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 April 3, 1999
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 19, 1999, there were outstanding 14,269,908 shares of
Class A Common Stock and 2,259,708 shares of Class B Common Stock.
FORM 10-Q
OSHKOSH B'GOSH, INC. AND SUBSIDIARIES
INDEX
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets-April 3, 1999
and January 2, 1999
Unaudited Condensed Consolidated Statements
of Income-Three Month Periods ended April 3, 1999
and April 4, 1998
Unaudited Condensed Consolidated Statements
of Cash Flow-Three Month Periods Ended
April 3, 1999 and April 4, 1998
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
Part I - Financial Information
Item 1. Financial Statements
OSHKOSH B'GOSH, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands)
April 3, January 2,
1999 1999 *
(unaudited)
Assets
Current assets
Cash and cash equivalents $ 3,126 $ 14,308
Short-term investments 480 2,500
Accounts receivable 30,736 24,008
Inventories 47,690 65,584
Prepaid expenses & other current assets 3,849 862
Deferred income taxes 14,200 16,700
Total current assets 100,081 123,962
Property, plant & equipment 65,488 65,588
Less accumulated depreciation
and amortization 34,359 33,208
Net property, plant & equipment 31,129 32,380
Non-current deferred income taxes 4,100 4,900
Other assets 1,245 1,326
Total assets $ 136,555 $ 162,568
Liabilities and shareholders' equity
Current liabilities
Accounts payable $ 1,329 $ 7,638
Accrued expenses 39,951 39,448
Total current liabilities 41,280 47,086
Employee benefit plan liabilities 12,714 12,465
Shareholders' equity
Preferred stock -- --
Common stock:
Class A 143 157
Class B 23 23
Retained earnings 82,395 102,837
Total shareholders' equity 82,561 103,017
Total liabilities and shareholders' equity $ 136,555 $ 162,568
*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
April 3 April 4,
1999 1998
Net sales $ 101,933 $ 102,535
Cost of products sold 61,791 65,146
Gross profit 40,142 37,389
Selling, general and administrative
expenses 31,465 30,662
Royalty income, net (1,996) (2,254)
Operating income 10,673 8,981
Other income (expense):
Interest expense (233) (85)
Interest income 291 238
Miscellaneous (57) (51)
Other income -- net 1 102
Income before taxes 10,674 9,083
Income taxes 4,166 3,742
Net income $ 6,508 $ 5,341
Net income per common share
Basic $ 0.37 $ 0.27
Diluted $ 0.36 $ 0.27
Weighted average common shares
outstanding
Basic 17,687 19,730
Diluted (Including share equivalents) 17,878 19,974
Cash dividends per common share
Class A $ 0.0500 $ 0.0350
Class B $ 0.0425 $ 0.0300
See notes to condensed consolidated financial statements.
OSHKOSH B'GOSH, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flow
(In thousands)
(Unaudited)
Three Month Period Ended
April 3, April 4,
1999 1998
Cash flows from operating activities
Net income for the period $ 6,508 $ 5,341
Depreciation 1,721 2,249
Deferred income taxes 3,300 1,000
Items in net income not affecting
cash and cash equivalents 425 542
Changes in current assets 8,179 (7,004)
Changes in current liabilities (5,806) (3,845)
Net cash provided by (used in)
operating activities 14,327 (1,717)
Cash flows from investing activities
Additions to property, plant and
equipment (832) (5,135)
Proceeds from disposal of assets 304 43
Sale of short-term investments, net 2,020 8,700
Changes in other assets (37) (34)
Net cash provided by investing
activities 1,455 3,574
Cash flows from financing activities
Dividends paid (880) (678)
Net proceeds from issuance of
common shares 991 400
Repurchase of common shares (27,075) --
Net cash used in financing activities (26,964) (278)
Net increase (decrease) in cash and
cash equivalents $ (11,182) $ 1,579
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 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 April 3, 1999, the results of operations for the three month
periods ended April 3, 1999 and April 4, 1998, and cash flows for
the three month periods ended April 3, 1999 and April 4, 1998.
