10-Q 1 tenq303.txt FORM 10Q FOR THE QUARTERLY PERIOD ENDED NOVEMBER 1, 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 November 1, 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. 288,582,164 shares of common stock, $.50 par value, as of November 29, 2003. 1 PART 1 - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS THE MAY DEPARTMENT STORES COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (millions) Nov. 1, Nov. 2, Feb. 1, ASSETS 2003 2002 2003 Current assets: Cash and cash equivalents $ 65 $ 65 $ 55 Accounts receivable, net 1,449 1,540 1,741 Merchandise inventories 3,493 3,596 2,857 Other current assets 98 74 82 Total current assets 5,105 5,275 4,735 Property and equipment, at cost 9,294 9,523 9,205 Accumulated depreciation (4,139) (4,096) (3,739) Property and equipment, net 5,155 5,427 5,466 Goodwill 1,468 1,433 1,441 Intangible assets, net 170 174 176 Other assets 129 115 131 Total assets $ 12,027 $ 12,424 $ 11,949 LIABILITIES AND SHAREOWNERS' EQUITY Current liabilities: Short-term debt $ 270 $ 618 $ 150 Current maturities of long-term debt 235 315 139 Accounts payable 1,405 1,349 1,099 Accrued expenses 954 964 880 Income taxes payable 28 102 264 Total current liabilities 2,892 3,348 2,532 Long-term debt 3,802 4,041 4,035 Deferred income taxes 831 729 710 Other liabilities 525 396 524 ESOP preference shares 241 272 265 Unearned compensation (91) (152) (152) Shareowners' equity 3,827 3,790 4,035 Total liabilities and shareowners' equity $ 12,027 $ 12,424 $ 11,949 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 39 Weeks Ended Nov. 1, Nov. 2, Nov. 1, Nov. 2, 2003 2002 2003 2002 Net sales $ 2,976 $ 2,992 $ 8,849 $ 9,118 Cost of sales: Recurring 2,160 2,171 6,366 6,493 Restructuring markdowns 1 3 1 23 Selling, general, and administrative expenses 658 691 1,955 2,006 Restructuring costs 5 6 323 85 Interest expense, net 78 96 238 265 Earnings (loss) before income taxes 74 25 (34) 246 Provision (credit) for income taxes 27 9 (43) 91 Net earnings $ 47 $ 16 $ 9 $ 155 Basic earnings (loss) per share $ .15 $ .05 $ (.01) $ .50 Diluted earnings (loss) per share $ .15 $ .05 $ (.01) $ .50 Dividends paid per common share $ .24 $.23-3/4 $ .72 $ .71-1/4 Weighted average shares outstanding: Basic 290.0 288.3 289.9 288.1 Diluted 290.5 307.4 289.9 308.4 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) 39 Weeks Ended Nov. 1, Nov. 2, 2003 2002 Operating Activities: Net earnings $ 9 $ 155 Adjustment for non-cash items included in earnings: Depreciation and other amortization 420 406 Intangible asset amortization 6 8 Store divestiture asset impairments 317 - Working capital changes: Accounts receivable, net 292 398 Merchandise inventories (636) (721) Other current assets (8) (19) Accounts payable 306 326 Accrued expenses 102 99 Income taxes payable (135) (170) Other, net 18 62 Cash flows from operations 691 544 Investing Activities: Net additions to property and equipment, and business combinations (480) (598) Cash flows used for investing activities (480) (598) Financing Activities: Net short-term debt issuances 120 540 Net long-term debt repayments (77) (253) Net repurchases of common stock (24) (2) Dividend payments (220) (218) Cash flows (used for) from financing activities (201) 67 Increase in cash and cash equivalents 10 13 Cash and cash equivalents, beginning of period 55 52 Cash and cash equivalents, end of period $ 65 $ 65 Cash paid during the period: Interest $ 252 $ 299 Income taxes 85 223 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. 