SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] Quarterly Report Pursuant To Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the quarterly period ended AUGUST 29, 2003
OR
[ ] Transition Report Pursuant To Section 13 or 15(d) of
For the transition period from____ to____
Commission File Number 1-4365
OXFORD INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Georgia
58-0831862
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification number)
222 Piedmont Avenue, N.E., Atlanta, Georgia 30308
(Address of principal executive offices)
(Zip Code)
(404) 659-2424
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report.)
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
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Number of shares outstanding
Title of each class
as of October 6, 2003
Common Stock, $1 par value
8,081,119
Table of contents
INDEX TO FORM 10-Q
August 29, 2003
PART I FINANCIAL INFORMATION
Page
Item 1 Financial Statements
Unaudited Consolidated Statements Of Earnings
3
Unaudited Consolidated Balance Sheets
4
Unaudited Consolidated Statements of Cash Flows
5
Unaudited Notes to Consolidated Financial Statements
6
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations
14
Item 3 Quantitative and Qualitative Disclosures About Market Risk
25
Item 4 Evaluation of Disclosure Controls and Procedures
PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K
26
Signatures
27
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
$ in thousands except per share amounts
Quarter Ended
August 30, 2002
Net Sales
$ 242,105
$ 172,139
Cost of goods sold
171,214
133,677
Gross Profit
70,891
38,462
Selling, general and administrative
53,612
30,949
Amortization of intangibles
1,678
19
55,290
30,968
Royalties and other operating income
1,180
-
Operating Income
16,781
7,494
Interest expense, net
5,746
41
Earnings Before Income Taxes
11,035
7,453
Income Taxes
4,193
2,943
Net Earnings
$6,842
$4,510
Basic Earnings Per Common Share
$0.87
$0.60
Diluted Earnings Per Common Share
$0.84
Basic Shares Outstanding
7,909,890
7,515,577
Diluted Shares Outstanding
8,109,923
7,560,674
Dividends Per Share
$0.21
See notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED EXCEPT FOR MAY 30, 2003)
$ in thousands
May 30, 2003
Assets
Current Assets:
Cash and cash equivalents
$ 17,370
$ 24,091
$ 6,253
Receivables
134,445
110,304
121,011
Inventories
117,846
104,334
90,020
Prepaid expenses
19,346
12,631
10,133
Total Current Assets
289,007
251,360
227,417
Property, plant and equipment, net
50,677
21,971
26,079
Restricted cash in escrow
204,986
Goodwill
88,095
5,839
Intangibles, net
152,365
682
740
Deferred income taxes
119
Other assets, net
21,940
9,408
1,637
Total Assets
$602,084
$494,365
$261,712
Liabilities and Stockholders' Equity
Current Liabilities:
Notes payable
$ 10,000
$ -
$ 2,500
Trade accounts payable
66,265
59,031
45,666
Accrued compensation
15,182
23,556
10,734
Other accrued expenses
31,234
15,063
14,860
Dividends payable
1,694
1,579
1,578
Income taxes payable
5,181
2,551
2,924
Current maturities of long-term debt
214
134
236
Total Current Liabilities
129,770
101,914
78,498
198,626
198,581
Other long-term debt, less current maturities
117
139
Noncurrent liabilities
9,573
4,500
53,680
423
Stockholders' Equity:
Common stock
8,076
7,522
7,516
Additional paid-in capital
30,436
14,759
14,633
Retained earnings
171,806
167,084
156,003
Total Stockholders' Equity
210,318
189,365
178,152
Total Liabilities and Stockholders' Equity
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash Flows From Operating Activities
Net earnings
Adjustments to reconcile net earnings to
net cash provided by (used in) operating activities:
Depreciation
2,357
1,444
Amortization of intangible assets
Amortization of deferred financing costs
574
Amortization of bond discount
45
Gain on sale of assets
(115)
(45)
Equity income
(105)
(843)
(128)
Changes in working capital:
5,453
(17,813)
14,857
(5,479)
(777)
(346)
(16,320)
2,346
Accrued expenses and other current liabilities
(12,726)
592
1,766
Other noncurrent assets
(2,351)
Other noncurrent liabilities
3,949
Net cash provided by (used in) operating activities
4,284
(11,971)
Cash Flows from Investing Activities
Acquisition
(240,754)
Decrease in restricted cash
Investment in deferred compensation plan
(1,356)
Purchases of property, plant and equipment
(3,171)
(412)
Proceeds from sale of property, plant and equipment
105
122
Net cash used in investing activities
(40,190)
(290)
Cash Flows from Financing Activities
Proceeds from short-term debt
10,000
2,500
Payments of long-term debt
(31)
(19)
Payments of debt issuance costs
(7,335)
Proceeds from issuance of common stock
5,805
20
Dividends on common stock
(1,579)
(1,578)
Net cash provided by financing activities
6,860
923
Net change in Cash and Cash Equivalents
(29,046)
(11,338)
Cash and Cash Equivalents at the Beginning of Period
46,416
17,591
Cash and Cash Equivalents at the End of Period
$17,370
$6,253
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 29, 2003
Finished goods
$89,335
$57,458
Work in process
8,905
13,459
Fabric, trim and supplies
19,606
19,103
$117,846
$90,020
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
Quarters Ended:
Net earnings as reported
Deduct: Total stock-based employee
compensation expense determined under fair value based method for all awards, net of related tax effects
(91)
(87)
Pro forma net earnings
$6,751
$4,423
Basic earnings per common share as reported
Pro forma basic earnings per common share
$0.85
$0.59
Diluted earnings per common share as reported
Pro forma diluted earnings per common share
$0.83
Quarters Ended
Oxford Shirt Group
$ 41,483
$ 47,173
Lanier Clothes
41,946
36,940
Oxford Slacks
32,325
21,354
Oxford Womenswear Group
62,953
66,599
Tommy Bahama Group
63,278
Corporate and Other
120
73
Total
$242,105
$172,139
8.
