10-Q 1 tenq202.txt FORM 10-Q FOR THE PERIOD ENDED AUGUST 3, 2002 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 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 August 3, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _______________ Commission File Number 1-79 THE MAY DEPARTMENT STORES COMPANY (Exact name of registrant as specified in its charter) Delaware 43-1104396 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 611 Olive Street, St. Louis, Missouri 63101 (Address of principal executive offices) (Zip Code) (314) 342-6300 (Registrant's telephone number, including area code) Indicate by check mark 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 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. 288,216,516 shares of common stock, $.50 par value, as of August 31, 2002. 1 PART 1 - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS THE MAY DEPARTMENT STORES COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (Millions) Aug. 3, Aug. 4, Feb. 2, ASSETS 2002 2001 2002 Current assets: Cash and cash equivalents $ 96 $ 58 $ 52 Accounts receivable, net 1,579 1,731 1,938 Merchandise inventories 2,993 3,140 2,875 Other current assets 55 115 60 Total current assets 4,723 5,044 4,925 Property and equipment, at cost 9,301 8,675 8,996 Accumulated depreciation (3,952) (3,506) (3,732) Property and equipment, net 5,349 5,169 5,264 Goodwill 1,433 1,286 1,433 Intangible assets, net 177 163 179 Other assets 118 90 119 Total assets $ 11,800 $ 11,752 $ 11,920 LIABILITIES AND SHAREOWNERS' EQUITY Current liabilities: Short-term debt $ - $ 191 $ 78 Current maturities of long-term debt 268 113 255 Accounts payable 1,087 1,013 1,023 Accrued expenses 933 910 900 Income taxes payable 115 145 272 Total current liabilities 2,403 2,372 2,528 Long-term debt 4,327 4,419 4,403 Deferred income taxes 716 603 696 Other liabilities 374 332 370 ESOP preference shares 279 292 286 Unearned compensation (152) (204) (204) Shareowners' equity 3,853 3,938 3,841 Total liabilities and shareowners' equity $ 11,800 $ 11,752 $ 11,920 The accompanying notes to condensed consolidated financial statements are an integral part of these balance sheets. 2 THE MAY DEPARTMENT STORES COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited) (Millions, except per share) 13 Weeks Ended 26 Weeks Ended Aug. 3, Aug. 4, Aug. 3, Aug. 4, 2002 2001 2002 2001 Revenues $ 3,093 $ 3,173 $ 6,262 $ 6,326 Cost of sales: Recurring 2,151 2,183 4,386 4,385 Nonrecurring - division combination markdowns 20 - 20 - Selling, general, and administrative expenses 688 718 1,387 1,406 Division combination costs 39 - 79 - Interest expense, net 86 89 169 175 Earnings before income taxes 109 183 221 360 Provision for income taxes 40 72 82 140 Net earnings $ 69 $ 111 $ 139 $ 220 Basic earnings per share $ .22 $ .36 $ .45 $ .71 Diluted earnings per share $ .22 $ .35 $ .45 $ .69 Dividends paid per common share $.23-3/4 $.23-1/2 $.47-1/2 $ .47 Weighted average shares outstanding: Basic 288.4 299.2 288.0 299.0 Diluted 308.9 320.9 308.9 321.1 The accompanying notes to condensed consolidated financial statements are an integral part of these statements. 3 THE MAY DEPARTMENT STORES COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Millions) 26 Weeks Ended Aug. 3, Aug. 4, 2002 2001 Operating Activities: Net earnings $ 139 $ 220 Depreciation and other amortization 262 238 Goodwill and other intangible amortization 5 22 Division combination costs 99 - Working capital changes: Accounts receivable, net 358 382 Merchandise inventories (137) (166) Other current assets 3 (12) Accounts payable 65 48 Accrued expenses (22) (8) Income taxes payable (158) (148) Other, net 31 17 Cash flows from operations 645 593 Investing Activities: Net additions to property and equipment (377) (392) Business combination - (304) Cash flows used for investing activities (377) (696) Financing Activities: Net issuances (repayments): Short-term debt (78) 191 Long-term debt (13) (42) Net issuances of common stock 12 5 Dividend payments, net of tax benefit (145) (149) Cash flows (used for) provided by financing activities (224) 5 Increase(Decrease) in cash and cash equivalents 44 (98) Cash and cash equivalents, beginning of period 52 156 Cash and cash equivalents, end of period $ 96 $ 58 Cash paid during the period: Interest $ 183 $ 155 Income Taxes 212 265 The accompanying notes to condensed consolidated financial statements are an integral part of these statements. 