| RUSSELL CORP ITEM 1A RISK FACTORS The following factors, as well as factors described elsewhere in this Form 10-K or in other filings with the Securities and Exchange Commission, could adversely affect our consolidated financial position, results of operations or cash flows |
| Other factors not presently known to us or that we presently believe are not material could also affect our business operations and financial results |
| We may fail to realize the cost savings and other benefits that we expect from our restructuring and cost savings initiatives and any savings that we do achieve may be offset by other competitive pressures |
| In January 2006, we announced a restructuring that includes a number of specific actions which, combined with planned focused marketing efforts, improved asset utilization and efficiency improvements, have been developed to improve our long-term competitiveness |
| We expect these efforts to lead to increased sales, higher margins and improved profitability |
| ” If we cannot successfully implement the strategic cost reductions included in our restructuring or other cost savings plans, we may not realize all anticipated cost savings and other benefits |
| Moreover, even if we realize the benefits of our efforts, any cost savings that we achieve may be offset by pressures from our customers to reduce prices or by higher fiber costs, higher costs associated with adding product features, higher energy and higher general and administrative expenses |
| Our failure to realize the anticipated benefits of our initiatives could have a material adverse effect on our business, results of operations and financial condition |
| We rely on a few customers for a significant portion of our sales and we generally do not have any long-term contracts with any of these customers |
| Some of our customers are material to our business and results of operations |
| For fiscal 2005, 2004 and 2003 respectively, Wal-Mart and its subsidiaries, our largest customer, represented approximately 16dtta9prca, 19dtta3prca and 21dtta2prca of our consolidated gross sales |
| Our sales to Wal-Mart may increase or decrease in any given year, dependent upon Wal-Mart merchandising and sourcing decisions |
| In 2005, Wal-Mart notified us that we would not be the sole supplier of their boys’ basic fleece business, beginning in 2006 |
| Our top ten customers accounted for approximately 38dtta9prca of our 2005 gross sales as compared to 44prca in 2004 |
| We believe that consolidation in the retail industry, particularly in the sporting goods retail industry, and the strength of our customers have given certain customers the ability to make greater demands over suppliers such as us and we expect this trend to continue |
| However, we also believe that this consolidation may afford us greater cost savings potential as a result of more advantageous economies of scale, as we have such a broad array of products and brands focused on the sporting goods market |
| If consolidation continues, our sales and results of operations may be increasingly sensitive to 8 ______________________________________________________________________ [39]Table of Contents deterioration in the financial condition of, or other adverse developments with, one or more of our customers |
| Although we believe that our relationships with our major customers are good, we generally do not have long-term contracts with any of them, which is typical of our industry |
| As a result, although our customers provide indications of their product needs and purchases on a season by season basis, they generally purchase our products on an order-by-order basis and the relationship, as well as particular orders, can be terminated at any time |
| The loss of, or significant decrease in, business from any of our major customers could have a material adverse effect on our business, results of operations and financial condition |
| We are dependent on joint ventures and other third parties for the purchase of yarn and other raw materials and the manufacture or sourcing of our products and if these parties fail to perform, we may not meet the demands of our customers |
| Our apparel business produces most of its yarn in the joint venture we established with Frontier Spinning Mills and purchases the remainder from our joint venture partner and other third-party suppliers |
| In addition, we outsource a portion of our sewing and assembly requirements for our products sold in the United States and Canada |
| Most of the products offered by our sporting goods and athletic equipment businesses are sourced from third party contractors outside the United States or manufactured by third-party contractors |
| Our dependence on third parties for manufacturing and raw materials production and for sourcing of finished products could subject us to difficulties in obtaining timely delivery of products that meet our quality standards |
| Although we monitor the performance of our contractors, we cannot assure you that they will deliver our products in a timely manner or that they will meet our quality standards |
| In this event, failure to satisfy our customers’ requirements could result in our customers canceling orders, demanding reduced prices, refusing to accept orders or reducing future orders, any of which could materially adversely affect our business, results of operations and financial condition |
| We do not have long-term supply contracts for any of our raw materials other than, for yarn, through our joint venture with Frontier Spinning Mills |
| As a result, other than with respect to Frontier Yarns, either we or our suppliers or manufacturers may unilaterally terminate the relationship at any time |