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 1998
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 1, 2000 for fiscal 1999 and
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 first quarter of 1998
consisted of 13 weeks and 3 days, while the first quarter period
ended April 3, 1999 consisted of 13 weeks.
Note 2. Inventories
A summary of inventories follows:
April 3, January 2,
1999 1999
(Dollars in thousands)
Finished goods $ 40,445 $ 55,005
Work in process 5,382 9,333
Raw materials 1,863 1,246
Total $ 47,690 $ 65,584
The replacement cost of inventory exceeds the above LIFO costs by
$14,049 and $13,899 at April 3, 1999 and January 2, 1999,
respectively.
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 First Quarter Ended
April 3, 1999 April 4, 1998
Net sales 100.0% 100.0%
Cost of products sold 60.6% 63.5%
Gross profit 39.4% 36.5%
Selling, general and
administrative expenses 30.9% 29.9%
Royalty income, net (2.0%) (2.2%)
Operating income 10.5% 8.8%
Other income, net 0.0% 0.1%
Income for income taxes 10.5% 8.9%
Income taxes 4.1% 3.7%
Net income 6.4% 5.2%
Net Sales
Consolidated net sales for the first quarter ended April 3, 1999
were $101.9 million, a $.6 million decrease (.6%) from 1998 first
quarter net sales of $102.5 million. The Company's net sales for
the first quarter periods ended April 3, 1999 and April 4, 1998
are summarized as follows:
Net Sales
(in millions)
Domestic
Wholesale Retail International Total
Three months ended:
April 3, 1999 $ 60.3 $ 38.9 $ 2.7 $ 101.9
April 4, 1998 64.1 36.6 1.8 102.5
Increase (decrease) (3.8) 2.3 .9 (.6)
Percent increase (decrease) (5.9%) 6.3% 50.0% (.6%)
The Company's first quarter 1999 domestic wholesale unit
shipments were flat as compared to 1998. The decrease in sales
dollars for the first quarter of 1999 resulted primarily from a
combination of product mix and lower average unit selling prices.
The Company's first quarter 1999 retail sales increase resulted
from a combination of a 5.9% comparable store sales gain and
sales volume from stores opened subsequent to April 4, 1998.
First quarter 1999 comparable store sales were favorably impacted
by an earlier Easter than in 1998. For the remainder of 1999,
the Company currently anticipates low single-digit comparable
store sales gains.
At April 3, 1999 the Company operated 123 domestic OshKosh retail
stores, including 118 outlet stores and 5 showcase stores.
During the first quarter of 1999, the Company opened one retail
store. At April 4, 1998 the Company operated a total of 120
domestic OshKosh retail stores. Current Company plans for the
remainder of 1999 call for the addition of 7-10 retail stores.
Gross Profit
The Company's gross profit margin as a percent of sales improved
to 39.4% in the first quarter of 1999, compared to 36.5% in the
first quarter of 1998. This gross profit margin improvement was
due primarily to continued implementation and execution of the
Company's global sourcing strategy and continuing focus on
product design and development activities. The Company's current
1999 sourcing plan indicates that approximately 36% of units will
be produced at the Company's domestic facilities as compared to
approximately 42% in 1998. The Company currently anticipates
further modest improvement in its gross profit margin for the
remainder of 1999 as compared to 1998.
Selling, General, and Administrative Expenses (S,G&A)
S,G&A expenses for the first quarter of 1999 increased $.8
million over the first quarter of 1998. As a percentage of net
sales, S,G&A expenses were 30.9% for the first quarter of 1999 as
compared to 29.9% for the first quarter of 1998. The increase in
S,G&A expenses relates primarily to costs associated with the
Company's transition to an updated product distribution system
and related processes.