4 THE MAY DEPARTMENT STORES COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Interim Results. These unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q of the Securities and Exchange Commission and should be read in conjunction with the Notes to Consolidated Financial Statements (pages 29-35) in the 2001 Annual Report. In the opinion of management, this information is fairly presented and all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the results for the interim periods have been included; however, certain items are included in these statements based on estimates for the entire year. Also, operating results of periods which exclude the Christmas season may not be indicative of the operating results that may be expected for the fiscal year. Division Combinations. On August 3, 2002, The May Department Stores Company (the company or the parent) completed its previously announced plan to combine its Kaufmann's division with its Filene's division, and its Meier & Frank division with its Robinsons-May division. Total nonrecurring pre-tax charges associated with the division combinations are expected to be approximately $110 million or $.22 per share, of which $59 million or $.12 per share were recognized in the second quarter consisting of $20 million as cost of sales and $39 million as other operating expenses. The company incurred approximately $40 million or $.08 per share of division combination costs in the first quarter and expects to incur the remaining division combination costs of approximately $11 million or $.02 per share over the third and fourth quarters. The significant components of the division combination costs and status of the related liability are summarized below: (Millions) Non-cash Balance at Charges Payments Uses Aug. 3, 2002 Severance and relocation benefits $ 58 $ 27 $ - $ 31 Inventory alignment 20 - 19 1 Central office closure 12 1 11 - Other 9 4 - 5 Total $ 99 $ 32 $ 30 $ 37 Severance and relocation benefits include severance for approximately 1,600 associates and the costs to relocate certain employees. Inventory alignment includes the markdowns incurred to conform merchandise assortments and to synchronize pricing and promotional strategies. Central office closure primarily includes accelerated depreciation of fixed assets to close central offices. The company anticipates that the division combinations will save approximately $60 million pre-tax or $.13 per share annually. Net earnings excluding division combination costs for the second quarter of 2002 were $106 million or $.34 per share. Net earnings excluding division combination costs for the first six months of 2002 were $201 million or $.65 per share. Income Taxes. The effective income tax rate for the first six months of 2002 was 37.0%, compared with 38.8% in the first six months of 2001. The effective income tax rate for the second quarter of 2002 was 36.6%, compared with 38.8% in the second quarter of 2001, reflecting the adjustment to record the year- to-date provision at the expected annual effective tax rate of 37.0%. The rate reduction for the first six months of 2002 is due to the favorable impact of eliminating goodwill amortization, corporate structure changes, and changes in tax regulations. 5 Inventories. Merchandise inventories are principally valued at the lower of LIFO (last-in, first-out) cost basis or market using the retail method. Based upon current estimates, the company does not expect a LIFO provision or credit in 2002, compared to a fiscal 2001 LIFO credit of $30 million. No LIFO provision was recorded in the second quarter or first six months of 2002, compared with an $8 million provision and a $16 million provision in the second quarter and first six months of 2001, respectively. Impact of New Accounting Pronouncements. In the first quarter of fiscal 2002, the company adopted Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets," which eliminates goodwill amortization and prescribes a new approach for assessing potential goodwill impairments. The company completed the transitional goodwill impairment test required by SFAS No. 142 and identified no potential impairment. The following table illustrates the impact of goodwill amortization on the results of the second quarter and first six months of 2001. (Millions, except per share) 13 Weeks Ended 26 Weeks Ended Aug. 3, Aug. 4, Aug. 3, Aug. 4, 2002 2001 2002 2001 Reported net income $ 69 $ 111 $ 139 $ 220 Add back: Goodwill amortization - 9 - 17 Adjusted net income $ 69 $ 120 $ 139 $ 237 Basic earnings per share: Reported net income $ .22 $ .36 $ .45 $ .71 Add back: Goodwill amortization - .03 - .06 Adjusted net income $ .22 $ .39 $ .45 $ .77 Diluted earnings per share: Reported net income $ .22 $ .35 $ .45 $ .69 Add back: Goodwill amortization - .03 - .06 Adjusted net income $ .22 $ .38 $ .45 $ .75 In April 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 eliminates the requirement to classify gains and losses from the extinguishment of indebtedness as extraordinary, requires certain lease modifications to be treated the same as a sale-leaseback transaction, and makes other non- substantive technical corrections to existing pronouncements. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002, with earlier adoption encouraged. The company expects the only impact of adopting SFAS No. 145 to be the reclassification of prior year extraordinary losses to interest expense and income taxes. