10-Q 1 tenq203.txt FORM 10-Q FOR THE QUARTERLY PERIOD ENDED AUGUST 2, 2003 UNITED STATES 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 2, 2003 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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). 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. 288,596,818 shares of common stock, $.50 par value, as of August 30, 2003. 1 PART 1 - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS THE MAY DEPARTMENT STORES COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (millions) Aug. 2, Aug. 3, Feb. 1, ASSETS 2003 2002 2003 Current assets: Cash and cash equivalents $ 77 $ 96 $ 55 Accounts receivable, net 1,479 1,579 1,741 Merchandise inventories 2,932 2,993 2,857 Other current assets 83 55 69 Total current assets 4,571 4,723 4,722 Property and equipment, at cost 9,210 9,301 9,205 Accumulated depreciation (4,008) (3,952) (3,739) Property and equipment, net 5,202 5,349 5,466 Goodwill 1,455 1,433 1,441 Intangible assets, net 172 177 176 Other assets 131 118 131 Total assets $ 11,531 $ 11,800 $ 11,936 LIABILITIES AND SHAREOWNERS' EQUITY Current liabilities: Short-term debt $ 138 $ - $ 150 Current maturities of long-term debt 164 268 139 Accounts payable 1,046 1,087 1,099 Accrued expenses 1,031 933 1,014 Income taxes payable 17 115 264 Total current liabilities 2,396 2,403 2,666 Long-term debt 3,934 4,327 4,035 Deferred income taxes 816 716 710 Other liabilities 371 374 377 ESOP preference shares 249 279 265 Unearned compensation (91) (152) (152) Shareowners' equity 3,856 3,853 4,035 Total liabilities and shareowners' equity $ 11,531 $ 11,800 $ 11,936 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. 2, Aug. 3, Aug. 2, Aug. 3, 2003 2002 2003 2002 Net sales $ 3,000 $ 3,030 $ 5,873 $ 6,126 Cost of sales: Recurring 2,118 2,119 4,206 4,322 Restructuring markdowns - 20 - 20 Selling, general, and administrative expenses 657 657 1,297 1,315 Restructuring costs 318 39 318 79 Interest expense, net 80 86 160 169 Earnings (loss) before income taxes (173) 109 (108) 221 Provision (credit) for income taxes (63) 40 (70) 82 Net earnings (loss) $ (110) $ 69 $ (38) $ 139 Basic earnings (loss) per share $ (.39) $ .22 $ (.16) $ .45 Diluted earnings (loss) per share $ (.39) $ .22 $ (.16) $ .45 Dividends paid per common share $ .24 $.23-3/4 $ .48 $.47-1/2 Weighted average shares outstanding: Basic 289.8 288.4 289.8 288.0 Diluted 289.8 308.9 289.8 308.9 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. 2, Aug. 3, 2003 2002 Operating Activities: Net earnings (loss) $ (38) $ 139 Depreciation and other amortization 276 262 Intangible asset amortization 4 5 Asset impairment 315 - Division combination costs - 99 Working capital changes: Accounts receivable, net 262 358 Merchandise inventories (75) (137) Other current assets (9) 3 Accounts payable (53) 65 Accrued expenses 26 (22) Income taxes payable (147) (158) Other, net (3) 31 Cash flows from operations 558 645 Investing Activities: Net additions to property and equipment and business combination (349) (377) Cash flows used for investing activities (349) (377) Financing Activities: Net short-term debt repayments (12) (78) Net long-term debt repayments (16) (13) Net issuances (repurchases) of common stock (13) 12 Dividend payments (146) (145) Cash flows used for financing activities (187) (224) Increase in cash and cash equivalents 22 44 Cash and cash equivalents, beginning of period 55 52 Cash and cash equivalents, end of period $ 77 $ 96 Cash paid during the period: Interest $ 173 $ 183 Income taxes 82 212 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 2002 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. Restructuring Costs. Restructuring costs consisted of the following: Store Divestitures. In the 2003 second quarter, the company announced its intention to divest 34 department stores. The store divestitures will result in asset impairment, severance, and other charges of approximately $380 million, of which $318 million were recognized in the 2003 second quarter. The 2003 second quarter costs consisted of $315 million of asset impairment charges and $3 million of initial severance benefits. Asset impairment charges were recorded to reduce store assets to their estimated fair value because of the shorter period over which they will be used. Estimated fair values were based on estimated market values for similar assets. Additional severance, inventory