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 1999 net royalty income of $2.0 million decreased
approximately 11.4% from net royalty income earned in the first
quarter of 1998 of approximately $2.3 million. 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).
Operating Income
As a result of the factors described above, the Company's
operating income increased to $10.7 million for the first quarter
of 1999 as compared to $9.0 million for the first quarter of
1998.
Income Taxes
The Company's effective tax rate for the first quarter of 1999
was 39.0% as compared to 41.2% for the first quarter of 1998.
The decrease in the effective tax rate in the first quarter of
1999 was a result of the impact of tax planning initiatives to
support changing business needs.
Net Income
Net income for the three months ended April 3, 1999 of $6.5
million was a $1.2 million (21.8%) increase over net income for
the three months ended April 4, 1998 of $5.3 million. The
Company's ongoing stock repurchase programs resulted in a
reduction in its weighted-average diluted shares outstanding
during the first quarter of 1999. This decrease, combined with
the 21.8% increase in net income, resulted in a 33.3% increase in
diluted earnings per share for the first quarter of 1999 of $.36
as compared to $.27 in 1998.
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
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 1999 quarterly sales and income. First
quarter 1999 operating results are not necessarily indicative of
anticipated quarterly results throughout the balance of the year.
YEAR 2000 CONSIDERATIONS
General
The Year 2000 issue involves computer programs and imbedded
microprocessors in computer systems and other equipment that
utilize two digits rather than four digits to define the
applicable year. These systems need to be modified to process
and properly recognize date sensitive information before, on, or
after December 31, 1999. Without modification, these systems may
not properly recognize date sensitive information when the year
changes to 2000 and could generate erroneous data or a system
failure.
State of Readiness
To assess the business risk associated with the Year 2000 issue,
the Company has divided its review into four major areas. These
areas include:
1. Computer hardware and application software programs that
comprise the Company's primary business systems.
2. PC hardware and software, including LANS and servers that
comprise various aspects of the Company's business.
3. Communications with what the Company believes to be all of its
significant customers and vendors regarding the status of
their Year 2000 compliance programs.
4. Other non-information technology aspects of the Company's
business.
The Company has identified three phases of its Year 2000 project
applicable to various portions of the above major areas, which
include a systems inventory of all hardware and programs, problem
assessment, and remediation and testing.
The Company has established a formal Year 2000 compliance project
that addresses the Company's significant business systems. This
project has an internal project leader to coordinate the
inventory, problem assessment, and remediation and testing of the
Year 2000 issues affecting the Company's information and other
business systems.
As of April 3, 1999, the systems inventory, problem assessment,
and over 90% of the remediation and testing have been completed
as it relates to the Company's computer hardware and application
software programs. The Company currently anticipates this
portion of the project will be substantially completed and all of
these systems will be Year 2000 compliant by the end of the
second quarter of 1999.
All the Company's personal computers have been inventoried and
problem assessment has been completed. Based on this assessment,
significant remediation is not necessary, as we do not anticipate
any major problems with our PC based hardware or software as a
result of the Year 2000.
The Company has received confirmation from what it believes to be
all of its significant vendors and customers 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.
The Company has completed the systems inventory and problem
assessment related to all other essential non-information
technology systems, and has initiated appropriate remediation and
testing which is expected to be completed by mid-1999.
Costs
The Company is executing the Year 2000 program primarily with
existing internal resources and some outside consultants. The
Company has and will spend an aggregate of approximately $1
million, of which approximately $.9 million has been incurred
through April 3, 1999, on its remediation efforts. All costs
associated with the Year 2000 compliance are being funded with
cash flow generated from operations and are being expensed as
incurred. These amounts do not have a material impact on the
Company's business, operations, or financial condition.
Risks
At this time, the Company believes that it is adequately
addressing the Year 2000 issues, but there can be no assurance
that the Year 2000 issues will not have a material adverse affect
on the business, financial condition, or results of operations of
the Company. Additionally, disruptions in the economy generally
resulting from the Year 2000 problem could have a material
adverse effect on the Company.