| In addition, we also compete for quality contractors, some of which have long-standing relationships with our competitors |
| After an initial period of disruption, we believe there are readily available alternative sources of supply and manufacturers; however, if we are unable to secure or maintain our relationships with suppliers and manufacturers, or experience a delay in obtaining an alternative source of supply, we may not be able to fulfill our customers’ requirements, which could have a material adverse effect on our business, results of operations and financial condition |
| Our success is dependent upon the continued protection of our trademarks and other intellectual property rights |
| We may be forced to incur substantial costs to protect our intellectual property and, if we are unable to protect our intellectual property, the image of one or more of our brands may suffer |
| Our registered and common law trademarks have significant value and some of our trademarks are instrumental to our ability to create and sustain demand for and market our products |
| We cannot assure you that third parties will not assert claims to our trademarks and other intellectual property or that we will be able to successfully resolve those claims |
| In addition, while we seek international protection of our intellectual property, the laws of some foreign countries may not allow us to protect our intellectual property to the same extent as the laws of the United States |
| In addition, we could incur substantial costs to defend legal actions taken against us relating to our use of trademarks, which could have a material adverse effect on our business, results of operations and financial condition |
| Product innovation is a highly important factor in our sporting goods and athletic equipment businesses and many of the innovations in the products marketed by those businesses have been patented |
| The demand for some of our products is cyclical and a downturn in the economy may reduce purchases of our products which could adversely affect our financial performance |
| The apparel, sporting goods and footwear industries historically have been subject to substantial cyclical variations |
| As domestic and international economic conditions change, trends in discretionary consumer spending become 9 ______________________________________________________________________ [40]Table of Contents unpredictable and could be subject to reductions due to uncertainties about the future |
| When consumers reduce discretionary spending, purchases of specialty apparel, footwear and sporting goods may decline |
| Many of our products, particularly our premium Russell Athletic, Brooks and artwear products, are discretionary purchases |
| Any substantial decline in general economic conditions could affect consumer and corporate spending habits and have an adverse effect on our business, results of operations and financial condition |
| The demand for some of our products is seasonal and unseasonably warm weather would likely reduce the demand for our core fleece products |
| Our results of operations are affected by numerous factors, including seasonal variations |
| Typically, demand for our apparel products is higher during the third and fourth quarters of each fiscal year |
| Weather conditions also affect the demand for our apparel products, particularly for our fleece (sweatshirts and sweatpants) products |
| Demand in our basketball and basketball equipment business is typically higher in the second and fourth quarters, but is not as pronounced as the seasonality of our fleece business |
| Typically, demand for Brooks’ products is slightly higher in the first half of the year |
| Generally, we produce and store finished goods inventory, particularly fleece, to meet the expected demand for delivery in the upcoming season |
| If, after producing and storing inventory in anticipation of seasonal deliveries, demand is significantly less than expected, we may hold inventory for extended periods of time, sell excess inventory at reduced prices or write down our inventories |
| Those events would adversely affect our results of operations |
| Reduced demand could also result in lower plant and equipment utilization, which would have a negative impact on our business, results of operations and financial condition |
| In addition, due to the time that may elapse between production and shipment of goods, prices may not immediately reflect changes in our cost of raw materials and other costs |
| Our business outside of the United States exposes us to uncertain conditions in overseas markets, including fluctuations in currency exchange rates |
| Our foreign operations subject us to risks customarily associated with foreign operations |
| Net sales are collected in the local currency and we are exposed to the risk of changes in social, political and economic conditions inherent in operating in foreign countries, including: a) currency fluctuations; b) import and export license requirements; c) trade restrictions; d) changes in tariffs and taxes; e) restrictions on repatriating foreign profits back to the United States; f) foreign laws and regulations; g) difficulties in staffing and managing international operations; h) political unrest; and i) disruptions or delays in shipments |
| We have foreign currency exposures relating to buying, selling and financing in currencies other than our functional currencies |
| We also have foreign currency exposure related to foreign denominated revenues and costs translated into US dollars |
| Fluctuations in foreign currency exchange rates may affect the results of our operations and the value of our foreign assets, which in turn may adversely affect reported earnings and the comparability of period-to-period results of operations |