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 changes the timing of when certain costs associated with exit or disposal activities are recognized. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002, with early application encouraged. The company does not expect SFAS No. 146 to have a material impact on its consolidated operating results or financial position. Stock Option and Stock-Related Plans. Effective February 2, 2003, the company will begin expensing the fair value of employee stock options. In accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," the company will adopt the fair value method prospectively. The expense associated with stock options is expected to be approximately $.02 per share in 2003, growing to approximately $.08 per share by 2006. 6 Reclassifications. Certain prior period amounts have been reclassified to conform with current year presentation. Earnings per Share. The following tables reconcile net earnings and weighted average shares outstanding to amounts used to calculate basic and diluted earnings per share ("EPS") for the periods shown (millions, except per share). 13 Weeks Ended Aug. 3, 2002 Aug. 4, 2001 Earnings Shares EPS Earnings Shares EPS Net earnings $ 69 $ 111 ESOP preference shares' dividends (5) (4) Basic EPS 64 288.4 $ .22 107 299.2 $ .36 ESOP preference shares 4 18.7 4 19.7 Assumed exercise of options (treasury stock method) - 1.8 - 2.0 Diluted EPS $ 68 308.9 $ .22 $ 111 320.9 $ .35 26 Weeks Ended Aug. 3, 2002 Aug. 4, 2001 Earnings Shares EPS Earnings Shares EPS Net earnings $ 139 $ 220 ESOP preference shares' dividends (9) (9) Basic EPS 130 288.0 $ .45 211 299.0 $ .71 ESOP preference shares 8 18.9 9 19.7 Assumed exercise of options (treasury stock method) - 2.0 - 2.4 Diluted EPS $ 138 308.9 $ .45 $ 220 321.1 $ .69 Condensed Consolidating Financial Information. The parent has fully and unconditionally guaranteed certain long-term debt obligations of its wholly- owned subsidiary, The May Department Stores Company, New York ("Subsidiary Issuer"). Other subsidiaries of the parent include May Department Stores International, Inc. (MDSI), Leadville Insurance Company, Snowdin Insurance Company, Priscilla of Boston, and David's Bridal, Inc. and subsidiaries, including After Hours Formalwear, Inc. Condensed consolidating balance sheets as of August 3, 2002, August 4, 2001,and February 2, 2002, the related condensed consolidating statements of earnings for the thirteen week and twenty-six week periods ended August 3, 2002 and August 4, 2001, and the related condensed consolidating statements of cash flows for the twenty-six week periods ended August 3, 2002 and August 4, 2001, are presented below. 7 Condensed Consolidating Financial Information (continued) - Condensed Consolidating Balance Sheet As of August 3, 2002 (Unaudited) (Millions) Subsidiary Other Parent Issuer Subsidiaries Eliminations Consolidated ASSETS Current assets: Cash and cash equivalents $ - $ 77 $ 19 $ - $ 96 Accounts receivable, net - 1,571 44 (36) 1,579 Merchandise inventories - 2,891 102 - 2,993 Other current assets - 37 18 - 55 Total current assets - 4,576 183 (36) 4,723 Property and equipment, at cost - 9,130 171 - 9,301 Accumulated depreciation - (3,913) (39) - (3,952) Property and equipment, net - 5,217 132 - 5,349 Goodwill - 1,129 304 - 1,433 Intangible assets, net - 8 169 - 177 Other assets - 108 10 - 118 Intercompany (payable) receivable (892) 528 364 - - Investment in subsidiaries 4,878 - - (4,878) - Total assets $ 3,986 $11,566 $ 1,162 $ (4,914) $11,800 LIABILITIES AND SHAREOWNERS' EQUITY Current liabilities: Short-term debt $ - $ - $ - $ - $ - Current maturities of long- term debt - 268 - - 268 Accounts payable - 993 94 - 1,087 Accrued expenses 6 885 78 (36) 933 Income taxes payable - 92 23 - 115 Total current liabilities 6 2,238 195 (36) 2,403 Long-term debt - 4,326 1 - 4,327 Intercompany note payable (receivable) - 3,200 (3,200) - - Deferred income taxes - 649 67 - 716 Other liabilities - 835 9 (470) 374 ESOP preference shares 279 - - - 279 Unearned compensation (152) (152) - 152 (152) Shareowners' equity 3,853 470 4,090 (4,560) 3,853 Total liabilities and shareowners' equity $ 3,986 $11,566 $ 1,162 $ (4,914) $11,800
8 Condensed Consolidating Financial Information (continued) - Condensed Consolidating Statement of Earnings For the Thirteen Weeks Ended August 3, 2002 (Unaudited) (Millions) Subsidiary Other Parent Issuer Subsidiaries Eliminations Consolidated Revenues $ - $ 2,953 $ 451 $ (311) $ 3,093 Cost of sales - 2,107 350 (286) 2,171 Selling, general, and administrative expenses - 658 59 (29) 688 Division combination costs - 39 - - 39 Interest expense (income), net: External - 86 - - 86 Intercompany - 72 (71) (1) - Equity in earnings of subsidiaries (69) - - 69 - Earnings before income taxes 69 (9) 113 (64) 109 Provision for income taxes - 1 39 - 40 Net earnings $ 69 $ (10) $ 74 $ (64) $ 69
