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 October 3, 1998
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.
(Exact name of registrant as specified in charter)
Delaware 39-0519915
(State or other jurisdiction of (IRS Employer Identification No.)
Incorporation or organization)
112 Otter Avenue, Oshkosh, Wisconsin 54901
(Address of principal executive offices) (Zip Code)
(920) 231-8800
(Registrant's telephone number)
Effective January 1, 1998, the Company changed its fiscal year
from a calendar year to a 52/53-week year ending on the Saturday
closest to December 31 (January 2, 1999 for fiscal 1998).
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 October 3, 1998, there were outstanding 15,816,686 shares
of Class A Common Stock and 2,338,544 shares of Class B Common
Stock.
FORM 10-Q
OSHKOSH B'GOSH, INC. AND SUBSIDIARIES
INDEX
Page
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets-October 3, 1998
and December 31, 1997 3
Unaudited Condensed Consolidated Statements of
Income-Three Month and Nine Month Periods Ended
October 3, 1998 and September 30, 1997 4
Unaudited Condensed Consolidated Statements
of Cash Flows-Nine Month Periods Ended October 3, 1998
and September 30, 1997 5
Notes to Condensed Consolidated Financial
Statements 6
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 7
Part II. Other Information 13
Signatures 13
OSHKOSH B'GOSH, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in thousands)
October 3, December 31,
1998 1997 *
(Unaudited)
Assets
Current assets
Cash and cash equivalents $ 1,084 $ 13,779
Short-term investments -- 8,700
Accounts receivable 37,427 23,278
Inventories 69,362 68,226
Prepaid expenses and other current assets 2,280 1,265
Deferred income taxes 15,100 15,800
Total current assets 125,253 131,048
Property, plant and equipment 69,547 62,192
Less accumulated depreciation and
amortization 33,090 29,237
Net property, plant and equipment 36,457 32,955
Deferred income taxes 5,400 5,500
Other assets 4,758 5,285
Total assets $ 171,868 $ 174,788
Liabilities and shareholders' equity
Current liabilities
Short-term borrowings $ 5,450 $ --
Accounts payable 4,394 10,273
Accrued expenses 47,369 38,013
Total current liabilities 57,213 48,286
Employee benefit plan liabilities 14,172 13,345
Shareholders' equity
Preferred stock -- --
Common stock:
Class A 158 174
Class B 23 24
Retained earnings 100,302 112,959
Total shareholders' equity 100,483 113,157
Total liabilities and shareholders' equity $ 171,868 $ 174,788
* 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 Nine month period ended
October 3, September 30, October 3, September 30,
1998 1997 1998 1997
Net sales $ 131,046 $ 124,922 $ 315,869 $ 293,429
Cost of products sold 80,242 78,320 194,900 190,751
Gross profit 50,804 46,602 120,969 102,678
Selling, general and
administrative expenses 30,767 29,382 91,129 83,041
Royalty income, net (2,446) (3,167) (6,242) (6,179)
Operating income 22,483 20,387 36,082 25,816
Other income (expense)
Interest expense (113) (75) (285) (204)
Interest income 169 338 666 1,403
Miscellaneous (17) 1 (91) (144)
Other income-net 39 264 290 1,055
Income before income
taxes 22,522 20,651 36,372 26,871
Income taxes 9,008 8,259 14,686 10,749
Net income $ 13,514 $ 12,392 $ 21,686 $ 16,122
Net income per common
share
Basic $ 0.71 $ 0.58 $ 1.12 $ 0.71
Diluted $ 0.70 $ 0.58 $ 1.10 $ 0.71
Weighted average common
shares outstanding
Basic 18,907 21,344 19,385 22,756
Diluted (Including
share equivalents) 19,228 21,534 19,669 22,850
Cash dividends per
common share
Class A $ 0.05 $ 0.035 $ 0.12 $ 0.105
Class B $ 0.0425 $ 0.03 $ 0.1025 $ 0.09
See notes to condensed consolidated financial statements.