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 second quarter of 2003, the company announced its intention to divest 34 underperforming department stores. These divestitures will result in estimated total charges of $380 million, consisting of asset impairments of $317 million, inventory liquidation losses of $25 million, severance benefits of $23 million, and other charges of approximately $15 million. Approximately $50 million of the $380 million represents the cash cost of the store divestitures, not including the benefit from future tax credits. Of the $380 million in expected total charges, $6 million was recognized in the third quarter and $324 million was recognized in the first nine months of 2003. The company will continue to fulfill its obligations under existing agreements with landlords and developers to operate each store until satisfactory arrangements are negotiated. This process may take three or more years to complete. Through the end of the 2003 third quarter, the company has closed two of the 34 stores it intends to divest. The significant components of the store divestiture costs and status of the related liability are summarized below: (millions) Balance 2003 Non-cash Nov. 1, Charge Payments Uses 2003 Asset impairments $ 317 $ - $ (317) $ - Severance benefits 4 (4) - - Inventory liquidation losses 1 - (1) - Other 2 (2) - - Total $ 324 $ (6) $ (318) $ - Asset impairment charges were recorded to reduce store assets to their estimated fair values due to the shorter period over which they will be used. Estimated fair values were based on estimated market values of similar assets. Severance benefits are recognized as each store is closed. As of November 1, 2003, severance benefits have been paid to 250 store and central office associates. Inventory liquidation losses are incurred to mark down inventory during liquidation sales as stores are closed and are included in cost of sales. Division Combinations - In 2002, the company recorded restructuring charges of $102 million for the Filene's/Kaufmann's and Robinsons-May/Meier & Frank division combinations and $12 million for the closure of the Arizona Credit Center and realignment of the company's data center. Of the $114 million in total charges, $9 million was recognized in the third quarter of 2002, $3 million of which was included as cost of sales. Charges of $108 million were recognized in the first nine months of 2002, $23 million of which was included as cost of sales. 5 Restructuring Costs (continued). The significant components of the division combination costs and status of the related liability are summarized below: (millions) Balance Balance Total | Feb. 1, Non-cash Nov. 1, Charge | 2003 Payments Uses 2003 Severance and | relocation benefits $ 59 | $ 17 $ (13) $ - $ 4 Inventory alignment 23 | - - - - Central office closure 15 | - - - - Other 17 | 7 (2) (5) - Total $114 | $ 24 $ (15) $ (5) $ 4 Severance and relocation benefits include severance for approximately 2,000 associates and the costs to relocate certain employees. Inventory alignment includes the markdowns incurred to conform merchandise assortments and synchronize pricing and promotional strategies. Central office closure primarily includes accelerated depreciation of fixed assets in the closed central offices. As of November 1, 2003, severance benefits of $4 million are payable to former associates whose jobs were eliminated in these combinations. All severance will be paid by the end of 2004. Business Combinations. In the 2003 third quarter, the company purchased certain assets of Desmonds Formalwear, consisting of 66 tuxedo rental and retail sales locations in the Midwest. The company also purchased 7 tuxedo rental and retail sales locations in Atlanta operating as Tyndall's Formal Wear. Earlier in 2003, the company purchased 25 Modern Tuxedo stores in the Chicago metropolitan area. The purchase price allocations for these business combinations are preliminary and subject to final valuations. These acquisitions did not have a material effect on the company's results of operations or financial position. Income Taxes. The effective income tax rate was 37.0% for both the third quarter of 2003 and 2002. The effective income tax rate for the first nine months of 2003 was 126.8% due to a $31 million tax credit recorded in the first quarter of 2003 upon the resolution of various federal and state income tax issues. Excluding the $31 million tax credit, the company's estimated effective tax rate for the first nine months of 2003 was 37.0%, compared with 37.0% for the same period in 2002. Inventories. Merchandise inventories are principally valued at the lower of LIFO (last-in, first-out) cost basis or market using the retail method. Earnings (Loss) per Share. The following tables reconcile net earnings and weighted average shares outstanding to amounts used to calculate basic and diluted earnings (loss) per share ("EPS") for the periods shown. 