SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal quarter ended August 2, 1997. FEDERATED DEPARTMENT STORES, INC. 151 West 34th Street New York, New York 10001 (212) 695-4400 and 7 West Seventh St. Cincinnati, Ohio 45202 (513) 579-7000 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. 209,546,590 shares of the Registrant's Common Stock, $.01 par value, were outstanding as of August 30, 1997. PART I -- FINANCIAL INFORMATION FEDERATED DEPARTMENT STORES, INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (THOUSAND, EXCEPT PER SHARE FIGURES)
13 Weeks Ended 26 Weeks Ended August 2, August 3, August 2, August 3, 1997 1996 1997 1996 Net Sales $3,452,829 $3,284,228 $6,861,920 $6,584,893 Cost of sales: Recurring 2,098,671 1,995,573 4,185,536 4,010,221 Inventory valuation adjustments related to consolidation - 29,093 - 65,681 Total cost of sales 2,098,671 2,024,666 4,185,536 4,075,902 Selling, general and administrative expenses: Recurring 1,142,298 1,113,984 2,316,464 2,267,049 Business integration and consolidation expenses - 69,824 - 110,924 Total selling, general and administrative expenses 1,142,298 1,183,808 2,316,464 2,377,973 Operating Income 211,860 75,754 359,920 131,018 Interest expense (106,358) (126,996) (221,083) (250,341) Interest income 7,095 11,382 17,443 22,446 Income (Loss) Before Income Taxes and Extraordinary Item 112,597 (39,860) 156,280 (96,877) Federal, state and local income tax (expense) benefit (46,227) 12,667 (65,851) 31,738 Income (Loss) Before Extraordinary Item 66,370 (27,193) 90,429 (65,139) Extraordinary Item - loss on early extinguishment of debt, net of tax effect of $24,960 (38,673) - (38,673) - Net Income (Loss) $ 27,697 $ (27,193) $ 51,756 $ (65,139) (Continued)
PART I -- FINANCIAL INFORMATION FEDERATED DEPARTMENT STORES, INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (THOUSANDS, EXCEPT PER SHARE FIGURES)
13 Weeks Ended 26 Weeks Ended August 2, August 3, August 2, August 3, 1997 1996 1997 1996 Earnings (Loss) per Share: Income (loss) before extraordinary item $ .31 $ (.13) $ .42 $ (.31) Extraordinary item (.18) - (.18) - Net Income (Loss) $ .13 $ (.13) $ .24 $ (.31) Fully Diluted Earnings (Loss) per Share: Income (loss) before extraordinary item $ .30 $ (.13) $ .42 $ (.31) Extraordinary item (.17) - (.18) - Net Income (Loss) $ .13 $ (.13) $ .24 $ (.31) The accompanying notes are an integral part of these unaudited Consolidated Financial Statements.
FEDERATED DEPARTMENT STORES, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED) (THOUSANDS)
August 2, February 1, August 3, 1997 1997 1996 ASSETS: Current Assets: Cash $ 317,352 $ 148,794 $ 134,133 Accounts receivable 2,498,148 2,834,321 2,768,417 Merchandise inventories 3,371,584 3,245,996 3,234,271 Supplies and prepaid expenses 128,981 109,678 176,729 Deferred income tax assets 105,989 88,513 115,541 Total Current Assets 6,422,054 6,427,302 6,429,091 Property and Equipment - net 6,371,055 6,524,757 6,270,870 Intangible Assets - net 703,761 717,404 731,047 Notes Receivable 3,976 204,400 204,035 Other Assets 373,286 390,280 397,326 Total Assets $13,874,132 $14,264,143 $14,032,369 LIABILITIES AND SHAREHOLDERS' EQUITY: Current Liabilities: Short-term debt $ 1,504,528 $ 1,094,557 $ 375,363 Accounts payable and accrued liabilities 2,482,362 2,492,195 2,386,569 Income taxes 4,370 8,947 3,211 Total Current Liabilities 3,991,260 3,595,699 2,765,143 Long-Term Debt 3,732,269 4,605,916 5,644,524 Deferred Income Taxes 835,725 830,943 730,725 Other Liabilities 559,001 562,431 561,847 Shareholders' Equity 4,755,877 4,669,154 4,330,130 Total Liabilities and Shareholders' Equity $13,874,132 $14,264,143 $14,032,369 The accompanying notes are an integral part of these unaudited Consolidated Financial Statements.