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, such failures could
have a materially adverse effect on the result of operations,
liquidity and financial condition of the Company.
Contingency Plans
The Company presently believes that the Year 2000 issue will not
pose significant operational problems for its computer systems.
The Company does plan to have its personnel "standing by" at the
end of the year to resolve any potential problems as rapidly as
possible. These problems are expected to be minimal.
FINANCIAL POSITION, CAPITAL RESOURCES AND LIQUIDITY
At April 3, 1999, the Company's cash, cash equivalents and short-
term investments were $3.6 million, compared to $16.8 million at
the end of 1998 and $15.4 million at April 4, 1998. This
reduction is attributable to the Company's stock repurchases,
offset in part by cash generated from operations. Net working
capital at April 3, 1999 was $58.8 million compared to $76.9
million at January 2, 1999, and $86.0 million at April 4, 1998.
Accounts receivable at April 3, 1999 were $30.7 million compared
to $24.0 million at January 2, 1999 and $30.9 million at April 4,
1998. Inventories at April 3, 1999 were $47.7 million, compared
to $65.6 million at January 2, 1999 and $64.1 million at April 4,
1998. Management believes that April 3, 1999 inventory levels
are generally appropriate for anticipated ongoing 1999 business
activities.
Cash provided by operations amounted to approximately $14.3
million in the first quarter of 1999, compared to a use of cash
of $1.7 million in the first quarter of 1998. The increase in
cash provided by operating activities in the first quarter of
1999 over 1998 is primarily attributable to reduced inventory
levels.
Cash provided by investing activities totaled $1.5 million in the
first quarter of 1999, compared to $3.6 million in 1998. Capital
expenditures were $.8 million in the first quarter of 1999,
compared with $5.1 million in 1998 and are currently budgeted at
$9.6 million for all of 1999. Capital expenditures in 1998
related primarily to the Company's upgrade of its distribution
systems and White House, Tennessee distribution facilities.
These capital expenditures were offset by reductions in the
levels of short-term investments. Depreciation and amortization
are currently budgeted at $9.0 million for 1999.
Cash used in financing activities totaled $27.0 million in the
first quarter of 1999, compared to $.3 million in the first
quarter of 1998. The Company's primary financing activities
consisted of stock repurchase transactions in 1999 and dividends
in both periods.
On August 10, 1998, the Company's Board of Directors authorized a
two-year, $60 million repurchase program of the Company's Class A
common stock. During the first quarter of 1999, the Company
repurchased 1,469,200 shares of its Class A common stock under
this program for approximately $27.1 million. The Company has
repurchased a total of 2,813,100 shares of its Class A common
stock under its current repurchase programs for approximately
$54.4 million.
The Company has a credit agreement with participating banks.
This arrangement provides a $60 million revolving credit facility
and a $40 million revocable demand line of credit for cash
borrowings, issuance of commercial paper and letters of credit.
The Company had no outstanding long-term debt at April 3, 1999,
January 2, 1999 or April 4, 1998. The agreement expires in
June, 2001. 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, remaining special charges, and business
development needs.
INFLATION
The effects of inflation on the Company's operating results and
financial condition were not significant.
FORWARD-LOOKING STATEMENTS
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. 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, 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.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET
RISK
The registrant does not believe it has material exposure to
market risk with respect to any of its investments; the
registrant does not utilize market rate sensitive instruments for
trading or other purposes. For information regarding the
Company's investments, refer to the "Cash equivalents" and
"Short-term investments" notes to the consolidated financial
statements on page 19 of the 1998 Form 10-K.
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: 4/21/99 /S/DOUGLAS W. HYDE
Chairman of the Board, President
Chief Executive Officer and Director
Date: 4/21/99 /S/DAVID L. OMACHINSKI
Vice President-Finance, Treasurer
Chief Financial Officer and Director
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