| Changes in currency exchange rates may affect the relative prices at which we and foreign competitors sell products in the same market |
| In addition, changes in the value of the relevant currencies may affect the cost of certain items required in our operations |
| We cannot assure you that management of our foreign currency exposure will protect us from fluctuations in foreign currency exchange rates |
| Fluctuations in foreign currency exchange rates could have a material adverse effect on our business, results of operations and financial condition |
| We are also subject to taxation in foreign jurisdictions |
| In addition, transactions between us and our foreign subsidiaries may be subject to United States and foreign withholding taxes |
| Applicable tax rates in foreign jurisdictions differ from those of the United States, and change periodically |
| 10 ______________________________________________________________________ [41]Table of Contents The raw materials used to manufacture our products are subject to price volatility which could increase our costs |
| The raw materials used to manufacture our products are subject to price volatility caused by weather, supply conditions, government regulations, economic climate and other unpredictable factors |
| In addition, fluctuations in petroleum prices can influence the prices of chemicals, dyestuffs and polyester yarn |
| To reduce the risk caused by market fluctuations, we have in the past entered into futures contracts to hedge commodity prices, principally cotton, on portions of anticipated purchases |
| However, we do not currently hold any significant hedging positions and have no present intention to engage in further commodity hedging |
| The supply agreement with our yarn joint venture provides for pricing to be calculated on a conversion cost basis plus the actual cost of raw materials |
| We direct the timing and pricing of cotton purchases by the joint venture |
| If one or more of our competitors is able to reduce their production costs by taking advantage of any reductions in raw material prices, we may face pricing pressures from those competitors and may be forced to reduce our prices or face a decline in net sales, either of which could have a material adverse effect on our business, results of operations and financial condition |
| The apparel and footwear industries are subject to consumer preferences and if we misjudge consumer preferences, the image of one or more of our brands may suffer and the demand for our products may decrease |
| The apparel and footwear industries are subject to shifting consumer demands and evolving fashion trends and our success is dependent upon our ability to anticipate and promptly respond to these changes |
| While the core of our apparel offerings is basic activewear and less subject to style trends, we do market a considerable number of performance products |
| Failure to anticipate, identify or promptly react to changing trends, styles, or brand preferences may result in decreased demand for our products, as well as excess inventories and markdowns, which could have a material adverse effect on our business, results of operations, and financial condition |
| In addition, if we misjudge consumer preferences, our brand image may be significantly impaired |
| We have substantial debt and interest payment requirements that may restrict our operations and impair our ability to meet our obligations |
| Our level of indebtedness could restrict our operations and make it more difficult for us to fulfill our obligations |
| Among other things, our indebtedness may: a) limit our ability to obtain additional financing for working capital, capital expenditures, strategic acquisitions and general corporate purposes; b) require us to dedicate all or a substantial portion of our cash flow to service our debt, which would reduce funds available for other business purposes, such as capital expenditures or acquisitions; c) limit our flexibility in planning for or reacting to changes in the markets in which we compete; d) place us at a competitive disadvantage relative to our competitors with less indebtedness; e) render us more vulnerable to general adverse economic and industry conditions; and f) make it more difficult for us to satisfy our financial obligations |
| We and our subsidiaries may still be able to incur substantially more debt |
| The terms of the agreements governing our outstanding indebtedness permit additional borrowings |
| Our incurrence of additional debt could further increase the risks above |
| Although there can be no assurances, we believe that the level of borrowings available to us, in addition to permitted sale/leaseback transactions combined with cash provided by our operations, will be sufficient to provide for our cash requirements |
| However, our ability to satisfy our obligations will depend on our future operating performance and financial results, which will be subject, in part, to factors beyond our control, including interest rates and general economic, financial and business conditions |
| If we are unable to generate sufficient cash flow to service our debt, we may be required to: a) refinance all or a portion of our debt; 11 ______________________________________________________________________ [42]Table of Contents b) obtain additional financing; c) sell some of our assets or operations; d) reduce or delay capital expenditures; or e) revise or delay our strategic plans |
| If we are required to take any of these actions, it could have a material adverse effect on our business, financial condition and results of operations |