Depreciation and Amortization
$ 358
$ 453
389
406
165
202
199
246
2,778
765
156
$ 4,654
$ 1,463
$ 326
$ 1,254
5,008
4,896
4,141
1,349
3,224
3,541
6,959
(2,877)
(3,546)
Earnings before taxes
$11,035
$ 7,453
Purchase of Property Plant and Equipment
$ 6
$ 219
681
68
52
77
9
1
2,413
10
47
$ 3,171
$ 412
$ 72,677
$ 82,181
78,496
75,458
40,030
34,546
66,812
86,071
330,044
14,025
(16,544)
9.
Variable Interest Entities: In December 2002, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"). FIN 46 requires that a variable interest entity be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. The consolidation requirements apply to the first fiscal year or interim period ending after December 15, 2003. We believe the adoption of FIN 46 will not have a material impact on our financial position, results of operations or liquidity.
10.
Basic and diluted earnings available to stockholders (numerator):
Shares (denominator):
Weighted average shares outstanding
Dilutive securities:
Options
199,933
45,097
Total assuming conversion
8,109,823
Per share amounts:
Basic earnings per common share
Diluted earnings per common share
During the first quarter of fiscal 2004, options to purchase 116,250 shares of our common stock at $52.875 were outstanding but were not included in the computation of diluted earnings per share because the inclusion of such shares would have had an antidilutive effect. During the first quarter of fiscal 2003, options to purchase 190,700 shares of our common stock at prices ranging from $27.88 to $35.66 per share were outstanding but were not included in the computation of diluted earnings per share because the inclusion of such shares would have had an antidilutive effect.
On June 13, 2003, we acquired all of the common stock of Viewpoint International, Inc. The transaction is valued at up to $325 million consisting of $240 million in cash, $10 million in Oxford common stock (388,200 shares), and up to $75 million in contingent payments, subject to the achievement by Viewpoint of certain performance targets. Such performance targets are based on earnings before interest and taxes after deduction of a capital charge based on net tangible assets employed as follows: Year 1-$42.3 million, Year 2-$50.0 million, Year 3-$58.1 million and Year 4-$69.7 million
For each of the four years after the closing of the acquisition, the selling stockholders of Viewpoint will receive an annual basic contingent payment if Viewpoint's earnings are greater than 90% of applicable target described above and will receive the maximum annual basic contingent payment of $12.5 million if Viewpoint's earnings are 100% or greater than the applicable target described above. If Viewpoint's earnings are between 90% and 100% of the applicable target described above, the annual basic contingent payment will be calculated on a straight line basis from $0 to $12.5 million. Up to 50% of any annual basic contingent payment may be paid in shares of our common stock at our option, and in the case of payments in the first two years, at the option of the selling stockholders of Viewpoint. Shares of our common stock issued at our option will be valued at the average price on the New York Stock Exchange (or other applicable exchange) for the ten full trading days prior to the applicable payment date. Shares of our common stock issued at the option of the selling stockholders will be valued at $25.76 per share.
If, at the end of the four year period, cumulative earnings exceed the cumulative targets, the selling stockholders will receive 33.33% of the cumulative excess up to a maximum cumulative additional contingent payment of $25.0 million. Any cumulative additional contingent payment will be paid in cash.
Viewpoint owns the Tommy Bahama lifestyle brand that is used to market a wide array of products and services including apparel, footwear, accessories, home furnishings and restaurants. Viewpoint also produces two additional collections under the Tommy Bahama label, Indigo Palms and Island Soft. It also operates 34 Tommy Bahama retail locations across the country, six of which are retail/restaurant compounds. This acquisition helped us achieve one of our key strategic objectives of owning a major lifestyle brand. Viewpoint's results of operations from June 14, 2003 through August 29, 2003 are included in our consolidated statement of earnings.
In connection with the Viewpoint acquisition, we entered into a $275 million senior secured revolving credit facility, which has a five year term and bears interest, at our option, at rates determined from time to time based upon (1) the higher of the federal funds rate or the applicable prime rate plus a spread or (2) LIBOR plus a spread. Borrowings under the senior secured revolving credit facility are subject to a borrowing base calculation based on our accounts receivable, inventories and real property.