Condensed Consolidating Statement of Earnings For the Twenty-six Weeks Ended August 3, 2002 (Unaudited) (Millions) Subsidiary Other Parent Issuer Subsidiaries Eliminations Consolidated Revenues $ - $ 5,972 $ 806 $ (516) $ 6,262 Cost of sales - 4,268 608 (470) 4,406 Selling, general, and administrative expenses - 1,322 121 (56) 1,387 Division combination costs - 79 - - 79 Interest expense (income), net: External - 169 - - 169 Intercompany - 142 (141) (1) - Equity in earnings of subsidiaries (139) - - 139 - Earnings before income taxes 139 (8) 218 (128) 221 Provision for income taxes - 2 80 - 82 Net earnings $ 139 $ (10) $ 138 $ (128) $ 139
9 Condensed Consolidating Financial Information (continued) - Condensed Consolidating Statement of Cash Flows For the Twenty-six Weeks Ended August 3, 2002 (Unaudited) (Millions) Subsidiary Other Parent Issuer Subsidiaries Eliminations Consolidated Operating activities: Net earnings $ 139 $ (10) $ 138 $ (128) $ 139 Equity in earnings of subsidiaries (139) - - 139 - Depreciation and other amortization - 248 14 - 262 Goodwill and intangible amortization - 1 4 - 5 Division combination costs - 99 - - 99 Decrease in working capital - 109 - - 109 Other, net 50 29 (37) (11) 31 50 476 119 - 645 Investing activities: Net additions to property and equipment - (355) (22) - (377) - (355) (22) - (377) Financing activities: Net repayments of short-term debt - (78) - - (78) Net repayments of long-term debt - (13) - - (13) Net issuances of common stock 3 9 - - 12 Dividend payments, net of tax benefit (147) 2 - - (145) Intercompany activity, net 94 - (94) - - (50) (80) (94) - (224) Increase in cash and cash equivalents - 41 3 - 44 Cash and cash equivalents, beginning of period - 36 16 - 52 Cash and cash equivalents, end of period $ - $ 77 $ 19 $ - $ 96
10 Condensed Consolidating Financial Information (continued) - Condensed Consolidating Balance Sheet As of August 4, 2001 (Unaudited) (Millions) Subsidiary Other Parent Issuer Subsidiaries Eliminations Consolidated ASSETS Current assets: Cash and cash equivalents $ - $ 38 $ 20 $ - $ 58 Accounts receivable, net - 1,726 42 (37) 1,731 Merchandise inventories - 3,053 87 - 3,140 Other current assets - 103 12 - 115 Total current assets - 4,920 161 (37) 5,044 Property and equipment, at cost - 8,588 87 - 8,675 Accumulated depreciation - (3,488) (18) - (3,506) Property and equipment, net - 5,100 69 - 5,169 Goodwill - 1,106 180 - 1,286 Intangible assets, net - 7 156 - 163 Other assets - 87 3 - 90 Intercompany (payable) receivable (714) 437 277 - - Investment in subsidiaries 4,747 - - (4,747) - Total assets $ 4,033 $11,657 $ 846 $ (4,784) $ 11,752 LIABILITIES AND SHAREOWNERS' EQUITY Current liabilities: Short-term debt $ - $ 191 $ - $ - $ 191 Current maturities of long- term debt - 113 - - 113 Accounts payable - 919 94 - 1,013 Accrued expenses 7 883 57 (37) 910 Income taxes payable - 143 2 - 145 Total current liabilities 7 2,249 153 (37) 2,372 Long-term debt - 4,418 1 - 4,419 Intercompany note payable (receivable) - 3,200 (3,200) - - Deferred income taxes - 600 3 - 603 Other liabilities - 784 - (452) 332 ESOP preference shares 292 - - - 292 Unearned compensation (204) (204) - 204 (204) Shareowners' equity 3,938 610 3,889 (4,499) 3,938 Total liabilities and shareowners' equity $ 4,033 $11,657 $ 846 $ (4,784) $ 11,752
11 Condensed Consolidating Financial Information (continued) - Condensed Consolidating Statement of Earnings For the Thirteen Weeks Ended August 4, 2001 (Unaudited) (Millions) Subsidiary Other Parent Issuer Subsidiaries Eliminations Consolidated Revenues $ - $ 3,093 $ 416 $ (336) $ 3,173 Cost of sales - 2,153 343 (313) 2,183 Selling, general, and administrative expenses - 710 36 (28) 718 Interest expense (income), net: External - 89 - - 89 Intercompany - 71 (71) - - Equity in earnings of subsidiaries 111 - - (111) - Earnings before income taxes 111 70 108 (106) 183 Provision for income taxes - 32 40 - 72 Net earnings $ 111 $ 38 $ 68 $ (106) $ 111
Condensed Consolidating Statement of Earnings For the Twenty-six Weeks Ended August 4, 2001 (Unaudited) (Millions) Subsidiary Other Parent Issuer Subsidiaries Eliminations Consolidated Revenues $ - $ 6,154 $ 750 $ (578) $ 6,326 Cost of sales - 4,317 605 (537) 4,385 Selling, general, and administrative expenses - 1,384 73 (51) 1,406 Interest expense (income), net: External - 175 - - 175 Intercompany - 142 (142) - - Equity in earnings of subsidiaries 220 - - (220) - Earnings before income taxes 220 136 214 (210) 360 Provision for income taxes - 62 78 - 140 Net earnings $ 220 $ 74 $ 136 $ (210) $ 220
