SECURITIES AND EXCHANGE COMMISSION
[ X ] Quarterly Report Pursuant To Section 13 or 15(d) ofThe Securities Exchange Act of 1934
For the quarterly period ended AUGUST 27, 2004
OR
[ ] Transition Report Pursuant To Section 13 or 15(d) ofThe Securities Exchange Act of 1934
For the transition period from_________ to________
Commission File Number 1-4365
OXFORD INDUSTRIES, INC.
222 Piedmont Avenue, N.E., Atlanta, Georgia 30308
(404) 659-2424
Not Applicable
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 by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).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.
Table of contents
OXFORD INDUSTRIES, INC.INDEX TO FORM 10-QAugust 27, 2004
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
See notes to consolidated financial statements.
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OXFORD INDUSTRIES, INC.NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)AUGUST 27, 2004
Intangible assets by category are summarized below:
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13. Consolidating Financial Data of Subsidiary Guarantors: The notes issued for the Tommy Bahama acquisition were issued by Oxford Industries, Inc. Not all of our subsidiaries guarantee the notes. Each subsidiary guarantor is wholly owned by Oxford Industries, Inc. and is organized in the U.S. All guarantees are full and unconditional. Non-guarantors consist of subsidiaries of Oxford Industries, Inc which are organized outside the U.S. Set forth below is the consolidated financial statements for the three months ended August 27, 2004 and August 29, 2003. We have used the equity method with respect to investment in subsidiaries.
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13. Consolidating Financial Data of Subsidiary Guarantors (continued):
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our“Consolidated Financial Statements” and the “Notes to Consolidated Financial Statements”contained in this report.
OVERVIEW
We are engaged in the design, production and sale of consumer apparel for men, women and children. Our principal markets and customers are located primarily in the United States. We source these products from third party producers, our owned manufacturing facilities and through our joint venture partners. We distribute our products through our wholesale customers and through our own retail stores.
The most significant factor impacting our results of operations for the current year was the completion of the acquisition of Ben Sherman, which we operate as part of our Menswear Group. Ben Sherman is a London-based designer, distributor and marketer of branded sportswear, accessories, and footwear.
In conjunction with the acquisition of Ben Sherman, our U.S. Revolver was amended and restated on July 28, 2004 and increased to $280 million with a syndicate of eight financial institutions
RESULTS OF OPERATIONS
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. Fiscal 2004 results include the Tommy Bahama Group from June 13, 2003 through August 29, 2003. Fiscal 2005 results include Ben Sherman from July 31, 2004 through August 27, 2004.
ACQUISITION
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On July 30, 2004, we acquired Ben Sherman. Ben Sherman is a London-based designer, distributor and marketer of branded sportswear, accessories, and footwear. The purchase price for Ben Sherman was £80 million, or approximately $145 million, plus associated expenses. The transaction was financed with cash on hand and borrowings under our U.S. Revolver and Seller Notes payable to the management shareholders of Ben Sherman.
In conjunction with the acquisition of Ben Sherman, our U.S. Revolver was amended and restated on July 28, 2004 and increased to $280 million with a syndicate of eight financial institutions. The maturity date was extended to July 28, 2009.
On July 30, 2004, our Ben Sherman subsidiary entered into a £12 million U.K. Revolver to provide for seasonal working capital requirements and general corporate purposes.
For further discussion of the acquisition, see Note 9 of “Notes to Consolidated Financial Statements”. For further discussion of financing arrangements see the section below titled “Financing Arrangements”.
TOTAL COMPANY
Net sales increased 9.4% from $242.1 million in the first quarter of Fiscal 2004 to $264.8 million in the first quarter of Fiscal 2005. We generated a 21.5% increase in the average selling price per unit and a 10.7% decline in unit sales. The increase in the average selling price per unit was due to the higher average selling price per unit of Tommy Bahama and Ben Sherman merchandise and the relatively higher proportion of these brands’ sales in the current year. The decline in unit sales was primarily due to the Womenswear Group. Our pre-acquisition businesses (excluding Tommy Bahama and Ben Sherman) experienced an 18.8% decline in unit sales and a 6.1% increase in the average selling price per unit.