11. Viewpoint Acquisition
Upon completion of the Viewpoint acquisition, the net proceeds from our $200 million senior notes offering were released from escrow. We used the net proceeds from our senior notes offering, together with limited borrowings under our senior secured revolving credit facility and cash on hand, to finance the cash portion of the purchase price for the Viewpoint acquisition. We also terminated the accounts receivable securitization facility in June 2003, in connection with the senior revolving credit facility.
The purchase price, exclusive of contingent consideration, was allocated to the net assets of Viewpoint based on their estimated fair values. Any contingent consideration will be recorded and allocated to goodwill when earned by the sellers. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition. We have not yet finalized the purchase price allocation. The purchase price allocation will be finalized upon resolution of a working capital adjustment to the purchase price and refinement of certain preliminary estimates.
Market value of stock issued
Cash consideration paid
237,391
Direct merger costs
3,363
Total purchase price
$ 250,754
Cash
$ 22,325
Accounts receivable
29,595
28,369
Other current assets
6,005
82,256
153,360
Property, plant and equipment
27,953
Other assets
2,470
Current liabilities
(45,035)
(1,253)
Deferred taxes
(55,291)
Fair value of net assets acquired
The pro forma financial information presented below gives effect to the Viewpoint acquisition as if it had occurred as of the beginning of our fiscal year 2003 and fiscal year 2002. The information presented below is for illustrative purposes only and is not indicative of results that would have been achieved or results which may be achieved in the future.
$253,837
$ 242,034
$7,425
$ 4,799
Net earnings per share
Basic
$0.94
$0.61
Diluted
$0.92
13.Subsequent Events:
On October 6, 2003, our Board of Directors approved a 2-for-1 common stock split in the form of a stock dividend payable on December 1, 2003 to shareholders of record on November 17, 2003. In addition, our shareholders approved an increase in our authorized common shares from 30,000,000 to 60,000,000. We have not retroactively adjusted the financial statements and related notes for this stock split. Pro forma earnings per common share, giving retroactive effect to the stock split are as follows:
Net earnings per common share:
$0.43
$0.30
$0.42
Shares used in per share calculations:
15,819,780
15,031,154
16,219,846
15,121,348
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with our Consolidated Financial Statements and the Notes to Consolidated Financial Statements contained in this Quarterly Report.
OVERVIEW
Oxford Industries, Inc. is a leading producer and marketer of branded and private label apparel for men, women and children. Oxford provides retailers and consumers with a wide variety of apparel products and services to suit their individual needs. Oxford's brands include Tommy Bahamaâ, Indigo PalmsÔ, Island SoftÔ, Ely and Walkerâand Oxford Golfâ.. The Company also holds exclusive licenses to produce and sell certain product categories under the Tommy Hilfigerâ, Nauticaâ, Geoffrey Beeneâ, Slatesâ, Dockersâand Oscar de la Rentaâlabels. Oxford's customers are found in every major channel of distribution including national chains, specialty catalogs, mass merchants, department stores, specialty stores and internet retailers. Our business is operated through the following groups: the Oxford Shirt Group, Lanier Clothes, Oxford Slacks, the Oxford Womenswear Group and the Tommy Bahama Group.
General business conditions in the apparel industry continue to be extremely competitive. Comparable store sales performance for many of our major retail customers has improved over the past two months, but continues to be inconsistent. The promotional environment, particularly in department stores, has had an impact on some segments of our business. Consumer price indexes for apparel products have continued to decline in each of the past five years ended August 2003.
The most significant factor to impact our results of operations was the completion of the acquisition of Viewpoint International, Inc. On June 13, 2003, we acquired all of the outstanding capital stock of Viewpoint International, Inc. ("Viewpoint"). The transaction is valued at up to $325.0 million, consisting of $240.0 million in cash, $10.0 million in Oxford common stock and up to $75.0 million in contingent payments subject to achievement by Viewpoint of certain performance targets. The transaction was financed by a $200.0 million private placement of senior unsecured notes completed on May 16, 2003 and a $275.0 million senior secured revolving credit facility that closed on June 13, 2003. Viewpoint owns the Tommy Bahama lifestyle brand that is used to market a wide array of products and services including apparel, footwear, accessories, home furnishings and restaurants.
SUBSEQUENT EVENTS
On October 6, 2003, our Board of Directors declared a two-for-one common stock split in the form of a stock dividend payable on December 1, 2003 to shareholders of record on November 17, 2003. Shareholders will receive one additional share of the Company's common stock for every one share of the Company's common stock held on the record date. In addition, our shareholders also approved an increase in our authorized common shares from 30,000,000 to 60,000,000.
RESULTS OF OPERATIONS
The following discussion provides information and analysis of our results of operations for the fiscal quarters ended August 29, 2003 and August 30, 2002, respectively. The following table sets forth the line items in the Consolidated Statements of Earnings data both in dollars and as a percentage of net sales. The table also sets forth the percentage change of the data as compared to the prior year. We have calculated all percentages set forth below based on actual data, but percentage columns may not add due to rounding. Prior year results include Oxford Industries, Inc. without Viewpoint. Current year results include Viewpoint for 11 of 13 weeks of the quarter following the acquisition. Certain prior year information has been reclassified to be consistent with the current presentation.