FEDERATED DEPARTMENT STORES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (THOUSANDS)
26 Weeks Ended 26 Weeks Ended August 2, 1997 August 3, 1996 Cash flows from operating activities: Net income (loss) $ 51,756 $ (65,139) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization of property and equipment 276,875 251,657 Amortization of intangible assets 13,643 13,642 Amortization of financing costs 12,580 14,384 Amortization of unearned restricted stock 560 1,334 Loss on early extinguishment of debt 38,673 - Changes in assets and liabilities: Decrease in accounts receivable 336,599 273,457 Increase in merchandise inventories (125,588) (139,423) Increase in supplies and prepaid expenses (19,303) (318) (Increase) decrease in other assets not separately identified (5,150) 22,517 (Decrease) increase in accounts payable and accrued liabilities not separately identified (20,997) 49,213 Increase (decrease) in current income taxes 3,459 (3,200) Increase (decrease) in deferred income taxes 4,230 (43,241) (Decrease) increase in other liabilities not separately identified (3,431) 3,420 Net cash provided by operating activities 563,906 378,303 Cash flows from investing activities: Purchase of property and equipment (218,659) (264,402) Disposition of property and equipment 89,343 105,053 Decrease in notes receivable 199,997 - Net cash provided (used) by investing activities 70,681 (159,349) Cash flows from financing activities: Debt issued 849,998 688,665 Financing costs (5,512) (11,016) Debt repaid (1,356,087) (1,034,350) Increase (decrease) in outstanding checks 11,165 (21,187) Acquisition of treasury stock (1,734) (598) Issuance of common stock 36,141 121,147 Net cash used by financing activities (466,029) (257,339) (Continued)
FEDERATED DEPARTMENT STORES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (THOUSANDS)
26 Weeks Ended 26 Weeks Ended August 2, 1997 August 3, 1996 Net increase (decrease) in cash $ 168,558 $ (38,385) Cash at beginning of period 148,794 172,518 Cash at end of period $ 317,352 $ 134,133 Supplemental cash flow information: Interest paid $ 211,911 $ 219,793 Interest received 19,619 13,611 Income taxes paid (net of refunds received) 48,244 9,368 The accompanying notes are an integral part of these unaudited Consolidated Financial Statements.
FEDERATED DEPARTMENT STORES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A description of the Company's significant accounting policies is included in the Company's Annual Report on Form 10-K for the fiscal year ended February 1, 1997 (the "1996 10-K"). The accompanying Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto in the 1996 10-K. Because of the seasonal nature of the general merchandising business, the results of operations for the 13 and 26 weeks ended August 2, 1997 and August 3, 1996 (which do not include the Christmas season) are not indicative of such results for the fiscal year. The Consolidated Financial Statements for the 13 and 26 weeks ended August 2, 1997 and August 3, 1996, 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. Earnings (loss) per share are computed on the basis of daily average number of shares and share equivalents (shares issuable under outstanding warrants and stock options) outstanding during the period for the 13 and 26 weeks ended August 2, 1997. For the 13 and 26 weeks ended August 3, 1996, the potential issuance of share equivalents was anti-dilutive and earnings (loss) per share were computed on the basis of daily average number of shares outstanding. The computation of fully diluted earnings (loss) per share takes into account, if dilutive, the above-described share equivalents and shares issuable upon the conversion of convertible debt. Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128"), was issued in February 1997. The statement establishes standards for computing and presenting earnings per share and is effective for financial statements for periods ending after December 15, 1997. Adoption of this statement will not have a material impact on the Company's earnings per share computations. Certain reclassifications have been made to amounts for the 13 and 26 weeks ended August 3, 1996 to conform with the classifications of such amounts for the 52 weeks ended February 1, 1997. 