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 November 1, 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 (Commission File No.) (I.R.S. Employer Incorporation) 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. 209,811,821 shares of the Registrant's Common Stock, $.01 par value, were outstanding as of November 29, 1997. PART I -- FINANCIAL INFORMATION FEDERATED DEPARTMENT STORES, INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (THOUSANDS, EXCEPT PER SHARE FIGURES)
13 Weeks Ended 39 Weeks Ended November 1, November 2, November 1, November 2, 1997 1996 1997 1996 Net Sales $ 3,746,276 $ 3,609,148 $10,608,196 $10,194,041 Cost of sales: Recurring 2,286,919 2,189,903 6,472,455 6,200,124 Inventory valuation adjustments related to consolidation - - - 65,681 Total cost of sales 2,286,919 2,189,903 6,472,455 6,265,805 Selling, general and administrative expenses: Recurring 1,191,396 1,187,629 3,507,860 3,454,678 Business integration and consolidation expenses - 44,304 - 155,228 Total selling, general and administrative expenses 1,191,396 1,231,933 3,507,860 3,609,906 Operating Income 267,961 187,312 627,881 318,330 Interest expense (100,957) (124,510) (322,040) (374,851) Interest income 9,079 11,149 26,522 33,595 Income (Loss) Before Income Taxes and Extraordinary Item 176,083 73,951 332,363 (22,926) Federal, state and local income tax expense (70,969) (32,150) (136,820) (412) Income (Loss) Before Extraordinary Item 105,114 41,801 195,543 (23,338) Extraordinary Item - loss on early extinguishment of debt, net of tax effect of $24,960 - - (38,673) - Net Income (Loss) $ 105,114 $ 41,801 $ 156,870 $ (23,338)
(Continued) PART I -- FINANCIAL INFORMATION FEDERATED DEPARTMENT STORES, INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (THOUSANDS, EXCEPT PER SHARE FIGURES)
13 Weeks Ended 39 Weeks Ended November 1, November 2, November 1, November 2, 1997 1996 1997 1996 Earnings (Loss) per Share: Income (loss) before extraordinary item $ .48 $ .20 $ .91 $ (.11) Extraordinary item - - (.18) - Net Income (Loss) $ .48 $ .20 $ .73 $ (.11) Fully Diluted Earnings (Loss) per Share: Income (loss) before extraordinary item $ .47 $ .20 $ .89 $ (.11) Extraordinary item - - (.17) - Net Income (Loss) $ .47 $ .20 $ .72 $ (.11) The accompanying notes are an integral part of these unaudited Consolidated Financial Statements.
FEDERATED DEPARTMENT STORES, INC. CONSOLIDATED BALANCE SHEET (UNAUDITED) (THOUSANDS)
November 1, February 1, November 2, 1997 1997 1996 ASSETS: Current Assets: Cash $ 431,156 $ 148,794 $ 152,596 Accounts receivable 2,513,143 2,834,321 2,821,833 Merchandise inventories 4,287,328 3,245,996 4,170,860 Supplies and prepaid expenses 119,685 109,678 169,532 Deferred income tax assets 116,107 88,513 90,883 Total Current Assets 7,467,419 6,427,302 7,405,704 Property and Equipment - net 6,423,168 6,524,757 6,384,812 Intangible Assets - net 696,940 717,404 724,225 Notes Receivable 6,923 204,400 204,997 Other Assets 337,091 390,280 376,956 Total Assets $ 14,931,541 $ 14,264,143 $ 15,096,694 LIABILITIES AND SHAREHOLDERS' EQUITY: Current Liabilities: Short-term debt $ 1,899,473 $ 1,094,557 $ 741,117 Accounts payable and accrued liabilities 3,047,907 2,492,195 3,059,327 Income taxes 28,042 8,947 3,550 Total Current Liabilities 4,975,422 3,595,699 3,803,994 Long-Term Debt 3,682,499 4,605,916 5,624,065 Deferred Income Taxes 842,048 830,943 727,772 Other Liabilities 560,247 562,431 564,606 Shareholders' Equity 4,871,325 4,669,154 4,376,257 Total Liabilities and Shareholders' Equity $ 14,931,541 $ 14,264,143 $ 15,096,694 The accompanying notes are an integral part of these unaudited Consolidated Financial Statements.