OSHKOSH B'GOSH, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
Nine month period ended
October 3, September 30,
1998 1997
Cash flows from operating activities
Net income $ 21,686 $ 16,122
Depreciation 5,939 6,412
Provision for deferred income taxes 800 1,000
Items in income not affecting cash 1,471 1,847
Changes in current assets (16,301) (2,853)
Changes in current liabilities 3,864 6,466
Net cash provided by operating
activities 17,459 28,994
Cash flows from investing activities
Additions to property, plant and
equipment (9,848) (5,140)
Proceeds from disposal of assets 224 2,096
Sale of short-term investments, net 8,700 10,040
Other 67 (2,248)
Net cash provided by (used in)
investing activities (857) 4,748
Cash flows from financing activities
Proceeds from short-term borrowings 5,450 --
Cash dividends paid (2,292) (2,305)
Repurchase of common stock (33,009) (40,068)
Common shares issued, net 554 20
Net cash used in financing activities (29,297) (42,353)
Net decrease in cash and cash
equivalents $ (12,695) $ (8,611)
See notes to condensed consolidated financial statements.
OSHKOSH B'GOSH, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(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 October 3, 1998 and the results of operations for
the three-month and nine-month periods ended October 3, 1998 and
September 30, 1997 and cash flows for the nine-month periods
ended October 3, 1998 and September 30, 1997.
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
financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's 1997
Annual Report.
Effective January 1, 1998, the Company changed its fiscal year
from a calendar year to a 52/53-week year ending on the Saturday
closest to December 31 (January 2, 1999 for fiscal 1998). Each
quarter will generally consist of a 13-week period ending on a
Saturday. Due to the conversion to a 52/53-week year, the three
month period ended October 3, 1998 was one day shorter than the
comparative period in fiscal 1997.
Shareholders' equity, share and per share amounts for all periods
presented have been adjusted for the 2 for 1 stock split declared
by the Company's Board of Directors on August 10, 1998, effected
in the form of a stock dividend.
Note 2. Inventories
A summary of inventories follows:
October 3, December 31,
1998 1997
(Dollars in thousands)
Finished goods $ 61,626 $ 49,400
Work in process 6,809 14,782
Raw materials 927 4,044
Total $ 69,362 $ 68,226
The replacement cost of inventory exceeds the above LIFO costs by
$14,678 and $14,138 at October 3, 1998 and December 31, 1997,
respectively.
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 month period ended Nine month period ended
Oct. 3, 1998 Sept. 30, 1997 Oct. 3, 1998 Sept. 30, 1997
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of products sold 61.2% 62.7% 61.7% 65.0%
Gross profit 38.8% 37.3% 38.3% 35.0%
Selling, general and
administrative expenses 23.5% 23.5% 28.9% 28.3%
Royalty income, net (1.9%) (2.5%) (2.0%) (2.1%)
Operating income 17.2% 16.3% 11.4% 8.8%
Other income, net -- 0.2% 0.1% .4%
Income before income
taxes 17.2% 16.5% 11.5% 9.2%
Income taxes 6.9% 6.6% 4.6% 3.7%
Net income 10.3% 9.9% 6.9% 5.5%
Net Sales
Consolidated net sales for the three month period ended October
3, 1998 were $131.0 million, a $6.1 million increase (4.9%) over
1997 third quarter net sales of $124.9 million. Consolidated net
sales for the nine month period ended October 3, 1998 were $315.9
million, a $22.5 million increase (7.7%) from net sales of $293.4
million for the first nine months of 1997. The Company's net
sales for the three month and nine month periods ended October 3,
1998 and September 30, 1997 are summarized as follows:
Net Sales
(in millions)
Domestic
Wholesale Retail International Total
Three month period
ended:
October 3, 1998 $ 70.1 $ 59.3 $ 1.6 $ 131.0
September 30, 1997 69.7 53.5 1.7 124.9
Increase (decrease) .4 5.8 (0.1) 6.1
Percent increase
(decrease) 0.6% 10.8% (5.9%) 4.9%
Nine month period
ended:
October 3, 1998 $ 175.9 $135.5 $ 4.5 $ 315.9
September 30, 1997 165.9 122.0 5.5 293.4
Increase (decrease) 10.0 13.5 (1.0) 22.5
Percent increase
(decrease) 6.0% 11.1% (18.2%) 7.7%
The Company's domestic wholesale unit shipments for the three
month and nine month periods ended October 3, 1998 were up 4.1%
and 7.5%, respectively, over the corresponding three month and
nine month periods of 1997. The Company currently anticipates a
5% to 7% increase in wholesale unit shipments for the remainder
of 1998 as compared to 1997.