Cost of goods sold for the first quarter of Fiscal 2005 was $179.9 million or 67.9% of net sales, compared to $171.2 million or 70.7% of net sales in the first quarter of Fiscal 2004. Expressed as a percentage of net sales, the decline in cost of goods sold was primarily due to the increased shipments of the Tommy Bahama Group and the addition of Ben Sherman, both of which have higher gross margins. Our gross margins may not be directly comparable to those of our competitors, as income statement classifications of certain expenses may vary by company.
Selling, general and administrative expenses (“SG&A”) increased from $53.6 million or 22.1% of net sales in the first quarter of Fiscal 2004 to $67.6 million or 25.5% of net sales in the first quarter of Fiscal 2005. The increase in SG&A was primarily due to growth in the Tommy Bahama Group and the acquisition of Ben Sherman.
Amortization of intangibles was unchanged at $1.7 million in both the first quarter of Fiscal 2004 and the first quarter of Fiscal 2005. Fiscal 2005 includes $1.4 million for Tommy Bahama and $0.3 million for Ben Sherman. While the purchase price valuation is preliminary, we anticipate the amortization of intangible assets related to Ben Sherman to be $0.9 million per quarter for the balance of Fiscal 2005. Total amortization of intangible assets is expected to be $2.3 million per quarter for the balance of Fiscal 2005.
Royalties and other operating income increased from $1.2 million in the first quarter of Fiscal 2004 to $1.8 million in the first quarter of Fiscal 2005 and is primarily licensing income from licensing the Tommy Bahama and Ben Sherman brands.
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Interest expense, net increased from $5.7 million in the first quarter of Fiscal 2004 to $7.9 million in the first quarter of Fiscal 2005. The increase in interest expense was due to the interest on debt incurred to finance the acquisition of Ben Sherman and the non-cash write-off of $1.8 million of deferred financing costs. The non-cash write-off of the deferred financing cost was due to the amendment of our U.S. Revolver.
Income taxes. The effective tax rate was approximately 38.0% in the first quarter of Fiscal 2004 and 35.0% in the first quarter of Fiscal 2005. Variations in the effective tax rate are primarily attributable to the acquisition of Ben Sherman and the relative distribution of pre-tax earnings among the various taxing jurisdictions in which we operate.
SEGMENT DEFINITION
We organize the components of our business for purposes of allocating resources and assessing performance. Our reportable segments are the Menswear Group, the Womenswear Group and the Tommy Bahama Group. The Menswear Group produces a variety of branded and private label sportswear, tailored clothing, dress shirts and golf apparel. The Menswear Group also operates one Ben Sherman retail store and licenses the Ben Sherman brand for other product categories. The Womenswear Group produces private label women’s sportswear separates, coordinated sportswear, outerwear, dresses and swimwear. The Tommy Bahama Group produces lifestyle branded casual attire, operates retail stores and restaurants, and licenses the Tommy Bahama brand for other product categories. Corporate and Other is a reconciling category for reporting purposes and includes our corporate offices, LIFO inventory accounting adjustments and other costs that are not allocated to the operating groups. LIFO inventory calculations are made on a legal entity basis, which do not correspond to our segment definitions. Therefore, LIFO inventory accounting adjustments are not allocated to the operating segments. Segment results are as follows:
* For further information regarding our segments, see Note 7 of “Notes to Consolidated Financial Statements”.
