10-Q 1 q101st01.txt OSHKOSH B'GOSH FIRST QUARTER 10Q FINANCIAL RESULTS 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 March 31, 2001 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 0-13365 OshKosh B'Gosh, Inc. A Delaware Corporation 39-0519915 (I.R.S. ID) 112 Otter Avenue Oshkosh, Wisconsin 54901 Telephone number: (920) 231-8800 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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [] As of April 16, 2001, there were outstanding 9,999,693 shares of Class A Common Stock and 2,225,201 shares of Class B Common Stock. FORM 10-Q OSHKOSH B'GOSH, INC. AND SUBSIDIARIES INDEX Page Part I. Financial Information 3 Item 1. Financial Statements 3 Condensed Consolidated Balance Sheets- March 31, 2001 and December 30, 2000 3 Unaudited Condensed Consolidated Statements of Income-Three Month Periods Ended March 31, 2001 and April 1, 2000 4 Unaudited Condensed Consolidated Statements of Cash Flows-Three Month Periods Ended March 31, 2001 and April 1, 2000 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 8 Item 3. Qualitative and Quantitative Disclosures About Market Risk 12 Part II. Other Information 13 Item 6. Exhibits and Reports on Form 8-K 13 Signatures Part I - Financial Information Item 1. Financial Statements OSHKOSH B'GOSH, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (In thousands) March 31, December 30, 2001 2000* (unaudited) Assets Current assets Cash and cash equivalents $ 7,614 $ 19,839 Investments -- 511 Accounts receivable 29,865 30,166 Inventories 54,645 53,185 Prepaid expenses and other current assets 1,964 1,882 Deferred income taxes 11,900 13,800 Total current assets 105,988 119,383 Property, plant and equipment 69,271 68,295 Less accumulated depreciation and amortization 37,750 36,010 Net property, plant and equipment 31,521 32,285 Non-current deferred income taxes 4,900 4,950 Other assets 2,378 1,638 Total assets $144,787 $ 158,256 Liabilities and shareholders' equity Current liabilities Current portion of long-term debt $ 333 $ 10,000 Accounts payable 8,105 14,840 Accrued liabilities 36,133 39,942 Total current liabilities 44,571 64,782 Long-term debt 36,667 34,000 Employee benefit plan liabilities 14,665 15,001 Shareholders' equity Preferred stock -- -- Common stock: Class A 100 99 Class B 22 22 Additional paid-in capital 461 -- Retained earnings 48,936 45,054 Unearned compensation under restricted stock plan (635) (702) Total shareholders' equity 48,884 44,473 Total liabilities and shareholders' equity $144,787 $ 158,256 *Condensed from audited financial statements. See notes to condensed consolidated financial statements. OSHKOSH B'GOSH, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Income (In thousands, except per share amounts) (Unaudited) Three Month Period Ended March 31, April 1, 2001 2000 Net sales $ 99,445 $ 95,051 Cost of products sold 58,452 54,464 Gross profit 40,993 40,587 Selling, general and administrative expenses 35,710 33,997 Royalty income, net (2,464) (2,077) Operating income 7,747 8,667 Other income (expense): Interest expense (731) (1,187) Interest income 216 161 Miscellaneous 31 49 Other income (expense) -- net (484) (977) Income before income taxes 7,263 7,690 Income taxes 2,789 2,999 Net income $ 4,474 $ 4,691 Net income per common share Basic $ 0.37 $ 0.37 Diluted $ 0.36 $ 0.37 Weighted average common shares outstanding Basic 12,183 12,612 Diluted (including share equivalents) 12,396 12,784 Cash dividends per common share Class A $ 0.0500 $ 0.0500 Class B $ 0.0425 $ 0.0425 See notes to condensed consolidated financial statements. OSHKOSH B'GOSH, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (In thousands) (Unaudited) Three Month Period Ended March 31, April 1, 2001 2000 Cash flows from operating activities Net income $ 4,474 $ 4,691 Depreciation and amortization 1,959 1,969 Deferred income taxes 1,950 200 Income tax benefit from stock option exercises 257 -- Items in net income not affecting cash and cash equivalents (277) 326 Changes in current assets (1,241) (4,155) Changes in current liabilities (10,544) (1,626) Net cash provided by (used in) operating activities (3,422) 1,405 Cash flows from investing activities Additions to property, plant and equipment (1,084) (1,095) Proceeds from disposal of assets 26 4 Sale of short-term investments 511 -- Changes in other assets (869) 12 Net cash used in investing activities (1,416) (1,079) Cash flows from financing activities Payment on long-term debt (7,000) -- Dividends paid (591) (613) Net proceeds from issuance of common shares 718 65 Repurchase of common shares (514) (4,395) Net cash used in financing activities (7,387) (4,943) Net decrease in cash and cash equivalents (12,225) (4,617) Cash and cash equivalents at beginning of period 19,839 9,093 Cash and cash equivalents at end of period $ 7,614 $ 4,476 See notes to condensed consolidated financial statements. OSHKOSH B'GOSH, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (In thousands) (Unaudited) Note 1. Basis of Preparation The condensed consolidated financial statements included herein have been prepared by the Company without audit. However, the foregoing statements contain all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of Company management, necessary to present fairly the financial position as of March 31, 2001, and the results of operations and cash flows for the three month periods ended March 31, 2001 and April 1, 2000. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company's 2000 Annual Report. Certain prior year amounts have been reclassified to conform with the current year presentation. Note 2. Inventories A summary of inventories follows: March 31, December 30, 2001 2000 Finished goods $43,230 $37,398 Work in process 9,217 12,595 Raw materials 2,198 3,192 Total $54,645 $53,185 The replacement cost of inventory exceeds the above LIFO costs by $11,983 at March 31, 2001 and December 30, 2000. Note 3. Segment Reporting The Company designs, sources, and markets apparel products using primarily the OshKosh B'Gosh brand. The apparel products are primarily marketed in two distinct distribution channels: domestic wholesale and through Company owned retail stores. The Company designs and sources product to meet the needs of these distribution channels through a single procurement business unit. Certain operations are classified as segments as defined by SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." The Company manages its business operations by periodic analysis of business unit operating results. For this purpose, domestic wholesale, retail, and procurement are separately identified for management reporting and are considered segments as defined by SFAS No. 131. Management evaluates the operating performance of each of its business units based on income from operations as well as return on net assets. For this purpose, product is transferred from procurement to the domestic wholesale and retail business units at cost. However, procurement receives a markup on product sold by the Company's wholesale and retail business units. Accounting policies used for segment reporting are consistent with the Company's overall accounting policies, except that inventories are valued on a FIFO basis. In addition, interest income, interest expense, certain corporate office expenses, and the effects of the LIFO inventory valuation method are not allocated to individual business units, and are included in the All Other/Corporate column below. Segment assets include all assets used in the operation of each business unit, including accounts receivable, inventories, and property, plant and equipment. Certain other corporate assets that cannot be specifically identified with the operation of a business unit are not allocated. Financial information for the Company's reportable segments follows: All Domestic Other/ Wholesale Retail Procurement Corporate Total For the three months ended March 31, 2001 Net sales $ 54,765 $ 42,854 $ -- $ 1,826 $ 99,445 Income before income taxes 5,342 785 (74) 1,210 7,263 Assets 63,481 40,760 19,985 20,561 144,787 Depreciation expense 427 901 290 212 1,830 For the three months ended April 1, 2000 Net sales $ 48,254 $ 44,340 $ -- $ 2,457 $ 95,051 Income before income taxes 5,368 1,482 116 724 7,690 Assets 48,725 38,424 19,162 21,778 128,089 Depreciation expense 395 723 377 245 1,740 For the year ended December 30, 2000 Net sales $215,982 $230,774 $ -- $ 6,306 $453,062 Income before income taxes $ 22,794 $ 25,505 $ 824 3,670 $ 52,793 Assets 62,140 36,216 25,160 34,740 158,256 Depreciation expense 1,612 3,319 1,357 866 7,154
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, selected Company income statement data expressed as a percentage of net sales. As a Percentage of Net Sales for the Three Months Ended March 31, April 1, 2001 2000 Net sales 100.0% 100.0% Cost of products sold 58.8% 57.3% Gross profit 41.2% 42.7% Selling, general and administrative expenses 35.9% 35.8% Royalty income, net (2.5%) (2.2%) Operating income 7.8% 9.1% Other income (expense), net (0.5%) (1.0%) Income before income taxes 7.3% 8.1% Income taxes 2.8% 3.2% Net income 4.5% 4.9% Net Sales Consolidated net sales for the first quarter ended March 31, 2001 were $99.4 million, a $4.3 million increase (4.5%) over 2000 first quarter net sales of $95.1 million. The Company's net sales for the first quarter of 2001 and 2000 are summarized as follows: Net Sales (in millions) Domestic Wholesale Retail Other Total Three months ended: March 31, 2001 $ 54.7 $ 42.9 $ 1.8 $ 99.4 April 1, 2000 48.3 44.3 2.5 95.1 Increase (decrease) $ 6.4 $ (1.4) $ (.7) $ 4.3 Percent increase (decrease) 13.3% (3.2%) (28.0%) 4.5%