12 Condensed Consolidating Financial Information (continued) - Condensed Consolidating Statement of Cash Flows For the Twenty-six Weeks Ended August 4, 2001 (Unaudited) (Millions) Subsidiary Other Parent Issuer Subsidiaries Eliminations Consolidated Operating activities: Net earnings $ 220 $ 74 $ 136 $ (210) $ 220 Equity in earnings of subsidiaries (220) - - 220 - Depreciation and amortization - 250 10 - 260 Decrease in working capital - 54 42 - 96 Other, net 66 41 (80) (10) 17 66 419 108 - 593 Investing activities: Net additions to property and equipment - (379) (13) - (392) Business combination - (304) - - (304) - (683) (13) - (696) Financing activities: Net issuances of notes payable - 191 - - 191 Net repayments of long-term debt - (41) (1) - (42) Net (purchases)issuances of common stock (8) 13 - - 5 Dividend payments, net of tax benefit (151) 2 - - (149) Intercompany activity, net 93 - (93) - - (66) 165 (94) - 5 (Decrease) Increase in cash and cash equivalents - (99) 1 - (98) Cash and cash equivalents, beginning of period - 137 19 - 156 Cash and cash equivalents, end of period $ - $ 38 $ 20 $ - $ 58
13 Condensed Consolidating Financial Information (continued) - Condensed Consolidating Balance Sheet February 2, 2002 (Unaudited) (Millions) Subsidiary Other Parent Issuer Subsidiaries Eliminations Consolidated ASSETS Current assets: Cash and cash equivalents $ - $ 36 $ 16 $ - $ 52 Accounts receivable, net - 1,930 45 (37) 1,938 Merchandise inventories - 2,801 74 - 2,875 Other current assets - 43 17 - 60 Total current assets - 4,810 152 (37) 4,925 Property and equipment, at cost - 8,844 152 - 8,996 Accumulated depreciation - (3,709) (23) - (3,732) Property and equipment, net - 5,135 129 - 5,264 Goodwill - 1,128 305 - 1,433 Intangible assets, net - 6 173 - 179 Other assets - 109 10 - 119 Intercompany (payable) receivable (841) 523 318 - - Investment in subsidiaries 4,770 - - (4,770) - Total assets $3,929 $ 11,711 $ 1,087 $ (4,807) $11,920 LIABILITIES AND SHAREOWNERS' EQUITY Current liabilities: Short-term debt $ - $ 78 $ - $ - $ 78 Current maturities of long- term debt - 254 1 - 255 Accounts payable - 947 76 - 1,023 Accrued expenses 6 854 87 (37) 910 Income taxes payable - 263 9 - 272 Total current liabilities 6 2,396 173 (37) 2,538 Long-term debt - 4,402 1 - 4,403 Intercompany note payable (receivable) - 3,200 (3,200) - - Deferred income taxes - 629 67 - 696 Other liabilities - 818 - (458) 360 ESOP preference shares 286 - - - 286 Unearned compensation (204) (204) - 204 (204) Shareowners' equity 3,841 470 4,046 (4,516) 3,841 Total liabilities and shareowners' equity $3,929 $ 11,711 $ 1,087 $ (4,807) $11,920
14 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Net retail sales include lease department sales but exclude sales from closed and non-replaced stores and finance charge revenues. Store-for-store sales compare sales of stores open during both years beginning the first day a store has prior year sales. Lease department sales are integral to our operations and including them in net retail sales gives us a measure of our total sales productivity. Through the exclusion of closed and non-replaced stores, net retail sales provide meaningful comparative data about our current store base. Net retail sales differ from generally accepted accounting principles due to the inclusion of lease department sales and the exclusion of sales from closed and non-replaced stores. Consequently, net retail sales may not be comparable to sales reported by other retailers and are not an alternative to revenues. Net retail sales for 2002 and 2001 are as follows: Percent Store-for-store 2002 2001 Decrease Decrease Second quarter $3,097 $3,151 (1.7)% (4.9)% First six months 6,251 6,267 (0.3) (3.6) The total net retail sales decrease for the second quarter of 2002 was due to a $154 million decrease in store-for-store sales offset by $100 million of new store sales. The total net retail sales decrease for the first six months of 2002 was due to a $227 million decrease in store-for-store sales offset by $211 million of new store sales. The following table presents the components of costs and expenses, as a percent of revenues. Second Quarter First Six Months 2002 2001 2002 2001 Revenues 100.0% 100.0% 100.0% 100.0% Cost of sales Recurring 69.6 68.8 70.0 69.3 Nonrecurring - division combination markdowns 0.6 0.0 0.3 0.0 Selling, general, and administrative expenses 22.2 22.6 22.2 22.2 Division combination costs 1.3 0.0 1.3 0.0 Interest expense, net 2.8 2.8 2.7 2.8 Earnings before income taxes 3.5 5.8 3.5 5.7 Provision for income taxes 36.6* 38.8* 37.0* 38.8* Net earnings 2.2% 3.5% 2.2% 3.5% * - Percent represents effective income tax rate. Revenues include sales from all stores operating during the periods, finance charge revenues, and lease department income. The decrease in revenues is due primarily to the decrease in net retail sales discussed above. 