liquidation, and other charges will be incurred as each store is divested. Division Combination Costs. In 2002, the company recorded $114 million of division combination charges. Of these charges, $59 million were recognized in the 2002 second quarter, $20 million of which were included as cost of sales. Charges of $99 million were recognized in the first six months of 2002, $20 million of which were included as cost of sales. The significant components of the division combination costs and status of the related liability are summarized below: (millions) Total | Balance Non-cash Balance Charge | Feb. 1, 2003 Payments Uses Aug. 2, 2003 Severance and | relocation benefits $ 59 | $ 17 $ 12 $ - $ 5 Inventory alignment 23 | - - - - Central office closure 15 | - - - - Other 17 | 7 2 4 1 Total $ 114 | $ 24 $ 14 $ 4 $ 6 Severance and relocation benefits include severance for approximately 2,000 associates and the costs to relocate certain employees. Inventory alignment includes the markdowns to conform merchandise assortments and to synchronize pricing and promotional strategies. Central office closure primarily includes accelerated depreciation of fixed assets in the closed central offices. Remaining severance costs will be paid by the end of fiscal 2004. Business Combination. In June 2003, the company purchased certain assets of Modern Tuxedo. This business combination consisted of 25 locations in the Chicago metropolitan area and did not have a material effect on results of operations or financial position. 5 Income Taxes. The effective income tax rate for the first six months of 2003 was 65.4%, compared with 37.0% in the first six months of 2002. The change is due to a $31 million tax credit recorded in the 2003 first quarter upon the resolution of various federal and state income tax issues. Excluding the $31 million tax credit, the company's 2003 estimated effective tax rate is 37.0%. Inventories. Merchandise inventories are principally valued at the lower of LIFO (last-in, first-out) cost basis or market using the retail method. 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. 2, 2003 Aug. 3, 2002 Earnings Shares EPS Earnings Shares EPS Net earnings (loss) $ (110) $ 69 ESOP preference shares' dividends (4) (5) Basic EPS (114) 289.8 $ (.39) 64 288.4 $ .22 ESOP preference shares - - 4 18.7 Assumed exercise of options (treasury stock method) - - - 1.8 Diluted EPS $ (114) 289.8 $ (.39) $ 68 308.9 $ .22 26 Weeks Ended Aug. 2, 2003 Aug. 3, 2002 Earnings Shares EPS Earnings Shares EPS Net earnings (loss) $ (38) $ 139 ESOP preference shares' dividends (8) (9) Basic EPS (46) 289.8 $ (.16) 130 288.0 $ .45 ESOP preference shares - - 8 18.9 Assumed exercise of options (treasury stock method) - - - 2.0 Diluted EPS $ (46) 289.8 $ (.16) $ 138 308.9 $ .45 Diluted shares and equivalents exclude all stock options and 17 million ESOP shares from the EPS calculation for the 13 and 26 weeks ended August 2, 2003 because their effect is antidilutive. 6 Stock Compensation Plans. Effective February 2, 2003, the company adopted the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation." The company adopted SFAS No. 123 using the prospective transition method, under which all stock-based compensation granted after February 2, 2003 is expensed using the fair value method. Stock option expense is recorded over each option grant's vesting period, usually four years. Accordingly, the cost related to stock-based employee compensation included in net earnings (loss) using the prospective method of transition is less than it would have been had the fair value method been applied retroactively to all outstanding grants. The following table illustrates the pro forma effect on net earnings (loss) and earnings (loss) per share for the second quarter and first six months of 2003 if the fair value based method had been applied retroactively rather than prospectively to all outstanding unvested grants. (millions) 13 Weeks Ended 26 Weeks Ended Aug. 2, Aug. 3, Aug. 2, Aug. 3, 2003 2002 2003 2002 Net earnings (loss), as reported $ (110) $ 69 $ (38) $ 139 Add: Compensation expense for employee stock options included in net earnings, net of tax 1 - 1 - Deduct: Total compensation expense for employee stock options determined under retroactive fair value based method, net of tax (6) (6) (13) (10) Pro forma net earnings (loss) $ (115) $ 63 $ (50) 129 Earnings (loss) per share: Basic - as reported (prospective) $ (.39) $ 0.22 $ (.16) $ 0.45 Basic - pro forma (retroactive) $ (.41) $ 0.20 $ (.21) $ 0.41 Diluted - as reported (prospective) $ (.39) $ 0.22 $ (.16) $ 0.45 Diluted - pro forma (retroactive) $ (.41) $ 0.20 $ (.21) $ 0.41 Lease Obligations. The company is a guarantor with respect to certain lease obligations of previously divested businesses. The leases, two of which include potential extensions to 2087, have future minimum lease payments aggregating approximately $844 million, and are offset by payments from existing tenants and subtenants. In addition, the company is liable for other expenses related to the above leases, such as property taxes and common area maintenance, which are also payable by the current tenants and subtenants. Potential liabilities related to these guarantees are subject to certain defenses by the company. The company believes that the risk of significant loss from these lease obligations is remote. Impact of New Accounting Pronouncements. In May 2003, the Financial Accounting Standards Board (FASB) issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 establishes standards that require companies to classify certain financial instruments as liabilities that were previously classified as equity. The company does not expect SFAS No. 150 to have a material impact on its consolidated financial position or operating results. 7 Condensed Consolidating Financial Information. The company ("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 2, 2003, August 3, 2002, and February 1, 2003, the related condensed consolidating statements of earnings for the thirteen week and twenty-six week periods ended August 2, 2003 and August 3, 2002, and the related condensed consolidating statements of cash flows for the twenty-six week periods ended August 2, 2003 and August 3, 2002, are presented below. Condensed Consolidating Balance Sheet August 2, 2003 (Unaudited) (millions) Subsidiary Other Parent Issuer Subsidiaries Eliminations Consolidated ASSETS Current assets: Cash and cash equivalents $ - $ 45 $ 32 $ - $ 77 Accounts receivable, net - 1,472 43 (36) 1,479 Merchandise inventories - 2,833 99 - 2,932 Other current assets - 59 24 - 83 Total current assets - 4,409 198 (36) 4,571 Property and equipment, at cost - 9,000 210 - 9,210 Accumulated depreciation - (3,945) (63) - (4,008) Property and equipment, net - 5,055 147 - 5,202 Goodwill - 1,129 326 - 1,455 Intangible assets, net - 5 167 - 172 Other assets - 120 11 - 131 Intercompany (payable) receivable (759) 297 3,662 (3,200) - Investment in subsidiaries 4,777 - - (4,777) - Total assets $ 4,018 $11,015 $ 4,511 $ (8,013) $11,531 LIABILITIES AND SHAREOWNERS' EQUITY Current liabilities: Short-term debt $ - $ 138 $ - $ - $ 138 Current maturities of long-term debt - 164 - - 164 Accounts payable - 953 93 - 1,046 Accrued expenses 4 968 95 (36) 1,031 Income taxes payable - (26) 43 - 17 Total current liabilities 4 2,197 231 (36) 2,396 Long-term debt - 3,933 1 - 3,934 Intercompany note payable (receivable) - 3,200 - (3,200) - Deferred income taxes - 751 65 - 816 Other liabilities - 844 10 (483) 371 ESOP preference shares 249 - - - 249 Unearned compensation (91) (91) - 91 (91) Shareowners' equity 3,856 181 4,204 (4,385) 3,856 Total liabilities and shareowners' equity $ 4,018 $11,015 $ 4,511 $ (8,013) $11,531
8 Condensed Consolidating Financial Information (continued) - Condensed Consolidating Statement of Earnings For the Thirteen Weeks Ended August 2, 2003 (Unaudited) (millions) Subsidiary Other Parent Issuer Subsidiaries Eliminations Consolidated Net sales $ - $ 2,833 $ 479 $ (312) $ 3,000 Cost of sales - 2,066 351 (299) 2,118 Selling, general, and administrative expenses - 599 76 (18) 657 Restructuring costs - 318 - - 318 Interest expense (income), net: External - 80 - - 80 Intercompany - 71 (71) - - Equity in loss of subsidiaries 110 - - (110) - Earnings (loss) before income taxes (110) (301) 123 115 (173) Provision (credit) for income taxes - (108) 45 - (63) Net earnings (loss) $ (110) $ (193) $ 78 $ 115 $ (110)
Condensed Consolidating Statement of Earnings For the Twenty-six Weeks Ended August 2, 2003 (Unaudited) (millions) Subsidiary Other Parent Issuer Subsidiaries Eliminations Consolidated Net sales $ - $ 5,538 $ 899 $ (564) $ 5,873 Cost of sales - 4,094 663 (551) 4,206 Selling, general, and administrative expenses - 1,180 141 (24) 1,297 Restructuring costs - 318 - - 318 Interest expense (income), net: External - 160 - - 160 Intercompany - 142 (142) - - Equity in loss of subsidiaries 38 - - (38) - Earnings (loss) before income taxes (38) (356) 237 49 (108) Provision (credit) for income taxes - (157) 87 - (70) Net earnings (loss) $ (38) $ (199) $ 150 $ 49 $ (38)