6 Earnings (Loss) per Share (continued). (millions, except per share) 13 Weeks Ended Nov. 1, 2003 Nov. 2, 2002 Earnings Shares EPS Earnings Shares EPS Net earnings $ 47 $ 16 ESOP preference share dividends (4) (5) Basic EPS 43 290.0 $ .15 11 288.3 $ .05 ESOP preference shares - - 4 18.4 Assumed exercise of options (treasury stock method) - 0.5 - 0.7 Diluted EPS $ 43 290.5 $ .15 $ 15 307.4 $ .05 39 Weeks Ended Nov. 1, 2003 Nov. 2, 2002 Earnings Shares EPS Earnings Shares EPS Net earnings $ 9 $ 155 ESOP preference share dividends (12) (14) Basic EPS (3) 289.9 $ (.01) 141 288.1 $ .50 ESOP preference shares - - 13 18.7 Assumed exercise of options (treasury stock method) - - - 1.6 Diluted EPS $ (3) 289.9 $ (.01) $ 154 308.4 $ .50 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 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 and earnings (loss) per share for the third quarter and first nine months of 2003 if the fair value based method had been applied retroactively to all outstanding unvested grants rather than prospectively. 7 Stock Compensation Plans (continued). (millions, except per share) 13 Weeks Ended 39 Weeks Ended Nov. 1, Nov. 2, Nov. 1, Nov. 2, 2003 2002 2003 2002 Net earnings, as reported $ 47 $ 16 $ 9 $ 155 Add: Compensation expense for employee stock options included in net earnings, net of tax 1 - 2 - Deduct: Total compensation expense for employee stock options determined under retroactive fair value based method, net of tax (6) (6) (19) (17) Pro forma net earnings (loss) $ 42 $ 10 $ (8) $ 138 Earnings (loss) per share: Basic - as reported (prospective) $ 0.15 $ 0.05 $ (.01) $ 0.50 Basic - pro forma (retroactive) $ 0.13 $ 0.03 $ (.07) $ 0.44 Diluted - as reported (prospective) $ 0.15 $ 0.05 $ (.01) $ 0.50 Diluted - pro forma (retroactive) $ 0.13 $ 0.03 $ (.07) $ 0.44 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 $833 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. Reclassifications. Certain prior period amounts have been reclassified to conform with current year presentation. Impact of New Accounting Pronouncements. In May 2003, the Financial Accounting Standards Board 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 did not reclassify any financial instruments as a result of adopting SFAS No. 150. 8 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 November 1, 2003, November 2, 2002,and February 1, 2003, the related condensed consolidating statements of earnings for the thirteen week and thirty-nine week periods ended November 1, 2003 and November 2, 2002, and the related condensed consolidating statements of cash flows for the thirty-nine week periods ended November 1, 2003 and November 2, 2002, are presented below. Condensed Consolidating Balance Sheet As of November 1, 2003 (Unaudited) (millions) Subsidiary Other Parent Issuer Subsidiaries Eliminations Consolidated ASSETS Current assets: Cash and cash equivalents $ - $ 52 $ 13 $ - $ 65 Accounts receivable, net - 1,442 43 (36) 1,449 Merchandise inventories - 3,394 99 - 3,493 Other current assets - 92 24 (18) 98 Total current assets - 4,980 179 (54) 5,105 Property and equipment, at cost - 9,068 226 - 9,294 Accumulated depreciation - (4,070) (69) - (4,139) Property and equipment, net - 4,998 157 - 5,155 Goodwill - 1,129 339 - 1,468 Intangible assets, net - 5 165 - 170 Other assets - 119 10 - 129 Intercompany (payable) receivable (820) 317 3,728 (3,225) - Investment in subsidiaries 4,797 - - (4,797) - Total assets $ 3,977 $11,548 $ 4,578 $ (8,076) $12,027 LIABILITIES AND SHAREOWNERS' EQUITY Current liabilities: Short-term debt $ - $ 270 $ - $ - $ 270 Current maturities of long-term debt - 235 - - 235 Accounts payable - 1,306 99 - 1,405 Accrued expenses - 884 105 (35) 954 Income taxes payable - - 46 (18) 28 Total current liabilities - 2,695 250 (53) 2,892 Long-term debt - 3,801 1 - 3,802 Intercompany note payable (receivable) - 3,225 - (3,225) - Deferred income taxes - 766 65 - 831 Other liabilities - 516 9 - 525 Minority interest in subsidiary - 489 - (489) - ESOP preference shares 241 - - - 241 Unearned compensation (91) (91) - 91 (91) Shareowners' equity 3,827 147 4,253 (4,400) 3,827 Total liabilities and shareowners' equity $ 3,977 $11,548 $ 4,578 $ (8,076) $12,027