First Quarter
FY 2004
FY 2003
Change
100.0%
$ 69,966
40.6%
Cost of Goods Sold
70.7%
77.7%
37,537
28.1%
29.3%
22.3%
32,429
84.3%
Selling, General & Administrative
22.1%
18.0%
22,663
73.2%
Amortization of Intangibles
0.7%
0.0%
1,659
NA
0.5%
0
6.9%
4.4%
9,287
123.9%
Interest Expense, Net
2.4%
5,705
Earnings Before Taxes
4.6%
4.3%
3,582
48.1%
1.7%
1,250
42.5%
$ 6,842
2.8%
$ 4,510
2.6%
$ 2,332
51.7%
On May 16, 2003, we completed a $200.0 million private placement of senior unsecured notes to finance the acquisition of Viewpoint. The notes bear interest at 8.875%, have an 8-year life, and were sold at a discount of .713% ($1.4 million) to yield an effective interest rate of 9.0%. The terms of the new notes provide certain limitations on additional indebtedness, and certain other transactions. Additionally, we are subject to certain financial covenants. The net proceeds from the senior notes of $198.6 million were placed in escrow. There were $7.2 million in debt issuance costs incurred in issuing the senior notes.
On June 13, 2003, we acquired all of the outstanding capital stock of Viewpoint. The transaction is valued at up to $325.0 million consisting of $240.0 million in cash, $10.0 million in Oxford common stock (388,200 shares) and up to $75.0 million in contingent payments, subject to the achievement by Viewpoint of certain performance targets. Viewpoint is a leading wholesaler and retailer of premium men's and women's sportswear and related accessories and products primarily under the Tommy Bahama brand. Viewpoint began its operations in 1992 primarily focused on building its Tommy Bahama brand as a lifestyle men's brand distributed through leading department stores and upscale independent specialty retailers. Since that time, Viewpoint has experienced rapid growth as it has expanded the Tommy Bahama lifestyle brand to reach both men and women through approximately 1,450 customers and approximately 2,100 doors, added additional Tommy Bahama lifestyle accessories and other products through selective licen sing relationships, and rolled out Tommy Bahama retail locations. After opening its first Tommy Bahama retail and restaurant compound in 1996 in Naples, Florida, Viewpoint's retail operations have grown to include 34 retail stores (including three outlets and six retail/restaurant compounds) across the country as of August 29, 2003.
On June 13, 2003, we also entered into a $275.0 million senior secured revolving credit facility (senior revolver), which has a five year term and bears interest, at our option, at rates determined from time to time based upon (1) the higher of the federal funds rate or the applicable prime rate plus a spread or (2) LIBOR plus a spread. Borrowings under the senior revolver are subject to a borrowing base calculation based on our accounts receivable, inventories and certain real property. There were $7.3 million in debt issuance costs incurred for the senior credit facility. Prior to June 13, 2003, our $65.0 million accounts receivable securitization program was terminated.
On June 13, 2003, in connection with the completion of the Viewpoint acquisition, the net proceeds from our $200.0 million senior notes offering were released from escrow. We used the net proceeds from our senior notes offering, together with limited borrowings under our senior revolver and cash on hand, to finance the cash portion of the purchase price for the Viewpoint acquisition.
The preliminary purchase price allocation was completed during the first quarter resulting in goodwill of $82.3 million and other intangible assets including trademarks, license agreements, customer relationships and covenants not to compete. Intangible assets other than goodwill with indefinite lives include trademarks valued at $127.8 million and will not be amortized. Intangible assets with finite lives include license agreements, customer relationships and covenants not to compete which are valued at $25.6 million and are being amortized using useful lives of 4 to 15 years. Based on the preliminary purchase price allocation, $1.7 million is expected to be amortized for each quarter of this fiscal year, or $6.6 million for all of fiscal year 2004. Amortization expense is projected to be $5.6 million for fiscal year 2005, $4.2 million for fiscal year 2006 and $3.0 million for fiscal year 2007.
Total Company
Net sales increased 40.6% from $172.1 million in the first quarter of the prior year to $242.1 million in the first quarter of the current year. We generated a 25.8% increase in unit sales and a 9.2% increase in the average selling price per unit. The sales increase was primarily driven by the acquisition of Viewpoint. Our pre-acquisition businesses generated a 3.9% sales increase.
Cost of goods sold for the first quarter of the current year was $171.2 million or 70.7% of net sales, compared to $133.7 million or 77.7% of net sales for the first quarter of the prior year. The relative decline in the cost of goods sold percentage was primarily due to the acquisition of Viewpoint with its higher margins and relatively lower cost of goods sold.