2. INVENTORY VALUATION ADJUSTMENTS RELATED TO CONSOLICATION AND BUSINESS INTEGRATION AND CONSOLIDATION EXPENSES In connection with the consolidation of merchandise inventories for acquired and pre-existing businesses, the Company recorded one-time inventory valuation adjustments related to merchandise in lines of business that were eliminated or replaced as a separate component of cost of sales. For the 26 weeks ended August 3, 1996, the amount recorded related to the consolidation of Broadway into the Company's Macy's West division. (Continued) FEDERATED DEPARTMENT STORES, INC. NOTES DO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Additionally, the Company incurred certain one-time costs related to the integration and consolidation of acquired and pre-existing businesses and classified such costs as business integration and consolidation expenses as a separate component of selling, general and administrative expenses. During the 26 weeks ended August 3, 1996, the Company recorded $110.9 million of business integration and consolidation expenses consisting of $83.0 million of costs associated with the integration of Broadway into the Company (related primarily to the incremental costs associated with converting the Broadway stores to other nameplates, including advertising, credit card issuance and promotion and other name change expenses, and the costs of operating Broadway central office functions for a transitional period), $17.1 million of costs related to the consolidation of Macy's and $10.8 million of costs related to other support operation restructurings. 3. EXTRAORDINARY ITEM On July 14, 1997, the Company issued $300.0 million of 7.45% Senior Debentures due 2017 and $250.0 million of 6.79% Senior Debentures due 2027 and on July 28, 1997, the Company entered into new credit agreements which provide for unsecured revolving credit loans of up to $2,000.0 million. Using proceeds from these transactions and other funds, the Company voluntarily prepaid $1,044.3 million of debt during the 13 weeks ended August 2, 1997. The associated costs for the debt prepayments were recorded as an extraordinary charge of $38.7 million, net of an income tax benefit of $25.0 million. The debt prepaid included all amounts outstanding under the Company's mortgage loan facility, secured promissory note, certain other mortgages and previous bank credit facility, all of which were retired and terminated. FEDERATED DEPARTMENT STORES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS COMPARISON OF THE 13 WEEKS ENDED AUGUST 2, 1997 AND AUGUST 3, 1996 For purposes of the following discussion, all references to "second quarter of 1997" and "second quarter of 1996" are to the Company's 13-week fiscal periods ended August 2, 1997 and August 3, 1996, respectively. Net sales for the second quarter of 1997 totaled $3,452.8 million, compared to net sales of $3,284.2 million for the second quarter of 1996, an increase of 5.1%. On a comparable store basis, net sales for the second quarter of 1997 increased 4.4% over the second quarter of 1996. Cost of sales was 60.8% as a percent of net sales for the second quarter of 1997 compared to 61.7% for the second quarter of 1996. Cost of sales for the second quarter of 1996 included $29.1 million of one-time inventory valuation adjustments related to merchandise in lines of business that were eliminated or replaced in connection with the consolidation of Broadway's merchandise inventories with the Company's merchandise inventories. Excluding these inventory valuation adjustments from the second quarter of 1996, cost of sales would have been 60.8% of net sales. Cost of sales was not impacted by the valuation of merchandise inventory on the last-in, first-out basis in the second quarter of 1997 or the second quarter of 1996. Selling, general and administrative ("SG&A") expenses were 33.1% as a percent of net sales for the second quarter of 1997 compared to 36.0% for the second quarter of 1996. SG&A expenses for the second quarter of 1996 included $69.8 million of one-time costs related to the integration and consolidation of acquired and pre-existing businesses as business integration and consolidation expenses ("BICE"). Excluding BICE, SG&A expenses would have been 33.9% of net sales for the second quarter of 1996. The major factor contributing to the 0.8% improvement in the SG&A expense rate (excluding BICE for the second quarter of 1996) was lower distribution-related expense resulting from restructuring and technological improvements in the merchandise distribution process. Net interest expense was $99.3 million for the second quarter of 1997, compared to $115.6 million for the second quarter of 1996. The lower interest expense