9 Condensed Consolidating Financial Information (continued) - Condensed Consolidating Statement of Cash Flows For the Twenty-six Weeks Ended August 2, 2003 (Unaudited) (millions) Subsidiary Other Parent Issuer Subsidiaries Eliminations Consolidated Operating Activities: Net earnings (loss) $ (38) $ (199) $ 150 $ 49 $ (38) Equity in loss of subsidiaries 38 - - (38) - Depreciation and other amortization - 262 14 - 276 Intangible asset amortization - 1 3 - 4 Asset impairment - 315 - - 315 Increase (decrease) in working capital - (10) 14 - 4 Other, net 89 (36) (45) (11) (3) Cash flows from operations 89 333 136 - 558 Investing Activities: Net additions to property and equipment and business combination - (305) (44) - (349) Cash flows used for investing activities - (305) (44) - (349) Financing Activities: Net short-term debt repayments - (12) - - (12) Net long-term debt repayments - (16) - - (16) Net issuances (repurchases) of common stock (20) 7 - - (13) Dividend payments (147) 1 - - (146) Intercompany activity, net 78 - (78) - - Cash flows used for financing activities (89) (20) (78) - (187) Increase in cash and cash equivalents - 8 14 - 22 Cash and cash equivalents, beginning of period - 37 18 - 55 Cash and cash equivalents, end of period $ - $ 45 $ 32 $ - $ 77
10 Condensed Consolidating Financial Information (continued) - Condensed Consolidating Balance Sheet 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 3,564 (3,200) - Investment in subsidiaries 4,878 - - (4,878) - Total assets $ 3,986 $11,566 $ 4,362 $ (8,114) $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 $ 4,362 $ (8,114) $11,800
11 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 Net sales $ - $ 2,890 $ 451 $ (311) $ 3,030 Cost of sales - 2,093 350 (304) 2,139 Selling, general, and administrative expenses - 609 59 (11) 657 Restructuring costs - 39 - - 39 Interest expense (income), net: External - 86 - - 86 Intercompany - 72 (71) (1) - Equity in loss of subsidiaries (69) - - 69 - Earnings (loss) before income taxes 69 (9) 113 (64) 109 Provision for income taxes - 1 39 - 40 Net earnings (loss) $ 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 Net sales $ - $ 5,836 $ 806 $ (516) $ 6,126 Cost of sales - 4,240 608 (506) 4,342 Selling, general, and administrative expenses - 1,214 121 (20) 1,315 Restructuring costs - 79 - - 79 Interest expense (income), net: External - 169 - - 169 Intercompany - 142 (141) (1) - Equity in loss of subsidiaries (139) - - 139 - Earnings (loss) before income taxes 139 (8) 218 (128) 221 Provision for income taxes - 2 80 - 82 Net earnings (loss) $ 139 $ (10) $ 138 $ (128) $ 139
12 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 (loss) $ 139 $ (10) $ 138 $ (128) $ 139 Equity in earnings of subsidiaries (139) - - 139 - Depreciation and other amortization - 248 14 - 262 Intangible asset amortization - 1 4 - 5 Division combination costs - 99 - - 99 Increase in working capital - 109 - - 109 Other, net 50 29 (37) (11) 31 Cash flows from operations 50 476 119 - 645 Investing Activities: Net additions to property and equipment - (355) (22) - (377) Cash flows used in investing activities - (355) (22) - (377) Financing Activities: Net short-term debt repayments - (78) - - (78) Net long-term debt repayments - (13) - - (13) Net issuances of common stock 3 9 - - 12 Dividend payments (147) 2 - - (145) Intercompany activity, net 94 - (94) - - Cash flows used in financing activities (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