15 Cost of sales includes the cost of merchandise, inbound freight, distribution expenses, and buying and occupancy costs. Cash or allowances received from vendors when merchandise does not achieve anticipated rates of sale are recognized as reductions of cost of sales. Recurring cost of sales was $2,151 million in the 2002 second quarter, down 1.5% from $2,183 million in the 2001 second quarter. For the first six months of 2002, recurring cost of sales was $4,386 million, compared to $4,385 million in the same 2001 period. In addition, $20 million of nonrecurring division combination markdowns were incurred to conform merchandise assortments and to synchronize pricing and promotional strategies. As a percent of revenues, recurring cost of sales for the second quarter of 2002 increased 0.8%, principally due to a 1.2% increase in occupancy costs, partially offset by the effect of the LIFO (last-in, first-out) cost method. For the first six months of 2002, recurring cost of sales as a percent of revenues increased 0.7%, principally due to a 1.0% increase in occupancy costs, partially offset by the effect of the LIFO cost method. Based upon current estimates, we do not expect a LIFO provision or credit in fiscal 2002, compared with a fiscal 2001 LIFO credit of $30 million. No LIFO provision was recorded in the second quarter or the first six months of 2002, compared with an $8 million provision and a $16 million provision in the second quarter and first six months of 2001, respectively. Selling, general, and administrative expenses were $688 million in the 2002 second quarter, compared with $718 million in the 2001 second quarter, a 4.2% decrease. For the first six months of 2002, selling, general, and administrative expenses were $1,387 million compared with $1,406 million in the 2001 period, a 1.3% decrease. Selling, general, and administrative expenses as a percent of revenues decreased 0.4% for the second quarter of 2002 as compared with 2001. The decrease was principally due to an 0.8% decrease in credit expense and a 0.3% decrease due to the elimination of goodwill amortization, offset by a 0.6% increase in payroll and a 0.2% increase in insurance costs. Selling, general, and administrative expenses as a percent of revenues in the first six months of 2002 were unchanged from the first six months of 2001, as credit expense decreased 0.8% and goodwill amortization decreased 0.3%, partially offset by a 0.4% increase in payroll and a 0.2% increase in insurance costs. On August 3, 2002, we completed our previously announced plan to combine our Kaufmann's division with our Filene's division, and our Meier & Frank division with our Robinsons-May division. Total non-recurring pre-tax charges associated with the division combinations are expected to be approximately $110 million or $.22 per share, of which $59 million or $.12 per share were recognized in the second quarter consisting of $20 million as cost of sales and $39 million as other operating expenses. We incurred approximately $40 million or $.08 per share of division combination costs in the first quarter and expect to incur the remaining division combination costs of approximately $11 million or $.02 per share over the third and fourth quarters. Components of net interest expense were (millions): Second Quarter First Six Months 2002 2001 2002 2001 Interest expense $ 94 $ 96 $188 $190 Interest income (1) (1) (7) (5) Capitalized interest (7) (6) (12) (10) Net interest expense $ 86 $ 89 $169 $175 Interest expense principally relates to long-term debt. 16 Short-term borrowings were (dollars in millions): Second Quarter First Six Months 2002 2001 2002 2001 Average balance outstanding $112 $371 $ 80 $242 Average interest rate on average balance 1.8% 4.0% 1.8% 4.2% The effective income tax rate for the first six months of 2002 was 37.0% compared with 38.8% in the first six months of 2001. The effective income tax rate for the second quarter of 2002 was 36.6%, compared with 38.8% in the second quarter of 2001, reflecting the adjustment to record the year-to-date provision at the expected annual effective tax rate of 37.0%. The rate reduction for the first six months of 2002 is due to the favorable impact of eliminating goodwill amortization, corporate structure changes, and changes in tax regulations. Operating results excluding division combination costs for the trailing years were (millions, except per share): Aug. 3, Aug. 4, 2002 2001 (a) Revenues $ 14,111 $ 14,656 Net earnings 687 823 Diluted earnings per share 2.18 2.55 (a)- Includes 53 weeks. Financial Condition Cash Flows. Cash flows from operations were $645 million and $593 million in the first six months of 2002 and 2001, respectively. The increase in current year cash flows is primarily due to changes in working capital accounts. Liquidity, Available Credit, and Debt Ratings. We finance our activities primarily with cash flows from operations, borrowings under credit facilities and issuances of long-term debt. We can borrow up to $1.0 billion under our credit agreements. In addition, we have filed with the Securities and Exchange Commission shelf registration statements that enable us to issue up to $525 million of debt securities. Our bonds are rated A2 by Moody's Investors Service, Inc. and A by Standard & Poor's Corporation. Our commercial paper is rated P1 by Moody's and A1 by Standard & Poor's. Our senior unsecured bank credit agreement is rated A1 by Moody's. Effective October 1, 2002, we intend to redeem all of our 8-3/8% debentures due in 2022. The redemption price for the $200 million debentures will be $1,040.44 for each $1,000 in principal plus accrued interest. This debt redemption will result in a $.02 per share charge in the third quarter of 2002. 