for the second quarter of 1997 is principally due to lower levels of borrowings. The Company's effective income tax rate of 41.1% for the second quarter of 1997 differs from the federal income tax statutory rate of 35.0% principally because of the effect of state and local income taxes and permanent differences arising from the amortization of intangible assets. The extraordinary item of $38.7 million in the second quarter of 1997 represents the after-tax expenses associated with debt prepayments. FEDERATED DEPARTMENT STORES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDISION AND RESULTS OF OPERATION (CONTINUED) COMPARISON OF THE 26 WEEKS ENDED AUGUST 2, 1997 AND AUGUST 3, 1996 For purposes of the following discussion, all references to "1997" and "1996" are to the Company's 26 week fiscal periods ended August 2, 1997 and August 3, 1996, respectively. Net sales for 1997 were $6,861.9 million compared to $6,584.9 million for 1996, an increase of 4.2%. On a comparable store basis, net sales for 1997 increased 3.5% over 1996. Cost of sales was 61.0% as a percent of net sales for 1997 compared to 61.9% for 1996. Cost of sales for 1996 included $65.7 million of one-time inventory valuation adjustments related to merchandise in lines of business that were eliminated or replaced in connection with the consolidation of Broadway's merchandise inventories with the Company's merchandise inventories. Excluding these inventory valuation adjustments from 1996, cost of sales would have been 60.9% and the 0.1% increase in 1997 is due to higher merchandise markdowns associated with the elimination of certain consumer electronics lines of business. Cost of sales was not impacted by the valuation of merchandise inventory on the last-in, first-out basis in 1997 or 1996. SG&A expenses were 33.8% as a percent of net sales for 1997 compared to 36.1% for 1996. SG&A expenses for 1996 included $110.9 million of one-time costs related to the integration and consolidation of acquired and pre-existing businesses under the caption BICE. Excluding BICE, SG&A expenses would have been 34.4% of net sales for 1996. The major factor contributing to the 0.6% improvement in the SG&A expense rate (excluding BICE for 1996) was lower distribution- related expenses resulting from restructuring and technological improvements in the merchandise distribution process. Net interest expense was $203.6 million for 1997 compared to $227.9 million for 1996. The lower interest expense for 1997 is principally due to lower levels of borrowings. The Company's effective income tax rate of 42.1% for 1997 differs from the federal income tax statutory rate of 35.0% principally because of the effect of state and local income taxes and permanent differences arising from the amortization of intangible assets. LIQUIDITY AND CAPITAL RESOURCES For purposes of the following discussion, all references to "1997" and "1996" are to the Company's 26 week fiscal periods ended August 2, 1997 and August 3, 1996, respectively. The Company's principal sources of liquidity are cash from operations, cash on hand and certain available credit facilities. FEDERATED DEPARTMENT STORES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Net cash provided by operating activities in 1997 was $563.9 million, an increase of $185.6 million compared to the $378.3 million provided in 1996. The major factors contributing to this improvement were improved operating results and greater reductions in customer accounts receivable. Net cash provided by investing activities was $70.7 million in 1997, with purchases of property and equipment totaling $218.7 million and dispositions of property and equipment totaling $89.3 million. During 1997, the Company opened five new stores, including a furniture gallery, and closed nine stores. On May 5, 1997, a $200.0 million installment of a note receivable held by the Company was received. Net cash used by the Company for all financing activities was $466.0 million in 1997. During 1997, the Company incurred debt totaling $850.0 million and repaid debt in the amount of $1,356.1 million. On July 14, 1997, the Company issued $300.0 million of 7.45% Senior Debentures due 2017 and $250.0 million of 6.79% Senior Debentures due 2027, and on July 28, 1997, the Company entered into new bank credit agreements which replaced its existing bank credit agreement. The new credit agreements provide for a $1,500.0 million unsecured revolving credit facility with a termination date of July 