13 CONDENSED CONSOLIDATING FINANCIAL INFORMATION (continued) - Condensed Consolidating Balance Sheet As of February 1, 2003 (millions) Subsidiary Other Parent Issuer Subsidiaries Eliminations Consolidated ASSETS Current assets: Cash and cash equivalents $ - $ 37 $ 18 $ - $ 55 Accounts receivable, net - 1,733 44 (36) 1,741 Merchandise inventories - 2,787 70 - 2,857 Other current assets - 49 23 (3) 69 Total current assets - 4,606 155 (39) 4,722 Property and equipment, at cost - 9,024 181 - 9,205 Accumulated depreciation - (3,690) (49) - (3,739) Property and equipment, net - 5,334 132 - 5,466 Goodwill - 1,129 312 - 1,441 Intangible assets, net - 6 170 - 176 Other assets - 122 9 - 131 Intercompany (payable) receivable (671) 254 417 - - Investment in subsidiaries 4,824 - - (4,824) - Total assets $ 4,153 $11,451 $ 1,195 $ (4,863) $11,936 LIABILITIES AND SHAREOWNERS' EQUITY Current liabilities: Short-term debt $ - $ 150 $ - $ - $ 150 Current maturities of long-term debt - 139 - - 139 Accounts payable - 1,021 78 - 1,099 Accrued expenses 5 957 88 (36) 1,014 Income taxes payable - 244 23 (3) 264 Total current liabilities 5 2,511 189 (39) 2,666 Long-term debt - 4,034 1 - 4,035 Intercompany note payable (receivable) - 3,200 (3,200) - - Deferred income taxes - 646 64 - 710 Other liabilities - 840 10 (473) 377 ESOP preference shares 265 - - - 265 Unearned compensation (152) (152) - 152 (152) Shareowners' equity 4,035 372 4,131 (4,503) 4,035 Total liabilities and shareowners' equity $ 4,153 $11,451 $ 1,195 $ (4,863) $11,936
14 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Net sales include merchandise sales and lease department income. Store-for- store sales compare sales of stores open during both years beginning the first day a new store has prior-year sales and excludes sales of stores closed during both periods. Net sales and related decreases are as follows: Percent Store-for-Store 2003 2002 Decrease Decrease Second quarter $3,000 $3,030 (1.0)% (3.1)% First six months 5,873 6,126 (4.1) (6.0) The total net sales decrease of $30 million for the 2003 second quarter was principally due to a $95 million decrease in store-for-store sales offset by $71 million of new store sales. The total net sales decrease of $253 million for the first six months of 2003 was principally due to a $364 million decrease in store-for-store sales offset by $134 million of new store sales. The following table presents the components of costs and expenses, as a percent of net sales. Second Quarter First Six Months 2003 2002 2003 2002 Net sales 100.0% 100.0% 100.0% 100.0% Cost of sales: Recurring 70.6 69.9 71.6 70.6 Restructuring markdowns 0.0 0.7 0.0 0.3 Selling, general, and administrative expenses 21.9 21.7 22.1 21.5 Restructuring costs 10.6 1.3 5.4 1.3 Interest expense, net 2.7 2.8 2.7 2.7 Earnings (loss) before income taxes (5.8) 3.6 (1.8) 3.6 Income taxes 37.0* 36.6* 65.4* 37.0* Net earnings (loss) (3.6)% 2.3% (0.6)% 2.3% * - Percent represents effective income tax rate. Recurring cost of sales was $2,118 million in the 2003 second quarter, compared to $2,119 million in the 2002 second quarter. For the first six months of 2003, recurring cost of sales was $4,206 million, compared to $4,322 million in the same 2002 period. In addition, $20 million of restructuring markdowns related to the division combinations were incurred in the 2002 second quarter to conform merchandise assortments and to synchronize pricing and promotional strategies. For the 13 weeks ended August 2, 2003, recurring cost of sales as a percent of net sales increased 0.7%, principally due to a 0.4% increase in occupancy costs and a 0.5% increase in the cost of merchandise. For the 26 weeks ended August 2, 2003, recurring cost of sales as a percent of net sales increased 1.0%, principally due to a 0.7% increase in occupancy costs and a 0.4% increase in the cost of merchandise. 15 Selling, general, and administrative expenses were $657 million in the second quarter for both 2003 and 2002. For the first six months of 2003, selling, general, and administrative expenses were $1,297 million, compared with $1,315 million in the 2002 period, a 1.4% decrease. Selling, general, and administrative expenses as a percent of net sales increased from 21.7% in the 2002 second quarter to 21.9% in the 2003 second quarter, principally due to a 0.3% increase in pension costs and a 0.4% increase in severance costs, offset by a 0.2% decrease in credit expense and a 0.5% decrease in payroll costs. Selling, general, and administrative expenses as a percent of net sales increased from 21.5% in the first six months of 2002 to 22.1% in the first six months of 2003. For the first six months of 2003, pension costs increased 0.3%, payroll costs increased 0.3%, and other expenses increased 0.3%, offset by a 0.3% decrease in credit expense. In the 2003 second quarter, we announced our intentions to divest 34 department stores. The store divestitures will result in asset impairment, severance and other charges of approximately $380 million, of which $318 