17 Financial Ratios. Key financial ratios for the periods indicated are as follows: Aug. 3, Aug. 4, Feb. 2, 2002 2001 2002 Current Ratio 2.0 2.1 1.9 Debt-Capitalization Ratio 50% 51% 51% Fixed Charge Coverage* 3.2x 3.7x 3.4x * Fixed charge coverage, which is presented for the 52 weeks ended August 3, 2002, August 4, 2001, and February 2, 2002, is defined as earnings before division combination costs and gross interest expense, the expense portion of interest on the ESOP debt, rent expense and income taxes divided by gross interest expense, interest expense on the ESOP debt, and total rent expense. Recent Sales Results and Other Recent Developments Sales for the four-week period ending August 31, 2002 were $983.1 million, a 5.8% decrease from $1.04 billion in the similar period last year. Store-for- store sales decreased 8.6%. Sales for the first seven months of fiscal 2002 were $7.23 billion, a 1.0% decrease, compared with $7.31 billion during the first seven months of fiscal 2001. Store-for-store sales decreased 4.3%. Effective February 2, 2003, we will begin expensing the fair value of employee stock options. In accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," we will adopt the fair value method prospectively. The expense associated with stock options is expected to be approximately $.02 per share in 2003, growing to approximately $.08 per share by 2006. Impact of New Accounting Pronouncements In the first quarter of fiscal 2002, we adopted Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets," which eliminates goodwill amortization and prescribes a new approach for assessing potential goodwill impairments. We completed the transitional goodwill impairment test required by SFAS No. 142 and identified no potential impairment. In the second quarter of fiscal 2001, selling, general, and administrative expenses included $10 million of goodwill amortization expense, which decreased net earnings by $9 million. In the first six months of fiscal 2001, selling, general, and administrative expenses included $19 million of goodwill amortization expense, which decreased net earnings by $17 million. In April 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 eliminates the requirement to classify gains and losses from the extinguishment of indebtedness as extraordinary, requires certain lease modifications to be treated the same as a sale-leaseback transaction, and makes other non- substantive technical corrections to existing pronouncements. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002 with earlier adoption encouraged. We expect the only impact of adopting SFAS No. 145 to be the reclassification of prior year extraordinary losses to interest expense and income taxes. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 changes the timing of when certain costs associated with exit or disposal activities are recognized. SFAS No. 146 is effective for exit or disposal activities, initiated after December 31, 2002, with early application encouraged. We do not expect SFAS No. 146 to have a material impact on our consolidated operating results or financial position. 18 Forward-looking Statements Management's Discussion and Analysis contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. While such statements reflect all available information and management's judgment and estimates of current and anticipated conditions and circumstances and are prepared with the assistance of specialists within and outside the company, there are many factors outside of our control that have an impact on our operations. Such factors include, but are not limited to: competitive changes, general and regional economic conditions, consumer preferences and spending patterns, availability of adequate locations for building or acquiring new stores, our ability to hire and retain qualified associates and our ability to manage the business to minimize the disruption of sales and customer service as a result of the division combinations. Because of these factors, actual performance could differ materially from that described in the forward-looking statements. Item 3 - Quantitative and Qualitative Disclosures About Market Risk. Our exposure to market risk primarily arises from changes in interest rates on short-term debt. Short-term debt has generally been used to finance seasonal working capital needs resulting in minimal exposure to interest rate fluctuations. Long-term debt is at fixed interest rates. Our merchandise purchases are denominated in United States dollars. Operating expenses of our international offices located outside the United States are generally paid in local currency and are not material. During the first six months of fiscal 2002 and fiscal 2001, we did not enter into any derivative