| In addition, we cannot assure you that we would be able to take any of these actions, that these actions would enable us to continue to satisfy our capital requirements or that these actions would be permitted under the terms of our various debt instruments |
| The covenants in the agreements governing our outstanding indebtedness impose restrictions that may limit our operating and financial flexibility and prevent us from engaging in transactions that we wish to consummate |
| The instruments governing our outstanding indebtedness contain a number of significant restrictions and covenants that limit our ability and our subsidiaries’ ability to: a) incur liens and debt or provide guarantees regarding the obligations of any other person; b) issue redeemable preferred stock and subsidiary preferred stock; c) increase our common stock dividends above specified levels; d) make redemptions and repurchases of capital stock; e) make loans, investments and capital expenditures; f) prepay, redeem or repurchase debt; g) engage in mergers, acquisitions, consolidations and asset dispositions; h) engage in sale/leaseback transactions and affiliate transactions; i) change our business, amend certain of our agreements and issue and sell capital stock of subsidiaries; and j) restrict distributions from subsidiaries |
| The apparel industry is subject to pricing pressures that may cause us to lower the prices we charge for our products and adversely impact our financial performance, such as our gross margins |
| Prices in the apparel industry have been declining over the past several years primarily as a result of the trend to move sewing operations offshore, the introduction of new manufacturing technologies, growth of the mass retail channel of distribution, increased competition, and consolidation in the retail industry |
| Products produced and sewn offshore generally cost less to make primarily because labor costs are lower |
| Many of our competitors also source their product requirements from developing countries to achieve a lower cost operating environment, possibly in environments with lower costs than our offshore operations, and those manufacturers may use these cost savings to reduce prices |
| To remain competitive, we must adjust our prices from time to time in response to these industry-wide pricing pressures |
| Our financial performance may be negatively affected by these pricing pressures if: a) we are forced to reduce our prices and we cannot reduce our production costs; or b) our production costs increase and we cannot increase our prices |
| 12 ______________________________________________________________________ [43]Table of Contents The markets in which we operate are highly competitive |
| The markets in which we operate are extremely competitive |
| Some of our competitors are larger, more diversified and have greater financial and other resources than we do |
| Competition could result in reduced sales or prices, or both, which could have a material adverse effect on us |
| We, and other participants in our industry, face competition on many fronts, including: a) quality of product; b) brand recognition; c) price; d) product differentiation; e) advertising; and f) customer service |
| We expect competition to intensify in each of our strategic business units |
| We also compete with other global companies, which may have lower costs |
| Our ability to remain competitive in the areas of quality, price, marketing, product development, manufacturing, distribution and order processing will, in large part, determine our future success |
| We cannot assure you that we will continue to compete successfully |
| Changing international trade regulation may increase competition in our industry |
| Future quotas, duties or tariffs may increase our costs or limit the amount of products that we can import into a country |
| The countries in which our products are manufactured or into which our goods are imported may from time to time impose safeguards, duties, tariffs, and requirements as to where raw materials must be purchased, additional workplace regulations, or other restrictions on our imports or adversely modify existing restrictions |
| Adverse changes in these costs and restrictions could harm our business |
| We cannot assure you that future trade agreements will not provide our competitors an advantage over us, or increase our costs, either of which could have a material adverse effect on our business, results of operations and financial condition |
| Our operations are also subject to the effects of international trade agreements and regulations such as the North American Free Trade Agreement, the Caribbean Basin Trade Partnership Act, the US – Dominican Republic – Central America Free Trade Agreement and the activities and regulations of the World Trade Organization |
| Generally, these trade agreements benefit our business by reducing or eliminating the duties and/or quotas assessed on products manufactured in a particular country |
| However, some trade agreements can also impose requirements that negatively impact our business, such as limiting the countries from which we can purchase raw materials and setting limits on products that may be imported into the United States from a particular country |
| In addition, trade organizations may commence a new round of trade negotiations that liberalize textile trade |
| The elimination of safeguards may result in increased competition from developing countries which historically have lower labor costs |
| This increased competition could have a material adverse effect on our business, results of operations and financial condition |