9 Condensed Consolidating Financial Information (continued) - Condensed Consolidating Statement of Earnings For the Thirteen Weeks Ended November 1, 2003 (Unaudited) (millions) Subsidiary Other Parent Issuer Subsidiaries Eliminations Consolidated Net sales $ - $ 2,838 $ 589 $ (451) $ 2,976 Cost of sales - 2,135 467 (441) 2,161 Selling, general, and administrative expenses - 602 71 (15) 658 Restructuring costs - 5 - - 5 Interest expense (income), net: External - 78 - - 78 Intercompany - 71 (71) - - Equity in earnings of subsidiaries (47) - - 47 - Earnings (loss) before income taxes 47 (53) 122 (42) 74 Provision (credit) for income taxes - (16) 43 - 27 Net earnings (loss) $ 47 $ (37) $ 79 $ (42) $ 47
Condensed Consolidating Statement of Earnings For the Thirty-nine Weeks Ended November 1, 2003 (Unaudited) (millions) Subsidiary Other Parent Issuer Subsidiaries Eliminations Consolidated Net sales $ - $ 8,376 $ 1,488 $ (1,015) $ 8,849 Cost of sales - 6,229 1,130 (992) 6,367 Selling, general, and administrative expenses - 1,782 212 (39) 1,955 Restructuring costs - 323 - - 323 Interest expense (income), net: External - 238 - - 238 Intercompany - 213 (213) - - Equity in earnings of subsidiaries (9) - - 9 - Earnings (loss) before income taxes 9 (409) 359 7 (34) Provision (credit) for income taxes - (173) 130 - (43) Net earnings (loss) $ 9 $ (236) $ 229 $ 7 $ 9
10 Condensed Consolidating Financial Information (continued) - Condensed Consolidating Statement of Cash Flows For the Thirty-nine Weeks Ended November 1, 2003 (Unaudited) (millions) Subsidiary Other Parent Issuer Subsidiaries Eliminations Consolidated Operating activities: Net earnings (loss) $ 9 $ (236) $ 229 $ 7 $ 9 Equity in earnings of subsidiaries (9) - - 9 - Depreciation and other amortization - 398 22 - 420 Intangible asset amortization - 1 5 - 6 Store divestiture asset impairments - 317 - - 317 Increase (decrease) in working capital (4) (108) 33 - (79) Other, net 150 (29) (87) (16) 18 Cash flows from operations 146 343 202 - 691 Investing activities: Net additions to property and equipment, and business combinations - (406) (74) - (480) Cash flows used for investing activities - (406) (74) - (480) Financing activities: Net short-term debt issuances - 120 - - 120 Net long-term debt repayments - (52) (25) - (77) Net issuances (repurchases) of common stock (33) 9 - - (24) Dividend payments (221) 1 - - (220) Intercompany activity, net 108 - (108) - - Cash flow (used for) from financing activities (146) 78 (133) - (201) Increase (decrease) in cash and cash equivalents - 15 (5) - 10 Cash and cash equivalents, beginning of period - 37 18 - 55 Cash and cash equivalents, end of period $ - $ 52 $ 13 $ - $ 65
11 Condensed Consolidating Financial Information (continued) - Condensed Consolidating Balance Sheet As of November 2, 2002 (Unaudited) (millions) Subsidiary Other Parent Issuer Subsidiaries Eliminations Consolidated ASSETS Current assets: Cash and cash equivalents $ - $ 47 $ 18 $ - $ 65 Accounts receivable, net - 1,533 43 (36) 1,540 Merchandise inventories - 3,513 83 - 3,596 Other current assets - 57 17 - 74 Total current assets - 5,150 161 (36) 5,275 Property and equipment, at cost - 9,343 180 - 9,523 Accumulated depreciation - (4,049) (47) - (4,096) Property and equipment, net - 5,294 133 - 5,427 Goodwill - 1,129 304 - 1,433 Intangible assets, net - 7 167 - 174 Other assets - 105 10 - 115 Intercompany (payable) receivable (937) 487 3,650 (3,200) - Investment in subsidiaries 4,848 - - (4,848) - Total assets $ 3,911 $12,172 $ 4,425 $ (8,084) $12,424 LIABILITIES AND SHAREOWNERS' EQUITY Current liabilities: Short-term debt $ - $ 618 $ - $ - $ 618 Current maturities of long-term debt - 315 - - 315 Accounts payable - 1,243 106 - 1,349 Accrued expenses 1 911 89 (37) 964 Income taxes payable - 77 25 - 102 Total current liabilities 1 3,164 220 (37) 3,348 Long-term debt - 4,039 2 - 4,041 Intercompany note payable (receivable) - 3,200 - (3,200) - Deferred income taxes - 660 69 - 729 Other liabilities - 387 9 - 396 Minority interest in subsidiary - 475 - (475) - ESOP preference shares 272 - - - 272 Unearned compensation (152) (152) - 152 (152) Shareowners' equity 3,790 399 4,125 (4,524) 3,790 Total liabilities and shareowners' equity $ 3,911 $12,172 $ 4,425 $ (8,084) $12,424