The Company's third quarter 1998 retail sales increase resulted
from a combination of an 8.1% comparable store sales gain and
sales volume from stores opened subsequent to September 30, 1997.
The Company's increase in retail sales for the first nine months
of 1998 resulted from a combination of an 8.8% comparable store
sales gains and sales volume from newly opened stores.
Comparable store sales for 1998 were also favorably impacted by
increased sales of Genuine Girl and Genuine Blues branded
products for the entire period. These bigger sizes were
introduced during the first quarter of 1997. For the remainder
of 1998, the Company currently anticipates comparable store sales
gains in the middle single digit range.
At October 3, 1998 the Company operated 121 domestic OshKosh
retail stores, including 113 outlet stores and 8 showcase stores.
During the third quarter of 1998, the Company opened 1 outlet
store and closed 1 existing store. At September 30, 1997, the
Company operated 116 domestic OshKosh retail stores, including
108 outlet stores and 8 showcase stores. Current Company plans
for the remainder of 1998 call for the addition of 3 retail
stores.
Gross Profit
The Company's gross profit margin as a percent of net sales
improved to 38.8% in the third quarter of 1998, compared to 37.3%
in the third quarter of 1997. For the nine month period ended
October 3, 1998, gross profit margin as a percent of net sales
was 38.3%, compared to 35.0% for the first nine months of 1997.
This gross profit margin improvement was due primarily to
continued implementation and execution of the Company's sourcing
strategy, improved operating efficiencies at the Company's
domestic sewing facilities and the Company's continuing focus on
product design and development activities. The Company's current
1998 sourcing plan indicates that approximately 40% of units will
be produced at the Company's domestic facilities as compared to
47% in 1997.
Selling, General and Administrative Expenses (S,G&A)
S,G&A expenses for the three month and nine month periods ended
October 3, 1998 increased $1.4 million and $8.1 million over the
three and nine month periods ended September 30, 1997,
respectively. As a percentage of net sales, S,G&A expenses were
23.5% and 28.9% for the three month and nine month periods ended
October 3, 1998 as compared to 23.5% and 28.3% in the comparable
periods of 1997. The increase in S,G&A expenses relates
primarily to a combination of continued expansion of the
Company's retail operations, increased volume of wholesale unit
shipments, and expansion of the Company's brand enhancing
activities.
Royalty Income
The Company licenses the use of its trade name to selected
licensees in the U.S. and in foreign countries. Royalty income
for the three month period ended October 3, 1998 decreased $.7
million (22.8%) from the three month period ended September 30,
1997. This decrease resulted primarily from the Company's
decisions to not renew its domestic outerwear license (which
expired in May 1998) and its Japanese license arrangement (which
ended in March 1998). Year to date royalty income of $6.2
million is flat with 1997 comparable period royalty income. The
Company currently anticipates royalty income for the fourth
quarter of 1998 to be relatively flat compared with the fourth
quarter of 1997.
Operating Income
As a result of the factors described above, the Company's
operating income for the three month and nine month periods ended
October 3, 1998 increased to $22.5 million and $36.1 million as
compared to $20.4 million and $25.8 million for the comparable
periods in 1997.
Income Taxes
The Company's effective tax rates for the three month and nine
month periods ended October 3, 1998 of approximately 40% and
40.4%, respectively, are comparable with 1997.