28, 2002 and a $500.0 million unsecured revolving credit facility with a termination date of July 27, 1998. The net incremental borrowings under the Company's revolving credit and commercial paper facilities were $300.0 million in 1997. The major components of debt repaid, with proceeds of the financings described above, proceeds of the $200.0 million note receivable and other funds, included the entire $345.1 million of outstanding borrowings under the Company's mortgage loan facility, the entire $220.8 million of borrowings outstanding under its secured promissory note, $176.0 million of borrowings outstanding under its note monetization facility, and all $515.7 million of outstanding term borrowings under its bank credit facility. In addition to extending the maturities of its debt, the Company expects to save $15.0-$20.0 million in annual interest expense from the refinancing transactions. On May 3, 1998, the final $200.0 million installment of a note receivable held by the Company matures and the remaining $176.0 million of borrowings under the related note monetization facility become due and payable. Accordingly, as of August 2, 1997, such amounts have been included in accounts receivable and short-term debt, respectively. Management believes the department store industry will continue to consolidate. Accordingly, the Company intends from time to time to consider additional acquisitions of department store assets and companies. Management of the Company believes that, with respect to its current operations, cash on hand and funds from operations, together with its credit facilities, will be sufficient to cover its reasonably foreseeable working capital, capital expenditure and debt service requirements. 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. Depending upon conditions in the capital markets and other factors, the Company will from time to time consider other possible capital markets transactions, including the refinancing of indebtedness. PART II -- OTHER INFORMATION FEDERATED DEPARTMENT STORES, INC. ITEM 1. LEGAL PROCEEDINGS The information regarding legal proceedings in the Company's Quarterly Report on Form 10-Q for the period ended May 3, 1997 covers events known to the Company and occurring prior to June 17, 1997. Subsequent to that date and prior to September 16, 1997, the Company and its subsidiaries have been involved in various legal proceedings incidental to the normal course of their business. Management does not expect that any of such proceedings will have a material adverse effect on the Company's consolidated financial position or results of operations. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1 364-Day Credit Agreement, dated as of July 28, 1997, by and among the Company, the Initial Lenders named therein, Citibank, N.A., as Administrative Agent and Paying Agent, The Chase Manhattan Bank, as Administrative Agent, BankBoston, N.A., as Syndication Agent, and The Bank of America, National Trust & Savings Association, as Documentation Agent. 10.2 Five-Year Credit Agreement, dated as of July 28, 1997, by and among the Company, the Initial Lenders named therein, Citibank, N.A., as Administrative Agent and Paying Agent, The Chase Manhattan Bank, as Administrative Agent, BankBoston, N.A., as Syndication Agent, and The Bank of America, National Trust & Savings Association, as Documentation Agent. 10.3 Eighth Supplemental Trust Indenture, dated as of July 14, 1997, by and among the Company and State Street Bank and Trust Company (successor to The First National Bank of Boston), Trustee (incorporated by reference to Exhibit 2 to the Company's Current Report on Form 8-K dated as of July 15, 1997 (the "July 1997 Form 8-K")). 10.4 Ninth Supplemental Trust Indenture, dated as of July 14, 1997, by and among the Company and State Street Bank and Trust Company (successor to The First National Bank of Boston), Trustee (incorporated by reference to Exhibit 3 to the July 1997 Form 8-K). 11 Statement re computation of per share earnings 27 Financial Data Schedule (b) Reports on Form 8-K Current Report on Form 8-K, dated July 15, 1997, reporting matters under Item 5 thereof. 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 thereunder duly authorized. FEDERATED DEPARTMENT STORES, INC. Date September 16, 1997 /s/ Dennis J. Broderick Dennis J. Broderick Senior Vice President, General Counsel and Secretary /s/ Joel A. Belsky Joel A. Belsky Vice President and Controller (Principal Accounting Officer)