12 Condensed Consolidating Financial Information (continued) - Condensed Consolidating Statement of Earnings For the Thirteen Weeks Ended November 2, 2002 (Unaudited) (millions) Subsidiary Other Parent Issuer Subsidiaries Eliminations Consolidated Net sales $ - $ 2,875 $ 627 $ (510) $ 2,992 Cost of sales - 2,162 516 (504) 2,174 Selling, general, and administrative expenses - 647 57 (13) 691 Restructuring costs - 6 - - 6 Interest expense (income), net: External - 97 (1) - 96 Intercompany - 71 (72) 1 - Equity in earnings of subsidiaries (16) - - 16 - Earnings (loss) before income taxes 16 (108) 127 (10) 25 Provision (credit) for income taxes - (37) 46 - 9 Net earnings (loss) $ 16 $ (71) $ 81 $ (10) $ 16
Condensed Consolidating Statement of Earnings For the Thirty-nine Weeks Ended November 2, 2002 (Unaudited) (millions) Subsidiary Other Parent Issuer Subsidiaries Eliminations Consolidated Net sales $ - $ 8,711 $ 1,433 $ (1,026) $ 9,118 Cost of sales - 6,402 1,124 (1,010) 6,516 Selling, general, and administrative expenses - 1,861 178 (33) 2,006 Restructuring costs - 85 - - 85 Interest expense (income), net: External - 266 (1) - 265 Intercompany - 213 (213) - - Equity in earnings of subsidiaries (155) - - 155 - Earnings (loss) before income taxes 155 (116) 345 (138) 246 Provision (credit) for income taxes - (35) 126 - 91 Net earnings (loss) $ 155 $ (81) $ 219 $ (138) $ 155
13 Condensed Consolidating Financial Information (continued) - Condensed Consolidating Statement of Cash Flows For the Thirty-nine Weeks Ended November 2, 2002 (Unaudited) (millions) Subsidiary Other Parent Issuer Subsidiaries Eliminations Consolidated Operating activities: Net earnings (loss) $ 155 $ (81) $ 219 $ (138) $ 155 Equity in earnings of subsidiaries (155) - - 155 - Depreciation and other amortization - 382 24 - 406 Intangible asset amortization - 2 6 - 8 Increase (decrease) in working capital (5) (132) 50 - (87) Other, net 95 112 (128) (17) 62 Cash flows from operations 90 283 171 - 544 Investing activities: Net additions to property and equipment, and business combinations - (569) (29) - (598) Cash flows used for investing activities - (569) (29) - (598) Financing activities: Net short-term debt issuances - 540 - - 540 Net long-term debt repayments - (253) - - (253) Net issuances (repurchases) of common stock (10) 8 - - (2) Dividend payments (220) 2 - - (218) Intercompany activity, net 140 - (140) - - Cash flows (used for) from financing activities (90) 297 (140) - 67 Increase in cash and cash equivalents - 11 2 - 13 Cash and cash equivalents, beginning of period - 36 16 - 52 Cash and cash equivalents, end of period $ - $ 47 $ 18 $ - $ 65
14 Condensed Consolidating Financial Information (continued) - Condensed Consolidating Balance Sheet As of February 1, 2003 (Unaudited) (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 - 62 23 (3) 82 Total current assets - 4,619 155 (39) 4,735 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 3,617 (3,200) - Investment in subsidiaries 4,824 - - (4,824) - Total assets $ 4,153 $11,464 $ 4,395 $ (8,063) $11,949 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 5 823 88 (36) 880 Income taxes payable - 244 23 (3) 264 Total current liabilities 5 2,377 189 (39) 2,532 Long-term debt - 4,034 1 - 4,035 Intercompany note payable (receivable) - 3,200 - (3,200) - Deferred income taxes - 646 64 - 710 Other liabilities - 987 10 (473) 524 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 $11,464 $ 4,395 $ (8,063) $11,949