Selling, general and administrative expenses (S, G & A) increased from $30.9 million or 18.0% of net sales in the first quarter of the prior year to $53.6 million or 22.1% of net sales in the first quarter of the current year. The increase in S, G & A percentage was primarily due to the acquisition of Viewpoint with its relatively higher S, G &A structure.
Amortization of intangibles increased from $19 thousand in the first quarter of the prior year to $1.7 million in the first quarter of the current year. All of the increase in the amortization of intangibles was due to the acquisition of Viewpoint.
Royalties and other operating income is primarily licensing income for Viewpoint related to licensing the Tommy Bahama brand.
Interest expense increased from $41 thousand in the first quarter of the prior year to $5.7 million in the first quarter of the current year. The increase in interest is due to the interest on debt incurred to finance the Viewpoint acquisition and the amortization of deferred financing cost related to the acquisition.
The effective tax rate was approximately 39.5% in the first quarter of the prior year and 38.0% in the first quarter of the current year. Variations in the rate are primarily attributable to the relative distribution of pre-tax earnings among the various taxing jurisdictions in which we operate.
Segment Definition
We identify operating segments based on the way we organize the components of our business for purposes of allocating resources and assessing performance. Our business segments are the Oxford Shirt Group, Lanier Clothes, Oxford Slacks, Oxford Womenswear Group and the Tommy Bahama Group. The Oxford Shirt Group operations encompass branded and private label dress and sport shirts and branded golf apparel. Lanier Clothes produces branded and private label suits, sportscoats, suit separates and dress slacks. Oxford Slacks is a producer of private label dress slacks, casual slacks and walkshorts. The Oxford Womenswear Group is a producer of private label women's sportswear. The Tommy Bahama Group markets wholesale and retail apparel, accessories and related products and operates restaurants under the Tommy Bahama brand. Corporate and Other is a reconciling category for reporting purposes and includes our corporate offices, transportation and logistics, intercompany eliminations, LIFO inventory account ing adjustments and other costs that are not allocated to the operating groups. All data with respect to the specific segments is presented before applicable intercompany eliminations. (See Note 8 of Notes to Consolidated Financial Statements.)
17.1%
27.4%
$ (5,690)
-12.1%
17.3%
21.5%
5,006
13.6%
13.4%
12.4%
10,971
51.4%
Womenswear Group
26.0%
38.7%
(3,646)
-5.5%
26.1%
64.4%
Total Net Sales
0.8%
2.7%
$ (928)
-74.0%
11.9%
13.3%
112
2.3%
12.8%
6.3%
2,792
207.0%
5.1%
5.3%
(317)
-9.0%
11.0%
669
-18.9%
Total Operating Income
$ 16,781
$ 7,494
$ 9,287
Segment Results
The Oxford Shirt Group reported a sales decline of 12.1% from $47.2 million in the first quarter of the prior year to $41.5 million in the first quarter of the current year. The sales decline was due to a 1.2% decline in unit sales and to an 11.6% decline in the average selling price per unit. The decline in sales was primarily due to a shift in sales for Tommy Hilfiger Golf that occurred in the first quarter of the prior year but is expected to occur in the second quarter of the current year. Also contributing were declines in golf apparel shipments due to the closure of our Izod Club U.S. Golf operation. Operating income declined from $1.3 million in the first quarter of the prior year to $0.3 million in the first quarter of the current year. The decline in operating income was due to the decline in sales.
Lanier Clothes reported a 13.6% increase in net sales from $36.9 million in the first quarter of the prior year to $41.9 million in the first quarter of the current year. The increase was primarily due to a 19.2% increase in unit sales partially offset by a 4.7% decline in the average selling price per unit. The increase in unit sales was primarily in the chain and department store distribution channels. The decline in the average selling price per unit was partially due to product mix and partially due to the year over year deflation in apparel prices. Operating income increased from $4.9 million in the first quarter of the prior year to $5.0 million in the first quarter of the current year. The increase in operating income was due to the increase in sales volume.
Oxford Slacks reported a 51.4% increase in net sales from $21.4 million in the first quarter of the prior year to $32.3 million in the first quarter of the current year. The net sales increase was due to a 71.4% increase in unit sales partially offset by an 11.4% decline in the average selling price per unit. The unit sales increase was primarily due to the continuing rollout of Lands' End products to selected Sears stores and new programs with major customers in the department store, direct mail and discount distribution channels. The decline in the average selling price per unit is due to product mix as evidenced by the increase in sales to the discount distribution channel and continued year over year deflation in apparel prices. Operating income increased from $1.3 million in the first quarter of the prior year to $4.1 million in the first quarter of the current year. The increase in operating income was due to the increased sales volume, improved manufacturing efficiency and significant leveraging of operating expenses.