Net Income Per Common Share
The computation of net income per common share for the third
quarter and first nine months of 1998 reflected a lower number of
weighted average outstanding shares as compared to the same
periods in 1997 (after retroactive consideration of the Company's
September 1998 two-for-one stock split), primarily as a result of
the Company's Dutch auction tender offer which was completed in
August 1997 along with ongoing open market share repurchases
under Company announced share repurchase programs.
SEASONALITY OF BUSINESS
The Company's business is increasingly 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 outlet 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 1998 quarterly sales and
income. Third quarter 1998 operating results are not necessarily
indicative of anticipated quarterly results throughout the
balance of the year.
FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY
At October 3, 1998 the Company's cash, cash equivalents and
short-term investments were $1.1 million, compared to $22.5
million at December 31, 1997 and $22.6 million at September 30,
1997. The Company had short-term borrowings under its credit
facilities of $5.5 million at October 3, 1998 as compared to no
short-term borrowings at December 31, 1997 and September 30,
1997. Net working capital at October 3, 1998 was $68.0 million
as compared to $82.8 million at the end of 1997 and $80.1 million
at September 30, 1997. The Company's current ratio was 2.2 to 1
at October 3, 1998 as compared to 2.7 to 1 at the end of 1997 and
2.6 to 1 at September 30, 1997. The reduction in cash, cash
equivalents and short-term investments, net working capital, and
current ratio at October 3, 1998, along with the increased short-
term borrowings as compared to September 30, 1997 is attributable
primarily to the Company's stock repurchases, offset in part by
cash generated from operations.
Accounts receivable at October 3, 1998 were $37.4 million
compared to $33.5 million at September 30, 1997. Inventories at
October 3, 1998 were $69.4 million, compared to $55.0 million at
September 30, 1997. The increase in inventory levels reflects
the earlier receipt of Holiday merchandise in 1998 to provide
improved complete and on time deliveries to the retail
marketplace. Management believes that at October 3, 1998
inventory levels are generally appropriate for anticipated
business activities for the remainder of 1998.
The Company's capital expenditures for the first nine months of
1998 of $9.8 million compares to $5.1 million for the first nine
months of 1997. This increase is primarily due to the Company's
upgrade of its distribution systems and Whitehouse, Tennessee
distributing facilities. Capital expenditures for all of 1998 are
currently planned to be in the range of $12.0 million, including
approximately $8.0 million related to the distribution system and
facilities project.
On August 10, 1998, the Company's Board of Directors authorized a
two year, $60 million share repurchase program of the Company's
Class A common stock. During the third quarter of 1998, the
Company repurchased 1,087,900 shares of its Class A common stock
under this program for approximately $22.7 million. During the
first nine months of 1998, the Company repurchased 1,632,500
shares of its Class A common stock under its current and prior
repurchase programs for approximately $33.0 million.
At October 3, 1998 and September 30, 1997 the Company had no
outstanding long-term debt. The Company believes that its cash
and cash equivalents at October 3, 1998, credit facilities, along
with cash generated from operations, will be sufficient to
finance the Company's seasonal working capital needs and planned
capital expenditures for the remainder of 1998.
YEAR 2000
The Year 2000 issue involves computer programs and embedded
microprocessors in computer systems and other equipment that
utilize two digits rather than four to define the applicable
year. These systems may be programmed to assume that all two
digit dates are preceded by "19", causing "00" to be interpreted
as 1900 versus 2000. This could result in the possible failure
of those programs and devices to properly recognize date
sensitive information when the year changes to 2000. Systems
that do not properly recognize date sensitive information could
generate erroneous data or a system failure.