The Company's first quarter 2001 domestic wholesale unit shipments increased approximately 22.1% compared to 2000. The increase in unit shipments resulted from a combination of higher booked orders, an increase in the number of "close-out" units sold and the timing of shipment of certain spring fashion items. (During 2000, shipment of certain spring fashion items was delayed into April. During 2001, no such delay occurred.) The wholesale sales dollar increase of 13.3% was lower than the 22.1% unit increase as a result of a combination of slightly lower average unit selling prices, higher customer sales allowances, and the higher level of "close-out" unit sales. The Company currently anticipates a 2% to 5% increase in its wholesale net sales dollars during the second quarter of 2001 as compared to the second quarter of 2000. The Company's first quarter 2001 retail sales decrease resulted from a 9.2% comparable store sales decrease offset in part by sales volume from stores opened subsequent to April 1, 2000 (the Company operated seven more stores during the first quarter of 2001 as compared to 2000). Lower customer store traffic, particularly during the second half of the first quarter, adversely impacted comparable stores sales. Company management believes that both adverse weather conditions and a generally negative economic environment impacted customer store traffic. For the remainder of 2001, the Company currently anticipates low single-digit comparable store sales gains. At March 31, 2001 the Company operated 136 domestic OshKosh retail stores, including 128 outlet stores, three showcase stores, and five strip mall stores. During the first quarter of 2001, the Company closed one retail outlet store. At April 1, 2000 the Company operated a total of 129 domestic OshKosh retail stores. Current Company plans for the remainder of 2001 call for the addition of approximately six outlet stores and the closing of one outlet store. Gross Profit The Company's gross profit margin as a percent of sales decreased to 41.2% in the first quarter of 2001, compared to 42.7% in the first quarter of 2000. The decrease in gross profit margin was due primarily to the decreased proportion of sales from the Company's retail stores for the quarter. The Company currently anticipates a relatively flat second quarter 2001 gross profit margin as compared to 2000 and modest improvement in its gross profit margin in the second half of 2001 as compared to 2000. The Company is currently on target with its 2001 sourcing plan which calls for approximately 90% of units to be produced at off- shore venues as compared to approximately 75% in 2000. Selling, General, and Administrative Expenses (S,G&A) S,G&A expenses for the first quarter of 2001 increased $1.7 million over the first quarter of 2000. As a percentage of net sales, S,G&A expenses were 35.9% for the first quarter of 2001 as compared to 35.8% for the first quarter of 2000. The increase in expenses relates primarily to growth in the Company's retail operations compared to the first quarter of 2000. Royalty Income The Company licenses the use of its trade name to selected licensees in the U.S. and in foreign countries. The Company's first quarter 2001 net royalty income of $2.5 million increased approximately 19% compared to net royalty income earned in the first quarter of 2000 of approximately $2.1 million. This increase is attributable primarily to increased business levels by the Company's Japanese licensees. Operating Income As a result of the factors described above, the Company's operating income decreased to $7.7 million for the first quarter of 2001 as compared to $8.7 million for the first quarter of 2000. Other Income (Expense) -Net The Company's first quarter 2001 net other income (expense) was a $.5 million expense compared to $1.0 million in 2000. Interest expense was lower for the first quarter of 2001 due to lower interest rates and prepayment of $7 million of the Company's long- term debt during the quarter. Income Taxes The Company's effective tax rate for the first quarter of 2001 was 38.4% compared to 39.0% in 2000. The Company currently anticipates an effective income tax rate of approximately 38.4% for the remainder of 2001. This anticipated reduction compared to 2000 is due primarily to the implementation of certain planned income taxation strategies. Net Income Net income for the three months ended March 31, 2001 