencies in certain sale-leaseback transactions. The provisions of SFAS 145 are effective for fiscal years beginning after May 15, 2002. Any gain or loss on extinguishement of debt that was classified as an extraordinary item in prior periods presented shall be reclassified. The Company does not expect that the adoption of SFAS 145 will have a material effect on the Company's financial position or results of operations.
Forward-Looking Information
Statements in the Management's Discussion and Analysis of Financial Condition and Results of Operations include certain "forward-looking statements", including (without limitation) statements with respect to anticipated future operating and financial performance, growth and acquisition opportunities and other similar forecasts and statements of expectation. Words such as "expects," "anticipates," "plans," and "believes," and variations of these words and similar expressions, are intended to identify these forward-looking statements. The Company cautions that forward-looking statements, as such term is defined in the Private Securities Litigation Reform Act of 1995, contained in this report, the Company's annual report on Form 10-K or made by management are based on estimates, projections, beliefs and assumptions of management at the time of such statements and are not guarantees of future performance. The Company disclaims any obligation to update or revise any forward-looking statements based on the occurrence of future events, the receipt of new information, or otherwise. Forward-looking statements of the Company involve risks and uncertainties and are subject to change based on various important factors. Actual future performance, outcomes and results may differ materially from those expressed in forward-looking statements made by the Company and its management as a result of a number of risks, uncertainties and assumptions. Representative examples of those factors (without limitation) include general industry and economic conditions; economic and weather conditions for regions in which the Company's stores are located and the effect of these factors on the buying patterns of the Company's customers; changes in consumer spending patterns and debt levels; trends in personal bankruptcies; the impact of competitive market factors and other economic and demographic changes of similar or dissimilar nature; changes in operating expenses, including employee wages, commissions structures and related benefits; the uncertainty surrounding the effect of the Company's adoption of SFAS No. 142; possible future acquisitions of store properties from other department store operators and the continued availability of financing in amounts and at the terms necessary to support the Company's future business.
Item 3. Quantitative and Qualitative Disclosure About Market Risk.
During the quarter ended May 4, 2002, the Company repurchased $6.1 million of its outstanding unsecured notes prior to their related maturity dates. Interest rates on the repurchased securities ranged from 6.4% to 9.1%. Maturity dates ranged from 2004 to 2023. Except as disclosed above, there have been no material changes in the information set forth under caption "Item 7A-Quantitative and Qualitative Disclosures About Market Risk" in the Company's Annual Report on Form 10-K for the fiscal year ended February 2, 2002.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Ratio of Earnings to Fixed Charges: The Company has calculated the ratio of earnings to fixed charges pursuant to Item 503 of Regulation S-K of the Securities and Exchange Act as follows: Three Months Ended Fiscal Years Ended - ---------------------------- ---------------------------------------------------------------------------- May 4, May 5, February 2, February 3, January 29, January 30, January 31, 2002 2001 2002 2001* 2000 1999 1998 - -------------- ------------ ------------- -------------- --------------- -------------- -------------- 2.83 1.75 1.48 1.54 2.04 1.97 3.69 ============== ============ ============= ============== =============== ============== ============== * 53 week year.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit (12): Statement re: Computation of Ratio of Earnings to Fixed Charges (b) Reports of Form 8-K filed during the first quarter: Adoption of shareholder rights plan by Dillard’s Board of Directors on March 2, 2002.
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 thereunto duly authorized. DILLARD'S Inc. (Registrant) Date: June 18, 2002 /s/ James I. Freeman James I. Freeman Senior Vice-President & Chief Financial Officer (Principal Financial and Accounting Officer)