15 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations Net Sales. Net sales include merchandise sales and lease department income. Store-for-store sales compare sales of stores open during both periods beginning the first day a new store has prior-year sales and exclude sales of stores closed during both periods. Net sales and related decreases were as follows: (dollars in millions) Percent Store-for-Store 2003 2002 Decrease Decrease Third quarter $2,976 $2,992 (0.5)% (2.4)% First nine months 8,849 9,118 (2.9) (4.8) The total net sales decrease of $16 million for the 2003 third quarter was principally due to a $72 million decrease in store-for-store sales offset by $68 million of new store sales. The total net sales decrease of $269 million for the first nine months of 2003 was principally due to a $436 million decrease in store-for-store sales offset by $202 million of new store sales. The decrease in store-for-store sales is characterized by decreases in the number of transactions and the average price per item, partially offset by an increase in the number of items per transaction. The following table presents the statements of earnings as a percent of net sales. Third Quarter First Nine Months 2003 2002 2003 2002 Net sales 100.0% 100.0% 100.0% 100.0% Cost of sales: Recurring 72.6 72.6 71.9 71.2 Restructuring markdowns 0.0 0.1 0.0 0.3 Selling, general, and administrative expenses 22.1 23.1 22.1 22.0 Restructuring costs 0.2 0.2 3.7 0.9 Interest expense, net 2.6 3.2 2.7 2.9 Earnings (loss) before income taxes 2.5 0.8 (0.4) 2.7 Income taxes 37.0* 37.0* 126.8* 37.0* Net earnings 1.6% 0.5% 0.1% 1.7% * - Percent represents effective income tax rate. Cost of Sales. Recurring cost of sales includes the cost of merchandise, inbound freight, distribution expenses, and buying and occupancy costs. Restructuring markdowns in 2003 consist of inventory liquidation losses incurred to mark down inventory during liquidation sales as stores to be divested are closed. Restructuring markdowns in 2002 consist of markdowns incurred to conform merchandise assortments and synchronize pricing and promotional strategies during the division combinations. Recurring cost of sales was $2,160 million in the 2003 third quarter, compared to $2,171 million in the 2002 third quarter. For the first nine months of 2003, recurring cost of sales was $6,366 million, compared to $6,493 million in the same 2002 period. Restructuring markdowns were $3 million and $23 million in the third quarter and first nine months of 2002, respectively. Recurring cost of sales as a percent of net sales was 72.6% for both the third quarter of 2003 and 2002. For the 2003 third quarter, a 0.3% increase in 16 occupancy costs was offset by a 0.3% decrease in the cost of merchandise. For the 39 weeks ended November 1, 2003, recurring cost of sales as a percent of net sales increased 0.7%, principally due to a 0.6% increase in occupancy costs. Selling, General, and Administrative Expenses. Selling, general, and administrative expenses were $658 million in the 2003 third quarter, compared with $691 million in the 2002 third quarter. For the first nine months of 2003, selling, general, and administrative expenses were $1,955 million, compared with $2,006 million in the 2002 period. Selling, general, and administrative expenses as a percent of net sales decreased from 23.1% in the third quarter of 2002 to 22.1% in the third quarter of 2003, principally due to an 0.8% decrease in payroll costs, a 0.5% decrease in advertising costs, and a 0.3% decrease in credit costs, offset by a 0.4% increase in pension costs. Selling, general, and administrative expenses as a percent of net sales increased from 22.0% in the first nine months of 2002 to 22.1% in the first nine months of 2003. For the first nine months of 2003, pension costs increased 0.3% and other expenses increased 0.3%, offset by a 0.3% decrease in credit expense and a 0.2% decrease in advertising costs. Restructuring Costs. In the second quarter of 2003, we announced our intention to divest 34 underperforming department stores. These divestitures will result in estimated total charges of $380 million, consisting of asset impairments of $317 million, inventory liquidation losses of $25 million, severance benefits of $23 million, and other charges of approximately $15 million. Approximately $50 million of the $380 million represents the cash cost of the store divestitures, not including the benefit from future tax credits. Of the $380 million in expected total charges, $6 million, or $0.01 per share, was recognized in the 2003 third quarter and $324 million, or $0.70 per share, was recognized in the first nine months of 2003. We will continue to fulfill our obligations under existing agreements with landlords and developers to operate each store until satisfactory arrangements are negotiated. This process may take three or more years to complete. Through the end of the 2003 third quarter, we have closed two of the 34 stores we intend to divest. Asset impairment charges were recorded to reduce store assets to their estimated fair values due to the shorter period over which they will be used. Estimated fair values were based on estimated market values of similar assets. Severance benefits are recognized as each store is closed. As of November 1, 2003, severance benefits of $4 million have been paid to 250 store and central office associates. Inventory liquidation losses and other costs of $3 million have been recognized to date. In 2002, we recorded restructuring charges of $102 million for the Filene's/Kaufmann's and Robinsons-May/Meier & Frank division combinations and $12 million for the closure of the Arizona Credit Center and realignment of the company's data center. Of the $114 million in total charges, $9 million, or $0.02 per share, was recognized in the third quarter of 2002, $3 million of which was included as cost of sales. Charges of $108 million, or $0.22 per share, was recognized in the first nine months of 2002, of which $23 million was included as cost of sales. As of November 1, 2003, severance benefits of $4 million are payable to former associates whose jobs were eliminated in these combinations. All severance will be paid by the end of 2004. Business Combinations. In the 2003 third quarter, we purchased certain assets of Desmonds Formalwear, consisting of 66 tuxedo rental and retail sales locations in the Midwest. We also purchased 7 tuxedo rental and retail sales locations in Atlanta operating as Tyndall's Formal Wear. Earlier in 2003, we purchased 25 Modern Tuxedo stores in the Chicago metropolitan area. The 17 purchase price allocations for these business combinations are preliminary and subject to final valuations. These acquisitions did not have a material effect on our results of operations or financial position. Interest Expense. Components of net interest expense were (millions): Third Quarter First Nine Months 2003 2002 2003 2002 Interest expense $ 82 $ 102 $ 252 $ 290 Interest income - - (1) (7) Capitalized interest (4) (6) (13) (18) Net interest expense $ 78 $ 96 $ 238 $ 265 Interest expense principally relates to long-term debt. The decrease in interest expense for the third quarter and first nine months of 2003 is due to $10 million of early debt redemption costs in the 2002 third quarter and a decrease in long-term debt. Short-term borrowings were (dollars in millions): Third Quarter First Nine Months 2003 2002 2003 2002 Average balance outstanding $137 $287 $236 $149 Average interest rate on average balance 1.3% 1.8% 1.3% 1.8% Income Taxes. The effective income tax rate for the first nine months of 2003 was 126.8% due to a $31 million tax credit recorded in the first quarter of 2003 upon the resolution of various federal and state income tax issues. Excluding the $31 million tax credit, our estimated effective tax rate for the first nine months of 2003 was 37.0%, compared with 37.0% for the same period in 2002. Trailing Years' Results. Operating results for the trailing years were as follows (millions, except per share): Nov. 1, Nov. 2, 2003 2002 Net sales $ 13,222 $ 13,693 Net earnings $ 396 $ 586 Diluted earnings per share $ 1.25 $ 1.86 Financial Condition Cash Flows. Cash flows from operations were $691 million and $544 million in the first nine months of 2003 and 2002, respectively. The 2003 increase in operating cash flows is primarily due to a decrease in cash paid for income taxes and the effect of inventory balance changes, partially offset by a decrease in cash flow from accounts receivable. 