of $4.5 million was a $.2 million (4.3%) decrease compared to net income for the three months ended April 1, 2000 of $4.7 million. Diluted earnings per share were $.36, a $.01 (2.7%) decrease from 2000 first quarter diluted earnings per share of $.37. SEASONALITY OF BUSINESS The Company's business is seasonal, with highest sales and income in the third quarter, which is the Company's peak wholesale shipping period and a major retail selling season at its retail stores. The Company's second quarter sales and income are the lowest, both because of relatively low domestic wholesale unit shipments and relatively modest retail store sales during this period. The Company anticipates this seasonality trend to continue to impact 2001 quarterly sales and income. First quarter 2001 operating results are not necessarily indicative of anticipated quarterly results throughout the balance of the year. FINANCIAL POSITION, CAPITAL RESOURCES AND LIQUIDITY At March 31, 2001, the Company's cash, cash equivalents and investments were $7.6 million, compared to $20.4 million at the end of 2000 and $5.0 million at April 1, 2000. The reduction from year end is primarily attributable to a $7.0 million payment on the current portion of long-term debt and reductions in acounts payable. Net working capital at March 31, 2001 was $61.4 million compared to $54.6 million at December 30, 2000, and $28.2 million at April 1, 2000. The increase in working capital compared to April 1, 2000 is attributable to increases in accounts receivable and inventories, and a decrease in the current portion of long term debt. Accounts receivable at March 31, 2001, were $29.9 million compared to $30.2 million at December 30, 2000, and $23.6 million at April 1, 2000. The increase in accounts receivable over April 1, 2000, is attributable to increased wholesale shipments in the first quarter of 2001. Inventories at March 31, 2001, were $54.6 million, compared to $53.2 million at December 30, 2000, and $45.0 million at April 1, 2000. Management believes that March 31, 2001, inventory levels are generally appropriate for anticipated ongoing 2001 business activities. Cash used in operations amounted to approximately $3.4 million in the first quarter of 2001, compared to cash provided of $1.4 million in the first quarter of 2000. The change in cash provided by operating activities in the first quarter of 2001 compared to 2000 is primarily attributable to increased accounts receivable and inventory levels during the first quarter of 2001, as compared to the first quarter of 2000. Investing activities used $1.4 million of cash in the first quarter of 2001 compared to $1.1 million in 2000. Capital expenditures were $1.1 million in both the first quarter of 2001 and 2000, and are currently budgeted at $9.0 million for all of 2001. Depreciation and amortization are currently budgeted at $8.0 million for 2001. Cash used in financing activities totaled $7.4 million in the first quarter of 2001, compared to $4.9 million in the first quarter of 2000. The payment on long-term debt accounts for substantially all of the financing activities in 2001, while the Company's primary financing activities for the first quarter of 2000 consisted of stock repurchase transactions and dividends. On December 6, 1999, the Company's Board of Directors authorized a 1.5 million share repurchase program of the Company's Class A common stock. On December 11, 2000, the Company's Board of Directors authorized an addition of 1.0 million shares to this repurchase program. During the first quarter of 2001, the Company repurchased 25,000 shares of its Class A common stock under these programs for approximately $0.5 million. The Company has repurchased a total of 864,100 shares of its Class A common stock under its current repurchase programs for approximately $15.5 million. The Company's unsecured credit agreement, as amended, with a number of banks provides for borrowings for the repurchase of shares of its common stock, and a $75 million revolving credit facility available for general corporate purposes, including cash borrowings and issuances of letters of credit. The Company had $37 million of outstanding long-term debt at March 31, 2001 and $44 million at December 30, 2000 and April 1, 2000 under the share repurchase component of the credit agreement. The remaining balance is due in annual installments of $7.3 million and cannot be reborrowed. The revolving credit facility expires November 3, 2002. The Company believes that these credit facilities, along with cash generated from operations, will be sufficient to finance the Company's seasonal working capital needs as well as its capital expenditures, required payments