The Oxford Womenswear Group reported a net sales decline of 5.5% from $66.6 million in the first quarter of the prior year to $63.0 million in the first quarter of the current year. The decline in sales was due to a 17.0% decline in the average selling price per unit partially offset by a 13.0% increase in unit sales. The decline in sales was due to three factors. We exited our business with Kmart last year after the second quarter. Sales to Kmart in the first quarter of the prior year were $6.7 million. The decline in average selling price per unit was partially due to increased shipments to customers on FOB foreign port terms. Under FOB foreign port terms, title transfers to the customer at the foreign port and the customer is responsible for subsequent freight and duty. The decline in average selling price per unit was also partially due to continued year over year deflation in womenswear apparel. Operating income declined from $3.5 million in the first quarter of the prior year to $3.2 million in the first quarter of the current year. The decline in operating income was due to the sales decline.
The Tommy Bahama Group reported net sales of $63.3 million in the first quarter of the current year. The first quarter for Tommy Bahama covered eleven of the thirteen weeks of the quarter as the acquisition was completed on June 13, 2003. Sales consisted of revenues from major department stores, upscale specialty stores, private label and its own retail stores and restaurants. Licensing income categories primarily included home furnishings, swimwear, shoes, neckwear, watches and handbags. During the quarter, Tommy Bahama opened three new retail stores. At August 29, 2003, Tommy Bahama retail operations have grown to include 34 retail stores (including three outlets and six retail/restaurant compounds) across the country. Tommy Bahama reported operating income of $7.0 million, which includes $1.7 million in amortization of intangible assets resulting from purchase accounting.
LIQUIDITY AND CAPITAL RESOURCES
On June 13, 2003, we entered into a $275.0 million senior secured revolving credit facility (senior revolver) with a syndicate of banks. The facility has a five year term and bears interest, at our option, at rates determined from time to time based upon (1) the higher of the federal funds rate or the applicable prime rate plus a spread or (2) LIBOR plus a spread. Borrowings under the senior revolver may be used for working capital, the issuance of letters of credit up to $175 million and other general corporate purposes and are subject to a borrowing base calculation based on defined percentages of eligible accounts receivable, inventories and certain real property. The senior revolver agreement contains customary covenants, including financial covenants requiring us to maintain specified debt and fixed charge coverage ratios and covenants restricting our ability to incur additional indebtedness, make investments and acquisitions and sell assets, among other restrictions.
At quarter-end, gross collateral availability under the senior revolver totaled $213.0 million. At quarter-end, we had 100.0 million in outstanding letters of credit, of which $8.5 million were issued prior to the establishment of the senior revolver and do not count against borrowing availability. We also had $10 million in direct borrowings outstanding under the senior revolver. Total outstanding under the senior revolver including letters of credit and direct borrowings reached a high of approximately $106 million and a low of approximately $90 during the quarter.
Operating Activities
Changes in cash flows from operating activities are primarily due to changes in net earnings and working capital. Changes in working capital are primarily monitored by analysis of the Company's investment in accounts receivable and inventories and by the amount of accounts payable. During the first quarter, we generated cash from operating activities of $4.3 million primarily from increased earnings and changes in working capital after giving effect to the acquisition of Viewpoint International, Inc. on June 13, 2003. Working capital changes included decreased receivables and decreased inventories, partially offset by decreased trade payables and decreased accrued expenses. The decrease in receivables is primarily due to the monthly sales pattern within the quarter and slightly reduced days sales outstanding (DSO's). The reduction in inventories is in line with prior levels. The decrease in trade payables is primarily due to the reduction in inventories. The reduction in accrued expenses is primaril y due to the payment of prior year incentive compensation costs.
During the first quarter of the prior year, we used cash from operating activities of $12.0 million. The usage was primarily due to increased receivables and inventories partially offset by net earnings and increases in trade accounts payables and income taxes payables. The increase in receivables was due to the monthly pattern of sales within the quarter and slightly increased DSO's. The increase in inventories was due to the planned increase in sales. The increase in trade payables was primarily due to increased inventories. The increase in income tax payable was due to the timing of income tax payments.
Investing Activities
During the first quarter of fiscal year 2004, investing activities used $40.2 million and represented the acquisition of Tommy Bahama net of the reduction in restricted proceeds from the sale of the senior secured notes. Capital expenditures of $3.2 million were primarily related to new Tommy Bahama retail stores and computer equipment and software. In fiscal year 2003 investing activities used $290 thousand.
Financing Activities
During the first quarter if fiscal year 2004, financing activities generated $6.9 million. This amount is primarily from the net proceeds from short-term debt and the issuance of common stock upon exercise of employee stock options, partially offset by the payment of debt issuance costs. In fiscal year 2003, financing activities generated $923 thousand, consisting of the net proceeds from short-term debt, partially offset by cash dividends.
On October 6, 2003, our Board of Directors declared a cash dividend of $0.21 per share payable on December 1, 2003, to share holders of record on November 17, 2003.
On October 6, 2003, our Board of Directors declared a two-for-one stock split in the form of a 100% stock dividend, payable on December 1, 2003 to shareholders of record on November 17, 2003. Shareholders will receive one additional share of the Company's common stock for every one share of the Company's common stock held on the record date. In addition, our shareholders also approved an increase in our authorized common shares from 30,000,000 to 60,000,000.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgements that affect the reported amounts of assets, liabilities, revenues, and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to bad debts, inventories, intangible assets, income taxes, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Financial Reporting Release No. 60, which was released by the Securities and Exchange Commission, requires all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements. The detailed Summary of Significant Accounting Policies is included in the Fiscal 2003 Annual Report on Form 10-K. The following is a brief discussion of the more significant accounting policies and methods we use.