financial instruments. PART II - OTHER INFORMATION Item 1 - Legal Proceedings The company is involved in claims, proceedings, and litigation arising from the operation of its business. The company does not believe any such claim, proceeding, or litigation, either alone or in the aggregate, will have a material adverse effect on the company's financial position or results of operations. Item 2 - Changes in Securities - None. Item 3 - Defaults Upon Senior Securities - None. Item 4 - Submission of Matters to a Vote of Security Holders (a) The annual meeting of shareowners of registrant was held on May 24, 2002. (b) At the annual meeting of shareowners of registrant held on May 24, 2002, the registrant's voting securities carried 306,707,844 votes, of which 270,371,546 were voted at the meeting. Action was taken with respect to: (i) the election of three directors of registrant; Authority For Withheld Marsha J. Evans 209,757,933 60,613,613 Edward E. Whitacre, Jr. 210,142,019 60,229,527 R. Dean Wolfe 210,339,380 60,032,166 19 (ii) a ratification of the appointment of Deloitte & Touche LLP as independent auditors (263,372,854 votes in favor, 5,744,501 votes against and 1,254,191 votes abstained); (iii) a proposal relating to a classified board of directors (150,760,787 votes in favor, 90,642,233 votes against, 3,185,158 votes abstained and 25,783,368 not voted). All such proposals were set forth and described in detail in the Notice of Annual Meeting and Proxy Statement of registrant dated April 25, 2002, filed with the Commission pursuant to Rule 12b-23 (b). Item 5 - Other Information - None. Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits (12) - Computation of Ratio of Earnings to Fixed Charges (b) Reports on Form 8-K A report was filed dated July 9, 2002, which contained information concerning debt ratings. A report was filed dated August 16, 2002, in which the Principal Executive Officer, Eugene S. Kahn, and the Principal Financial Officer, Thomas D. Fingleton, of the company, submitted to the SEC sworn statements pursuant to Securities and Exchange Commission Order No. 4-460. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE MAY DEPARTMENT STORES COMPANY (Registrant) Date: September 13, 2002 /s/ Thomas D. Fingleton Thomas D. Fingleton Executive Vice President and Chief Financial Officer 20 Certifications Pursuant to Exchange Act 13a-14 and 15d-14 I, Eugene S. Kahn, certify that: 1. I have reviewed this quarterly report on Form 10-Q of The May Department Stores Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. Date: September 13, 2002 /s/ Eugene S. Kahn Eugene S. Kahn Chairman of the Board and Chief Executive Officer I, Thomas D. Fingleton, certify that: 1. I have reviewed this quarterly report on Form 10-Q of The May Department Stores Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. Date: September 13, 2002 /s/ Thomas D. Fingleton Thomas D. Fingleton Executive Vice President and Chief Financial Officer 21 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Quarterly Report of The May Department Stores Company (the "Company") on Form 10-Q for the period ending August 3, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), we, Eugene S. Kahn, Chairman of the Board and Chief Executive Officer and Thomas D. Fingleton, Executive Vice President and Chief Financial Officer of the Company, each certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. section 1350, as adopted), that: 1. The Report fully complies with the requirements of section 13(a) or section 15(d) of the Securities Exchange Act of 1934, and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: September 13, 2002 /s/ Eugene S. Kahn /s/ Thomas D. Fingleton Eugene S. Kahn Thomas D. Fingleton Chairman of the Board and Executive Vice President and Chief Executive Officer Chief Financial Officer 22 Exhibit 12 THE MAY DEPARTMENT STORES COMPANY AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES FOR THE FIVE FISCAL YEARS ENDED FEBRUARY 2, 2002 AND FOR THE TWENTY-SIX WEEKS ENDED AUGUST 3, 2002 AND AUGUST 4, 2001 (Millions) 26 Weeks Ended Fiscal Year Ended Aug. 3, Aug. 4, Feb. 2, Feb. 3, Jan. 29, Jan. 30, Jan. 31, 2002 2001 2002 2001 2000 1999 1998 Earnings Available for Fixed Charges: Pretax earnings from continuing operations $ 221 $ 360 $1,144 $1,402 $ 1,523 $ 1,395 $ 1,279 Fixed charges (excluding interest capitalized and pretax preferred stock dividend requirements) 201 205 406 406 346 344 363 Dividends on ESOP preference shares (10) (10) (22) (23) (24) (25) (26) Capitalized interest amortization 4 4 8 8 7 7 6 416 559 1,536 1,793 1,852 1,721 1,622 Fixed Charges: Gross interest expense (a) $ 195 $ 200 $ 396 $ 395 $ 340 $ 339 $ 353 Interest factor attributable to rent expense 18 16 32 28 22 21 23 213 216 428 423 362 360 376 Ratio of Earnings to Fixed Charges 2.0 2.6 3.6 4.2 5.1 4.8 4.3 (a) Represents interest expense on long-term and short-term debt, ESOP debt and amortization of debt discount and debt issue expense.