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. 18 As of November 29, 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. Subsequent to the third quarter, we entered into an agreement with The Gingiss Group, Inc., a national tuxedo rental and sales chain, to purchase 125 stores and related leases, trade names, and inventory. The agreement is pending completion of a sale auction and approval of the U.S. Bankruptcy Court for the District of Delaware, where the Gingiss bankruptcy is pending. This acquisition would not have a material effect on our results of operations or financial position. Financial Ratios. Key financial ratios as of and for the thirty-nine weeks ended November 1, 2003 and November 2, 2002, and as of and for the fifty-two weeks ended February 1, 2003 are as follows: Nov. 1, Nov. 2, Feb. 1, 2003 2002 2003 Current Ratio 1.8 1.6 1.9 Debt-Capitalization Ratio 50% 53% 48% Fixed Charge Coverage 0.8x 1.7x 2.8x The decline in the fixed charge coverage ratio for the first nine months of 2003 is due to the store divestiture restructuring charges reducing earnings. Impact of New Accounting Pronouncements In May 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (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 did not reclassify any financial instruments as a result of adopting SFAS No. 150. 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 nine months of fiscal 2003 and fiscal 2002, we did not enter into any derivative financial instruments. 19 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 consolidated financial statements taken as a whole. Item 2 - Changes in Securities and Use of Proceeds - None. Item 3 - Defaults Upon Senior Securities - None. Item 4 - Submission of Matters to a Vote of Security Holders - None. 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 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 November 12, 2003, which furnished a company press release announcing its financial results for the 13 and 39 weeks ended November 1, 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: December 5, 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 November 1, 2003 and November 2, 2002, and the related condensed consolidated statements of earnings for the thirteen and thirty-nine week periods ended November 1, 2003 and November 2, 2002, and of cash flows for the thirty-nine week periods ended November 1, 2003 and November 2, 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 December 4, 2003 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 THIRTY-NINE WEEKS ENDED NOVEMBER 1, 2003 AND NOVEMBER 2, 2002 (dollars in millions) 39 Weeks Ended Fiscal Year Ended Nov. 1, Nov. 2, 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) $ (34) $ 246 $ 820 $1,139 $1,402 $1,523 $1,395 Fixed charges (excluding interest capitalized and pretax preferred stock dividend requirements) 276 310 405 411 406 346 344 Dividends on ESOP preference shares (14) (16) (20) (22) (23) (24) (25) Capitalized interest amortization 7 7 9 8 8 7 7 $ 235 $ 547 $1,214 $1,536 $1,793 $1,852 $1,721 Fixed Charges: Gross interest expense (a) $ 260 $ 301 $ 392 $ 401 $ 395 $ 340 $ 339 Interest factor attributable to rent expense 30 27 36 32 28 22 21 $ 290 $ 328 $ 428 $ 433 $ 423 $ 362 $ 360 Ratio of Earnings to Fixed Charges 0.8 1.7 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 December 4, 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 thirty-nine week periods ended November 1, 2003 and November 2, 2002, as indicated in our report dated December 4, 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 November 1, 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: December 5, 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: December 5, 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 November 1, 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: December 5, 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