on long-term debt, and business development needs. FORWARD-LOOKING STATEMENTS This report contains certain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding future sales, planned store expansions and store closings, future comparable store net sales, inventory levels and valuation implications, future growth in royalty income, future effective income tax rate, planned capital expenditures and depreciation and amortization expenses, and future cash needs. In addition, from time to time, the Company may issue press releases and other written communications, and representatives of the Company may make oral statements which contain forward-looking information. Except for historical information, matters discussed in such oral and written communications, including this report, are forward- looking statements. Such forward-looking statements are based on current assumptions and expectations that involve risks and uncertainties. Actual results may differ materially. The Company's future results of operations and financial position can be influenced by such factors as the level of consumer spending for apparel, particularly in the children's wear segment, overall consumer acceptance of the Company's product styling, the financial strength of the retail industry, including, but not limited to, business conditions and the general economy, natural disasters, competitive factors, risk of non-payment of accounts receivable, the unanticipated loss of a major customer, failure of Company suppliers to timely deliver needed raw materials, as well as risk associated with foreign operations. In addition, the inability to ship Company products within agreed timeframes due to unanticipated manufacturing and/or distribution system delays or the failure of Company contractors to deliver products within scheduled timeframes are risk factors in ongoing business. As a part of the Company's product sourcing strategy, it routinely contracts for apparel products produced by contractors in Asia, Mexico, and Central America. If financial, political, or other related difficulties were to adversely impact the Company's contractors in these regions, it could disrupt the supply of products contracted for by the Company. The forward-looking statements included herein are only made as of the date of this report. The Company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK Interest Rate Risk The credit agreement entered into by the Company in November, 1999, as amended, provided for $44 million to finance repurchases of the Company's common stock (of which $37 million is outstanding) and a $75 million revolving credit facility available for general corporate purposes. Borrowings under this agreement bear interest at a variable rate, based on the London Interbank Offered Rates. Accordingly, the Company is affected by interest rate changes on its long-term debt. Management monitors this risk by carefully analyzing the short-term rates on its long- term debt portfolio and comparable long-term interest rates. The Company does not presently hedge its interest rate risk. With respect to this debt, a 1% change in interest rates would not have a material impact on the Company's interest expense for fiscal 2001. Foreign Currency Risk The Company contracts for the manufacture of apparel with contractors in Asia, Central America, and Mexico. While these contracts are stated in terms of U.S. dollars, there can be no assurance that the cost for the production of the Company's products will not be affected by exchange fluctuations between the United States and the local currencies of these contractors. Due to the number of currencies involved, the Company cannot quantify the potential impact of future currency fluctuations on net income in future years. The Company does not hedge its exchange rate risk. Inflation Risk The Company manages its inflation risks by ongoing review of product selling prices and production costs. Management does not believe that inflation risks are material to the Company's business, its consolidated financial position, results of operations, or cash flows. Investment Risk The Company does not believe it has material exposure to market risk with respect to any of its investments; the Company does not utilize market rate sensitive instruments for trading or other purposes. PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits None (b) Reports on Form 8-K None SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. OSHKOSH B'GOSH, INC. Date: 4/25/01 /S/DOUGLAS W. HYDE Chairman of the Board, President Chief Executive Officer and Director Date: 4/25/01 /S/DAVID L. OMACHINSKI Vice President-Finance, Treasurer Chief Financial Officer and Director