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SEGMENT RESULTS
Menswear Group
The Menswear Group reported a 2.5% increase in net sales from $115.8 million in the first quarter of Fiscal 2004 to $118.7 million in the first quarter of Fiscal 2005. The increase resulted from a 6.1% increase in the average selling price per unit partially offset by a 3.2% decline in unit sales. Ben Sherman contributed $16.6 million in sales. Our other Menswear businesses experienced declines of $13.6 million including declines of $7.3 million with Sears/Lands’ End and $3.4 million of Izod Club Golf sales. The Sears/Lands’ End reduction was primarily due to the prior year benefit of initial fixture load of Lands’ End shops in Sears’s stores that did not recur in the current period. We discontinued our Izod Club Golf business in Fiscal 2004. Operating income declined from $9.5 million in the prior period to $8.9 million in the current period. The decline in operating income was primarily due to the decrease in sales excluding Ben Sherman, partially offset by the operating income of Ben Sherman.
Womenswear Group
The Womenswear Group reported a 16.7% decline in net sales from $63.0 million in the first quarter of Fiscal 2004 to $52.5 million in the first quarter of Fiscal 2005. The decline in net sales resulted from a 22.0% decline in unit sales partially offset by a 5.5% increase in the average selling price per unit. The decline in sales was primarily due to decreased sales to Wal-Mart. These sales declines were partially offset by increased sales to other customers in the department store and direct mail distribution channels. Operating income declined from $3.2 million in the first quarter of Fiscal 2004 to an operating loss of $1.0 million in the first quarter of Fiscal 2005. The decline in operating income was the result of the sales decline and margin pressures due to competitive market conditions and the continuing emphasis on direct sourcing by our key customers.
Tommy Bahama Group
Tommy Bahama was acquired on June 13, 2003. Tommy Bahama was included for 11 of 13 weeks in the first quarter of Fiscal 2004 and the entire first quarter of Fiscal 2005. Sales of Tommy Bahama for the two weeks immediately prior to the acquisition were $11.7 million and operating income for that period was $1.2 million.
The Tommy Bahama Group reported a 47.7% increase in net sales from $63.3 million for the first quarter of Fiscal 2004 to $93.5 million in the first quarter of Fiscal 2005. The increase in sales was primarily due to increased wholesale sales with existing customers, increased retail sales from eleven more retail stores in operation, and the additional two weeks of sales in Fiscal 2005 compared to Fiscal 2004. Overall, Tommy Bahama experienced a 33.9% increase in unit sales and a 10.0% increase in the average selling price per unit. The increase in the average selling price per unit was primarily due to product and channel mix. The retail operation grew from 34 retail locations at the end of the first quarter of Fiscal 2004 to 45 retail locations at the end of the first quarter of Fiscal 2005. Operating income increased from $7.0 million in the first quarter of Fiscal 2004 to $11.9 million in the first quarter of Fiscal 2005. The increase in operating income was due to the increase in sales, increased leveraging of operating expenses and the inclusion of two additional weeks in the first quarter of Fiscal 2005 as compared to the first quarter of Fiscal 2004.
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Corporate and Other
The Corporate and Other operating loss declined from $2.9 million in the first quarter of Fiscal 2004 to $2.5 million in the first quarter of Fiscal 2005 primarily due to the favorable impact of LIFO accounting in the first quarter of Fiscal 2005 as compared to the first quarter of Fiscal 2004.
LIQUIDITY AND CAPITAL RESOURCES
Financing Arrangements
On May 16, 2003, we completed a $200 million private placement of senior unsecured notes to finance the acquisition of Tommy Bahama. The notes bear interest at 8.875%, have an 8-year life and were sold at a discount of 0.713%, or $1.4 million, to yield an effective interest rate of 9.0%. Interest is payable semi-annually with the principal amount due at maturity on June 1, 2011. The notes are guaranteed by all existing and future direct and indirect domestic wholly owned restricted subsidiaries of Oxford Industries, Inc. The senior notes indenture restricts our ability to incur additional indebtedness or liens, to enter into lease or hedging arrangements, to make investments and acquisitions, to sell assets, to pay dividends and to pay amounts due under the earnout agreement with the selling shareholders of the Tommy Bahama Group. The indenture also requires us to maintain a minimum consolidated fixed charge coverage ratio which is defined as the sum of consolidated net income, consolidated interest expense and non-cash charges to consolidated interest expense, calculated as applicable on a pro forma basis. We are in compliance with these covenants as of August 27, 2004.