Revenue Recognition and Accounts Receivable
We consider revenue realized or realizable and earned when the following criteria are met: persuasive evidence of an agreement exists, delivery has occurred, our price to the buyer is fixed and determinable, and collectibility is reasonably assured. For accounts receivable, we estimate the net collectibility, considering both historical and anticipated trends of trade discounts and co-op advertising deductions taken by our customers, allowances we provide to our retail customers for a variety of reasons, and the possibility of non-collection due to the financial condition of our customers.
Inventory
For segment reporting, inventory is carried at the lower of FIFO cost or market. We estimate the amount of goods that we will not be able to sell in the normal course of business and write down the value of these goods to the recovery value expected to be realized through off-price channels yielding a normal gross margin when shipped. If we incorrectly anticipate these trends or unexpected events occur, our results of operations could be materially affected. For consolidated financial reporting, inventory is valued at the lower of LIFO cost or market. As part of our LIFO accounting, markdowns are deferred until the period in which the goods are shipped, except for markdowns below the allocated LIFO reserve. The markdown deferral is reflected in Corporate and Other.
The evaluation of goodwill under SFAS 142 requires valuations of each applicable underlying business. These valuations can be significantly affected by estimates of future performance and discount rates over a relatively long period of time, market price valuation multiples and transactions in related markets. These estimates will likely change over time. Goodwill is required to be evaluated annually, or more frequently if events or changes in circumstances indicate that the carrying amount may exceed fair value. If this review indicates an impairment of goodwill balances, the amount of impairment will be recorded immediately and reported as a component of current operations. The business valuation reviews required by SFAS 142 indicated that no reduction of the carrying value of goodwill for our business units has been required.
Intangible Assets Other than Goodwill
Intangible assets with finite lives are amortized, while intangible assets with indefinite useful lives are not amortized, but tested at least annually for impairment. Intangible assets whose useful lives are finite are amortized over their useful lives using a method of amortization that reflects the pattern in which the economic benefits of the intangible assets are consumed.
Seasonality
Although our business is impacted by the general seasonal trends characteristic of the apparel and retail industries, we do not consider our revenue to be highly seasonal. Current year projections indicate that sales will be somewhat higher and earnings will be significantly higher in the second half of our fiscal year due to the heavier spring shipments of Tommy Bahama product, which generate higher profit margins than our other businesses. As the timing of product shipments and other events affecting the retail business may vary, results for any particular quarter may not be indicative of results for the full year.
New Accounting Statements
FUTURE LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations is our primary source of liquidity. Cash flow from operations will be supplemented with our senior revolver. On August 29, 2003, collateral availability under the senior revolver totaled $213 million, against which approximately $91.5 million in letters of credit and $10 million in direct borrowings were outstanding.
FUTURE OPERATING RESULTS
Our previously issued guidance excluded intangible asset amortization expenses because the purchase price allocation analysis would not be conducted until the first quarter. The preliminary purchase price allocation was completed during the first quarter and intangible asset amortization expenses will be included in both reported earnings and guidance for each quarter going forward. Intangible asset amortization, on an after-tax basis, is projected to total approximately $0.50 per diluted share for fiscal year 2004 or approximately $0.125 per diluted share for each quarter.
We believe the current economic and retail environment remains quite challenging. Comparable store sales performance for many of our major retail customers has improved over the past two months, but continues to be inconsistent. We are encouraged by some of the positive chatter in the industry, but remain conservative with respect to our forward planning.
For the fiscal year ending May 28, 2004, we continue to anticipate sales in the range of $1.05 billion to $1.1 billion and diluted earnings per share in the range of $4.17 to $4.39 including intangible amortization expense. For the second quarter, we continue to anticipate sales in the range of $245 to $255 million and earnings per share in the range of $0.75 to $0.80. For the third quarter, we continue to believe appropriate targets for sales are in the range of $280 to $295 million and for diluted earnings per share between $1.08 and $1.15. For the fourth quarter, we continue to believe appropriate targets for sales are in the range of $295 to $310 million and for diluted earnings per share of between $1.50 and $1.60.
Market Risk Sensitivity
Trade Policy Risk
Substantially all of our products are manufactured outside the United States. Most apparel imported into the United States is subject to duty and restrictive quotas on the number of garments that can be imported from certain countries into the United States each year. Because of the duty rates and quotas, changes in U.S. trade policy as reflected in various legislation, trade preference programs and trade agreements have the potential to materially impact our sourcing strategy and the competitiveness of our owned manufacturing facilities and existing contract manufacturing facilities. We manage this risk by continually monitoring U.S. trade policy, analyzing the impact of changes in such policy and adjusting our manufacturing and sourcing strategy accordingly.