FEDERATED DEPARTMENT STORES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (THOUSANDS)
39 Weeks Ended 39 Weeks Ended November 1, 1997 November 2, 1996 Cash flows from operating activities: Net income (loss) $ 156,870 $ (23,338) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization of property and equipment 417,474 379,816 Amortization of intangible assets 20,464 20,464 Amortization of financing costs 16,905 20,790 Amortization of unearned restricted stock 896 1,629 Loss on early extinguishment of debt 38,673 - Changes in assets and liabilities: Decrease in accounts receivable 321,733 220,041 Increase in merchandise inventories (1,041,333) (1,076,012) (Increase) decrease in supplies and prepaid expenses (10,007) 6,879 (Increase) decrease in other assets not separately identified (6,995) 20,342 Increase in accounts payable and accrued liabilities not separately identified 467,991 652,942 Increase (decrease) in current income taxes 4,055 (2,861) Decrease in deferred income taxes (16,489) (21,536) (Decrease) increase in other liabilities not separately identified (2,184) 6,179 Net cash provided by operating activities 408,053 205,335 Cash flows from investing activities: Purchase of property and equipment (410,547) (523,540) Disposition of property and equipment 120,113 137,464 Decrease in notes receivable 199,997 - Net cash used by investing activities (90,437) (386,076) Cash flows from financing activities: Debt issued 1,284,049 688,665 Financing costs (6,351) (11,096) Debt repaid (1,445,080) (689,172) Decrease in outstanding checks 87,724 47,842 Acquisition of treasury stock (1,803) (646) Issuance of common stock 46,207 125,226 Net cash (used) provided by financing activities (35,254) 160,819
(Continued) FEDERATED DEPARTMENT STORES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (THOUSANDS)
39 Weeks Ended 39 Weeks Ended November 1, 1997 November 2, 1996 Net increase (decrease) in cash $ 282,362 $ (19,922) Cash at beginning of period 148,794 172,518 Cash at end of period $ 431,156 $ 152,596 Supplemental cash flow information: Interest paid $ 310,052 $ 337,553 Interest received 28,889 33,875 Income taxes paid (net of refunds received) 96,587 18,604 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 39 weeks ended November 1, 1997 and November 2, 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 39 weeks ended November 1, 1997 and November 2, 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 39 weeks ended November 1, 1997. For the 13 and 39 weeks ended November 2, 1996 the potential issuance of share equivalents was immaterial or 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 39 weeks ended November 1, 1996 to conform to the classifications of such amounts for the 52 weeks ended February 1, 1997. 2.INVENTORY VALUATION ADJUSTMENTS RELATED TO CONSOLIDATION 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 39 weeks ended November 2, 1996, the amount recorded related to the consolidation of Broadway into the Company's Macy's West division. FEDERATED DEPARTMENT STORES, INC. NOTES TO 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 39 weeks ended November 2, 1996, the Company recorded $155.2 million of business integration and consolidation expenses consisting of $116.9 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), $21.9 million of costs related to the consolidation of Macy's and $16.4 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 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. 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. 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 NOVEMBER 1, 1997 AND NOVEMBER 2, 1996 For purposes of the following discussion, all references to "third quarter of 1997" and "third quarter of 1996" are to the Company's 13-week fiscal periods ended November 1, 1997 and November 2, 1996, respectively. Net sales for the third quarter of 1997 totaled $3,746.3 million, compared to net sales of $3,609.1 million for the third quarter of 1996, an increase of 3.8%. On a comparable store basis, net sales for the third quarter of 1997 increased 3.1% over the third quarter of 1996. Cost of sales was 61.0% as a percent of net sales for the third quarter of 1997 compared to 60.7% for the third quarter of 1996. Cost of sales for the third quarter of 1997 reflected higher levels of clearance markdowns than the third quarter of 1996. Cost of sales was not impacted by the valuation of merchandise inventory on the last-in, first-out basis in the third quarter of 1997 or the third quarter of 1996. Selling, general and administrative ("SG&A") expenses were 31.8% as a percent of net sales for the third quarter of 1997 compared to 34.1% for the third quarter of 1996. SG&A expenses for the third quarter of 1996 included $44.3 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 32.9% of net sales for the third quarter of 1996. The major factor contributing to the 1.1% improvement in the SG&A expense rate (excluding BICE