In association with the Ben Sherman acquisition, our U.S. Revolver was amended on July 28, 2004 and increased to $280 million with a syndicate of eight financial institutions. The maturity date was extended to July 28, 2009. Under the amended U.S. Revolver, borrowing spreads and letter of credit fees are based upon a pricing grid, which is tied to a ratio of total debt to EBITDA, calculated as applicable on a pro forma basis. The credit agreement also requires us to maintain certain financial ratios including the ratio of total debt to EBITDA, the ratio of senior debt to EBITDA, a fixed charge coverage ratio and an interest coverage ratio. Our borrowings under the amended U.S. Revolver are no longer subject to a borrowing base calculation based on our accounts receivable, inventories and real property. The amendment of our U.S. Revolver resulted in a write-off of deferred financing costs of $1.8 million in the first quarter of Fiscal 2005. We are in compliance with these covenants as of August 27, 2004. At August 27, 2004, gross availability under the U.S. Revolver totaled $280.0 million, against which approximately $112.9 million in letters of credit and $98.3 million in direct borrowings were outstanding.
In conjunction with our acquisition of Ben Sherman on July 30, 2004, we entered into Seller Notes with the management shareholders of Ben Sherman. The Seller Notes total £3.5 million (or approximately $6.3 million) and are payable on demand beginning six months after July 30, 2004. The notes bear interest at the annual rate of LIBOR plus 1.2% and is payable on the last day of September, December, March and June, until the principal has been paid.
On July 30, 2004, our Ben Sherman subsidiary entered into a £12 million U.K. Revolver to provide for seasonal working capital requirements and general corporate purposes. The facility is secured by substantially all of the United Kingdom assets of Ben Sherman and bears interest at the lender’s prime or base rate plus 1.2%. The facility is payable on demand and requires the borrower to maintain certain financial ratios
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including a minimum interest coverage ratio, a minimum asset coverage ratio and a minimum level of earnings before interest, taxes and intangible asset amortization. We are in compliance with these covenants as of August 27, 2004.
Operating Activities
The cash flow from operating activities is primarily due to net earnings and changes in working capital. Changes in working capital are primarily monitored by analysis of the investment in accounts receivable and inventories and by the amount of accounts payable. During the first quarter of Fiscal 2005, we generated cash from operating activities of $12.1 million primarily from net earnings and non-cash charges and a slight increase in working capital after giving effect to the acquisition of Ben Sherman. Working capital changes included increased inventories, decreased trade payables and decreased accrued expenses offset by decreased accounts receivable. The inventory increase occurred in our Tommy Bahama businesses to support increased sales. Trade payables decreased primarily due to the decline in inventory purchases during the first quarter of Fiscal 2005 compared to the fourth quarter of Fiscal 2004. The decline in accrued expenses was primarily due to incentive compensation and interest accrued at the end of Fiscal 2004 and paid in the first quarter of Fiscal 2005. The accounts receivable decline was due to the decline in sales in the last two months of the first quarter of Fiscal 2005 compared to the last two months of the fourth quarter of Fiscal 2004.
During the first quarter of Fiscal 2004, we generated cash from operating activities of $5.6 million primarily from net earnings and non-cash charges and a slight increase in working capital after giving effect to the acquisition of Tommy Bahama. Working capital changes included decreased accounts payable and accrued expenses partially offset by decreased inventory and decreased receivables. The decreased trade payables was primarily due to the decline in inventory purchases. The decline in accrued expenses was primarily due to incentive compensation accrued at the end of Fiscal 2003 and paid in the first quarter of Fiscal 2004. The decline in inventory occurred primarily in our preacquisition business. The decline in accounts receivable was the same as described above for the current year.
Investing Activities
During the first quarter of Fiscal 2005, investing activities used $141.7 million in cash, principally for the acquisition of the Ben Sherman. Capital expenditures of $2.5 million were primarily related to new Tommy Bahama retail stores, computer equipment and software.