The Company has a formal Year 2000 compliance project that
addresses the Company's information technology systems. The
Company has identified three phases of its Year 2000 project: 1)
affected systems inventory, 2) problem assessment, and 3)
remediation and testing. As of October 3, 1998, the inventory
and assessment phases have been completed, and significant
progress has been made in the remediation and testing phase. The
Year 2000 project is currently anticipated to be complete in
early 1999. The Company does not expect the costs associated
with ensuring Year 2000 compliance to have a material impact on
the Company's business, operations or financial condition. All
costs associated with Year 2000 compliance are being funded with
cash flow generated from operations and are being expensed as
incurred.
If some or all of the Company's remediated or replaced internal
computer systems fail the testing phase, or if any software
applications or embedded microprocessors critical to the
Company's operations are overlooked in the assessment and
remediation phases, there could be a material adverse effect on
the Company's results of operations, liquidity and financial
condition of a magnitude which the Company has not fully
analyzed.
The Company has requested written confirmation from what it
believes to be all of its significant suppliers as to their Year
2000 compliance status, and has taken steps to determine the
extent to which the Company's interface systems are vulnerable to
those third parties' failure to remedy their own Year 2000
issues. There can be no assurance that the systems of other
companies with which the Company does business will be timely
converted or that any such failure to upgrade or convert would
not have an adverse effect on the Company's systems and
operations.
If the vendors of the Company's most important goods and
services, or suppliers of the Company's necessary energy,
telecommunications and transportation needs, fail to provide the
Company with the materials and services which are necessary to
produce, distribute and sell its products, the electrical power
and other utilities to sustain its operations, or reliable means
of obtaining supplies and transporting products to its customers,
such failures could have a material adverse effect on the results
of operations, liquidity and financial condition of the Company.
The Company presently believes that the Year 2000 issue will not
pose significant operational problems for its computer systems.
However, the Company does not presently have a formal contingency
plan in the event its Year 2000 compliance program is
unsuccessful or not completed on a timely basis.
SEGMENT INFORMATION
In June 1997, the Financial Accounting Standards Board issued
SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information," which will be effective with the Company's
financial statements for the fiscal year ending January 2, 1999.
This statement establishes standards for reporting information
about segments in annual and interim financial statements. This
statement introduces a model for segment reporting entitled the
"Management Approach." The Company does not believe that this
statement will have a significant impact on the consolidated
financial statements.
OTHER FACTORS THAT MAY AFFECT FUTURE PERFORMANCE
This Form 10-Q 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. 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,
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, Year 2000
issues, particularly with respect to the Company's vendors and
customers, as well as risk associated with foreign operations.
In addition, the inability to ship Company products within agreed
timeframes due to unanticipated manufacturing 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.
If the current financial and related difficulties were to
adversely impact the Company's contractors in the Asian region,
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.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule-Article 5 of Regulation S-X
(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: 10/21/98 /S/DOUGLAS W. HYDE
Chairman of the Board, President
Chief Executive Officer and Director
Date: 10/21/98 /S/DAVID L. OMACHINSKI
Vice President-Finance, Treasurer,
Chief Financial Officer and Director
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-END> OCT-03-1998
<CASH> 1,084,000
<SECURITIES> 0
<RECEIVABLES> 42,827,000
<ALLOWANCES> 5,400,000
<INVENTORY> 69,362,000
<CURRENT-ASSETS> 125,253,000
<PP&E> 69,547,000
<DEPRECIATION> 33,090,000
<TOTAL-ASSETS> 171,868,000
<CURRENT-LIABILITIES> 57,213,000
<BONDS> 0
0
0
<COMMON> 181,000
<OTHER-SE> 100,302,000
<TOTAL-LIABILITY-AND-EQUITY> 171,868,000
<SALES> 315,869,000
<TOTAL-REVENUES> 315,869,000
<CGS> 194,900,000
<TOTAL-COSTS> 91,129,000
<OTHER-EXPENSES> 91,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 285,000
<INCOME-PRETAX> 36,372,000
<INCOME-TAX> 14,686,000
<INCOME-CONTINUING> 21,686,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,686,000
<EPS-PRIMARY> 1.12
<EPS-DILUTED> 1.10
</TABLE>