Foreign Currency Risk
We receive United States dollars for substantially all of our product sales. Substantially all inventory purchases from contract manufacturers throughout the world are also denominated in United States dollars; however, purchase prices for our products may be impacted by fluctuations in the exchange rate between the United States dollar and the local currencies of the contract manufacturers, which may have the effect of increasing our cost of goods sold in the future. During the last three fiscal years, exchange rate fluctuations have not had a material impact on our inventory costs; however, due to the number of currencies involved and the fact that not all foreign currencies react in the same manner against the United States dollar, we cannot quantify in any meaningful way the potential effect of such fluctuations on future income. We do not engage in hedging activities with respect to such exchange rate risk.
Commodity Price Risk
We are subject to commodity price risk arising from price fluctuations in the market prices of sourced garments or the various raw materials components of our manufactured products. We are subject to commodity price risk to the extent that any fluctuations in the market prices of our purchased garments and raw materials are not reflected by adjustments in selling prices of our products or if such adjustments significantly trail changes in these costs. We neither enter into significant long-term sales contracts nor significant long-term purchase contracts. We do not engage in hedging activities with respect to such risk.
Inflation Risk
The consumer price index indicates deflation in apparel prices for at least the last five years. This deflation has resulted in the decline in the average selling price per unit for most of our segments. In order to maintain gross margins and operating profit, we constantly seek more cost effective product sourcing, productivity improvements and cost containment initiatives, in addition to efforts to increase unit sales.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The matters in this quarterly report that are forward-looking statements, including but not limited to statements about our expected business outlook, anticipated financial and operating results, the anticipated benefits of the Viewpoint acquisition, growth of particular product lines, strategies, contingencies, financing plans, working capital needs, sources of liquidity, estimated amounts and timing of capital expenditures and other expenditures, are based on current management expectations that involve certain risks which if realized, in whole or in part, could have a material adverse effect on Oxford's business, financial condition and results of operations, including, without limitation: (1) general economic cycles; (2) competitive conditions in our industry; (3) price deflation in the worldwide apparel industry; (4) our ability to identify and respond to rapidly changing fashion trends and to offer innovative and upgraded products; (5) the price and availability of raw materials; (6) our dependence on and relationships with key customers; (7) the ability of our third party producers to deliver quality products in a timely manner; (8) potential disruptions in the operation of our distribution facilities; (9) economic and political conditions in the foreign countries in which we operate or source our products; (10) regulatory risks associated with importing products; (11) the impact of labor disputes and wars or acts of terrorism on our business; (12) increased competition from direct sourcing; (13) our ability to maintain our licenses; (14) our ability to protect our intellectual property and prevent our trademarks and service marks and goodwill from being harmed by competitors' products; (15) our reliance on key management; (16) our inability to retain premium pricing on Tommy Bahama products due to competitive or other factors; (17) the impact of reduced travel to resort locations on our sales; (18) risks related to our operation of restaurants under the Tommy Bahama name; (19) the integration of View point into our company; (20) the expansion of our business through the Viewpoint acquisition into new businesses; (21) our ability to successfully implement our growth plans for Tommy Bahama; (22) our ability to open new Tommy Bahama stores; and (23) unforeseen liabilities associated with the acquisition of Viewpoint and other businesses.
For a further discussion of significant factors to consider in connection with forward-looking statements concerning Oxford, reference is made to Exhibit 99.1 to Oxford's Current Report on Form 8-K dated July 16, 2003; other risks or uncertainties may be detailed from time to time in Oxford's future SEC filings. Oxford disclaims any duty to update any forward-looking statements.
ADDITIONAL INFORMATION
For additional information concerning our operations, cash flows, liquidity and capital resources, this analysis should be read in conjunction with the Consolidated Financial Statements and the Notes to Consolidated Financial Statements contained in our Annual Report on Form 10-K for the fiscal year ended May 30, 2003.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See the section entitled "Liquidity and Capital Resources" in Item 2 above, which sections are incorporated herein by reference.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")) including those disclosure controls and procedures applicable to the newly-acquired Tommy Bahama Group). Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
Internal controls that existed at the Tommy Bahama Group at the time of the acquisition were incorporated into our internal controls over financial reporting.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
3.1 Articles of Incorporation of the Company as amended
3.2 ByLaws as amended and restated
10.1 Executive Performance Plan
10.2 1997 Stock Plan as amended
10.3 1997 Restricted Stock Plan as amended
31 Section 302 Certifications by Chief Executive Officer and Chief Financial Officer
32 Section 906 Certification by Chief Executive Officer and Chief Financial Officer.
(b) Reports on Form 8-K.
We filed a Form 8-K on October 2, 2003 furnishing our 1st quarter earnings release.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
OXFORD INDUSTRIES, INC.(Registrant)
/s/J. Hicks Lanier
Dated October 13, 2003
J. Hicks Lanier
Chief Executive Officer
/s/Ben B. Blount, Jr.
Date: October 13, 2003
Ben B. Blount, Jr
Chief Financial Officer
/s/K. Scott Grassmyer
K. Scott Grassmyer
Controller and
Chief Accounting Officer