for the third quarter of 1996) was lower distribution-related expenses resulting from restructuring and technological improvements in the merchandise distribution process. Net interest expense was $91.9 million for the third quarter of 1997, compared to $113.4 million for the third quarter of 1996. The lower interest expense for the third quarter of 1997 is due to lower levels of borrowings and lower interest rates resulting from the refinancings completed in July 1997. The Company's effective income tax rate of 40.3% for the third 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. COMPARISON OF THE 39 WEEKS ENDED NOVEMBER 1, 1997 AND NOVEMBER 2, 1996 For purposes of the following discussion, all references to "1997" and "1996" are to the Company's 39 week fiscal periods ended November 1, 1997 and November 2, 1996, respectively. Net sales for 1997 were $10,608.2 million compared to $10,194.0 million for 1996, an increase of 4.1%. On a comparable store basis, net sales increased 3.4%. FEDERATED DEPARTMENT STORES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Cost of sales was 61.0% as a percent of net sales for 1997 compared to 61.5% 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 adjustment from 1996, cost of sales would have been 60.8% of net sales, with the 0.2% increase in 1997 being 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 33.1% as a percent of net sales for 1997 compared to 35.4% for 1996. SG&A expenses for 1996 included $155.2 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 33.9% of net sales for 1996. The major factor contributing to the 0.8% 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 $295.5 million for 1997 compared to $341.3 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 41.2% 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. The extraordinary item of $38.7 million for 1997 represents the after-tax expenses associated with debt prepayments. LIQUIDITY AND CAPITAL RESOURCES For purposes of the following discussion, all references to "1997" and "1996" are to the Company's 39 week fiscal periods ended November 1, 1997 and November 2, 1996, respectively. The Company's principal sources of liquidity are cash from operations, cash on hand and certain available credit facilities. Net cash provided by operating activities in 1997 was $408.1 million compared to the $205.3 million provided in 1996. The major factors contributing to this improvement were improved operating results and greater reductions in accounts receivable. FEDERATED DEPARTMENT STORES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Net cash used by investing activities was $90.4 million in 1997, with purchases of property and equipment totaling $410.5 million and dispositions of property and equipment totaling $120.1 million. During 1997, the Company opened five new stores, including a furniture gallery, and closed ten 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 $35.3 million in 1997. During 1997, the Company incurred debt totaling $1,284.0 million and repaid debt in the amount of $1,445.1 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 $734.0 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 November 1, 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 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1 Ninth Amendment to Amended and Restated Pooling and Servicing Agreement, dated as of August 28, 1997, by and among Prime Receivables Corporation, as Transferor, FDS National Bank, as Servicer, and The Chase Manhattan Bank, as Trustee. 10.2 First Amendment to Series 1992-1 Supplement, dated as of August 28, 1997, to the Pooling and Servicing Agreement, dated as of December 15, 1992, by and among Prime Receivables Corporation, as Transferor, FDS National Bank, as Servicer, and The Chase Manhattan Bank, as Trustee. 10.3 First Amendment to Series 1992-2 Supplement, dated as of August 28, 1997, to the Pooling and Servicing Agreement, dated as of December 15, 1992, by and among Prime Receivables Corporation, as Transferor, FDS National Bank, as Servicer, and The Chase Manhattan Bank, as Trustee. 10.4 First Amendment to Series 1995-1 Supplement, dated as of August 28, 1997, to the Pooling and Servicing Agreement, dated as of December 15, 1992, by and among Prime Receivables Corporation, as Transferor, FDS National Bank, as Servicer, and The Chase Manhattan Bank, as Trustee. 10.5 First Amendment to Series 1996-1 Supplement, dated as of August 28, 1997, to the Pooling and Servicing Agreement, dated as of December 15, 1992, by and among Prime Receivables Corporation, as Transferor, FDS National Bank, as Servicer, and The Chase Manhattan Bank, as Trustee. 11 Statement re computation of per share earnings 27 Financial Data Schedule (b) Reports on Form 8-K No reports were filed on Form 8-K during the quarter ended November 1, 1997. 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 December 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)