million, or $0.69 per share, were recognized in the 2003 second quarter. The 2003 second quarter costs consisted of $315 million of non-cash asset impairment charges and $3 million of initial severance benefits. Approximately $50 million of the $380 million represents the cash cost of the store divestitures, not including the benefit from future tax credits. The remaining cash costs for severance, inventory liquidation, and other charges will be incurred as each store is divested. In 2002, charges of $114 million, or $0.24 per share, were recognized related to division combinations. Of these charges, $59 million, or $0.12 per share, were recognized in the 2002 second quarter, $20 million of which were included as cost of sales. Charges of $99 million, or $0.20 per share, were recognized in the first six months of 2002, $20 million of which were included as cost of sales. In June 2003, our After Hours Formalwear division purchased certain assets of Modern Tuxedo. This business combination consisted of 25 tuxedo rental and retail sales locations in the Chicago metropolitan area and did not have a material effect on results of operations or financial position. Components of net interest expense were (millions): Second Quarter First Six Months 2003 2002 2003 2002 Interest expense $ 85 $ 94 $170 $ 188 Interest income - (1) (1) (7) Capitalized interest (5) (7) (9) (12) Net interest expense $ 80 $ 86 $160 $ 169 Interest expense principally relates to long-term debt. Short-term borrowings were (dollars in millions): Second Quarter First Six Months 2003 2002 2003 2002 Average balance outstanding $321 $112 $285 $ 80 Average interest rate on average balance 1.3% 1.8% 1.3% 1.8% 16 The effective income tax rate for the first six months of 2003 was 65.4%, compared with 37.0% in the first six months of 2002. The change is due to a $31 million tax credit recorded in the 2003 first quarter upon the resolution of various federal and state income tax issues. Excluding the $31 million tax credit, our 2003 estimated effective tax rate is 37.0%. Operating results for the trailing years were (millions, except per share): Aug. 2, Aug. 3, 2003 2002 Net sales $ 13,238 $ 13,837 Net earnings $ 365 $ 622 Diluted earnings per share $ 1.15 $ 1.97 Financial Condition Cash Flows. Cash flows from operations were $558 million and $645 million in the first six months of 2003 and 2002, respectively. The 2003 decrease in operating cash flows is primarily due to decreases from accounts receivable and accounts payable, partially offset by the effect of inventory balance changes. 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, consisting of a $700 million multi-year credit agreement and a $300 million 364-day credit agreement, which was renewed August 4, 2003. 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. As of August 15, 2003, our bonds are rated Baa1 by Moody's Investors Service, Inc. and BBB+ by Standard & Poor's Corporation. Our commercial paper is rated Prime-2 by Moody's and A-2 by Standard & Poor's. Our senior unsecured bank credit agreements are rated Baa1 by Moody's. Financial Ratios. Key financial ratios as of and for the twenty-six weeks ended August 2, 2003 and August 3, 2002, and as of and for the fifty-two weeks ended February 1, 2003 are as follows: Aug. 2, Aug. 3, Feb. 1, 2003 2002 2003 Current Ratio 1.9 2.0 1.8 Debt-Capitalization Ratio 49% 50% 48% Fixed Charge Coverage 0.4x 2.0x 2.8x The decline in the fixed charge coverage ratio for the first six months of 2003 is due to the second quarter restructuring charge reducing earnings. Impact of New Accounting Pronouncements In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 establishes standards that require companies to classify certain financial instruments as liabilities that were previously classified as equity. We do not expect SFAS No. 150 to have a material impact on our consolidated financial position or operating results. 17 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 restructuring activities. 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 2003 and fiscal 2002, we did not enter into any derivative financial instruments. Item 4 - Controls and Procedures. As of the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation, under the supervision and with the participation of the company's management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934, as amended). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective. There have been no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date the controls were evaluated. 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 and Use of Proceeds - None. Item 3 - Defaults Upon Senior Securities - None. 18 Item 4 - Submission of Matters to a Vote of Security Holders (a) The annual meeting of shareowners of registrant was held on May 23, 2003. (b) At the annual meeting of shareowners of registrant held on May 23, 2003, the registrant's voting securities carried 305,774,098 votes, of which 274,677,046 were voted at the meeting. Action was taken with respect to: (i) the election of five directors of registrant; Authority For Withheld John L. Dunham 200,706,866 73,970,180 Russell E. Palmer 191,371,207 83,305,839 Michael R. Quinlan 191,564,337 83,112,709 Joyce M. Roche' 227,546,036 47,131,010 William P. Stiritz 200,418,186 74,258,860 (ii) a ratification of the appointment of Deloitte & Touche LLP as independent auditors (263,974,089 votes in favor, 8,709,144 votes against and 1,993,813 votes abstained); (iii) a resolution to approve an amendment to the company's 1994 Stock Incentive Plan (205,248,259 votes in favor, 41,895,874 votes against, 2,720,143 votes abstained and 24,812,770 not voted); (iv) a proposal relating to a classified board of directors (176,447,898 votes in favor, 69,074,923 votes against, 4,341,455 votes abstained and 24,812,770 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 4, 2003, 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 10.1 - 364-day Credit Agreement dated as of August 4, 2003 among The May Department Stores Company, a New York corporation, as Borrower, The May Department Stores Company, a Delaware corporation, as Guarantor, and The Initial Lenders Named Herein, as Initial Lenders, and Citibank, N.A., as Administrative Agent, and JPMorgan Chase Bank, The Bank of New York, Bank One NA, and BNP Paribas, Chicago Branch, as Syndication Agents, and J.P. Morgan Securities Inc. and Citigroup Global Markets Inc., as Joint Lead Arrangers and Bookrunners. 10.2 - Amendment No. 1 to the Five Year Credit Agreement, dated as of August 4, 2003, among The May Department Stores Company, a New York corporation, as Borrower, The May Department Stores Company, a Delaware corporation, as Guarantor, the banks, financial institutions and other institutional lenders parties to the Credit Agreement, and Citibank, N.A., as Agent for the Lenders. 19 Item 6 - Exhibits and Reports on Form 8-K (continued) (a) Exhibits (continued) 12 - Computation of Ratio of Earnings to Fixed Charges 15 - Letter Regarding Unaudited Interim Financial Information 31.1 - Certification Pursuant to Exchange Act 13a-15 and 15d-15(e) 31.2 - Certification Pursuant to Exchange Act 13a-15 and 15d-15(e) 32 - Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(18 U.S.C. Section 1350, as adopted) (b) Reports on Form 8-K A report dated May 8, 2003, which furnished a company press release providing information on its earnings for the 13 weeks ended May 3, 2003. A report dated May 13, 2003, which furnished a company press release announcing its financial results for the 13 weeks ended May 3, 2003. A report dated June 20, 2003, which filed information concerning debt ratings. A report dated June 27, 2003, which filed information concerning debt ratings. A report dated July 30, 2003, which filed a company press release announcing its intention to divest 32 Lord & Taylor stores. A report dated August 12, 2003, which furnished a company press release announcing its financial results for the 13 and 26 weeks ended August 2, 2003. 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 11, 2003 /s/ Thomas D. Fingleton Thomas D. Fingleton Executive Vice President and Chief Financial Officer 20 INDEPENDENT ACCOUNTANTS' REPORT Board of Directors and Shareowners The May Department Stores Company We have reviewed the accompanying condensed consolidated balance sheets of The May Department Stores Company and subsidiaries (the "Company") as of August 2, 2003 and August 3, 2002, and the related condensed consolidated statements of earnings for the thirteen and twenty-six week periods ended August 2, 2003 and August 3, 2002, and of cash flows for the twenty-six week periods ended August 2, 2003 and August 3, 2002. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America. We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of the Company as of February 1, 2003, and the related consolidated statements of earnings, shareowners' equity, and cash flows for the year then ended (not presented herein); and in our report dated February 12, 2003, we expressed an unqualified opinion (which includes explanatory paragraphs relating to (1) the adoption of a new accounting principle and (2) the application of procedures relating to certain other disclosures and reclassifications of financial statement amounts related to the 2001 and 2000 consolidated financial statements that were audited by other auditors who have ceased operations and for which we have expressed no opinion or other form of assurance other than with respect to such disclosures and reclassifications) on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of February 1, 2003 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ Deloitte & Touche LLP DELOITTE & TOUCHE LLP St. Louis, Missouri September 9, 2003 21 Exhibit 12 THE MAY DEPARTMENT STORES COMPANY AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES FOR THE FIVE FISCAL YEARS ENDED FEBRUARY 1, 2003 AND FOR THE TWENTY-SIX WEEKS ENDED AUGUST 2, 2003 AND AUGUST 3, 2002 (dollars in millions) 26 Weeks Ended Fiscal Year Ended Aug. 2, Aug. 3, Feb. 1, Feb. 2, Feb. 3, Jan. 29, Jan. 30, 2003 2002 2003 2002 2001 2000 1999 Earnings Available for Fixed Charges: Pretax earnings (loss) from continuing operations $ (108) $ 221 $ 820 $1,139 $1,402 $1,523 $1,395 Fixed charges (excluding interest capitalized and pretax preferred stock dividend requirements) 185 201 405 411 406 346 344 Dividends on ESOP preference shares (9) (10) (20) (22) (23) (24) (25) Capitalized interest amortization 5 4 9 8 8 7 7 73 416 1,214 1,536 1,793 1,852 1,721 Fixed Charges: Gross interest expense (a) $ 175 $ 195 $ 392 $ 401 $ 395 $ 340 $ 339 Interest factor attributable to rent expense 20 18 36 32 28 22 21 195 213 428 433 423 362 360 Ratio of Earnings to Fixed Charges 0.4 2.0 2.8 3.5 4.2 5.1 4.8
(a) Represents interest expense on long-term and short-term debt, ESOP debt and amortization of debt discount and debt issue expense. Exhibit 15 September 9, 2003 The May Department Stores Company St. Louis, Missouri We have made a review, in accordance with standards established by the American Institute of Certified Public Accountants, of the unaudited interim condensed consolidated financial information of The May Department Stores Company and subsidiaries (the "Company") for the thirteen and twenty-six week periods ended August 2, 2003 and August 3, 2002, as indicated in our report dated August 28, 2003; because we did not perform an audit, we expressed no opinion on that information. We are aware that our report referred to above, which is included in your Quarterly Report on Form 10-Q for the quarter ended August 2, 2003, is incorporated by reference in Registration Statements Nos. 333-59792, 333-76227, 333-00957, and 333-103352 on Form S-8 and Registration Statements Nos. 333- 42940 and 333-42940-01 on Form S-3. We also are aware that the aforementioned report, pursuant to Rule 436(c) under the Securities Act of 1933, is not considered a part of the Registration Statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of that Act. /s/ Deloitte & Touche LLP DELOITTE & TOUCHE LLP St. Louis, Missouri Exhibit 31.1 CERTIFICATION 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 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: September 11, 2003 /s/ Eugene S. Kahn Eugene S. Kahn Chairman of the Board and Chief Executive Officer Exhibit 31.2 CERTIFICATION 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 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: September 11, 2003 /s/ Thomas D. Fingleton Thomas D. Fingleton Executive Vice President and Chief Financial Officer Exhibit 32 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. Section 1350, as adopted) In connection with the Quarterly Report of The May Department Stores Company (the "Company") on Form 10-Q for the period ending August 2, 2003, 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 11, 2003 /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 A signed original of this written statement required by Section 906 has been provided to The May Department Stores Company and will be retained by The May Department Stores Company and furnished to the Securities and Exchange Commission or its staff upon request.