During the first quarter of Fiscal 2004, investing activities used $17.8 million in cash and principally for the acquisition of the Tommy Bahama net of the reduction in restricted proceeds from the sale of the senior unsecured notes. Capital expenditures of $3.2 million were primarily related to new Tommy Bahama retail stores, computer equipment and software.
Financing Activities
During the first quarter of Fiscal 2005, financing activities generated $93.6 million in cash. This represents the amount of increased U.S. Revolver debt, issuance of Seller Notes to finance the acquisition of Ben Sherman and proceeds from the issuance of common stock upon the exercise of employee stock options, partially offset by payments of deferred financing cost to amend our U.S. Revolver and payment of dividends on our common stock.
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During the first quarter of Fiscal 2004, financing activities generated $5.5 million in cash. This represents an increase in revolver debt and proceeds from the issuance of common stock upon the exercise of employee stock options, partially offset by payments of deferred financing cost and payment of dividends on our common stock.
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 and certain other accrued expenses. 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.
The Securities and Exchange Commission’s Financial Reporting Release No. 60 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 Notes to Consolidated Financial Statements contained in this report. 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:
Sales are recorded net of discounts, as well as provisions for estimated returns and allowances. We estimate returns and allowances on an ongoing basis considering historical and current trends and projected seasonal results. We record these costs as a reduction to net revenue. Our historical estimates of these sales reductions have not differed materially from actual results. 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 position of our customers. Credit losses are charged to SG&A.
Inventories
For segment reporting, inventory is carried at the lower of first-in first-out (“FIFO”) cost or market. For wholesale inventory, we estimate the amount of goods that we will not be able to sell in the
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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. For Tommy Bahama retail inventory, we provide an allowance for shrinkage and goods expected to be sold below cost. If we incorrectly anticipate these trends or unexpected events occur, the results of operations could be materially affected. For consolidated financial reporting, significant portions of our inventory are valued at the lower of LIFO cost or market. LIFO inventory calculations are made on a legal entity basis, which do not correspond to our segment definitions. Therefore, LIFO inventory accounting adjustments are not allocated to the operating segments. As part of our LIFO accounting, markdowns for inventory valued at LIFO cost are deferred until the period in which the goods are sold. However, in non-routine circumstances, such as discontinuance of a product line, markdowns below the allocated LIFO reserve are not deferred. Both the LIFO reserve and the markdown deferral are reflected in Corporate and Other.
Goodwill
The evaluation of the recoverability of goodwill under SFAS 142 requires valuations of each applicable underlying business using fair value techniques and market comparable. 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 were performed as of the end of the first quarter of fiscal 2005 and indicated that no reduction of the carrying value of goodwill for our business units was 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. The valuation of the recoverability of indefinite lived intangibles can be significantly impacted by estimates of future cash flows and discount rates over a relatively long period of time, which will likely change over time. 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 or otherwise realized.
Legal and Tax Contingencies
We are involved in tax and legal proceedings, claims and litigation arising in the ordinary course of business. We periodically assess our liabilities and contingencies in connection with these matters, based upon the latest information available. For those matters where it is probable that we have incurred a loss and the loss or range of loss can be reasonably estimated, we have recorded reserves in the consolidated financial statements. In other instances, because of the uncertainties related to both the probable outcome and amount or range of loss, we are unable to make a reasonable estimate of a liability, if any. As additional information becomes available, we adjust our assessment and estimates of such liabilities accordingly.
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Cost of Goods Sold
We include in cost of goods sold all manufacturing and sourcing costs and expenses incurred prior to receipt of finished goods at our distribution facilities. These costs principally include product cost, inbound freight charges, purchasing costs, internal transfer costs, as well as insurance, duty, brokers’ fees and consolidators’ fees. Our gross margins may not be directly comparable to those of our competitors, as income statement classifications of certain expenses may vary by company.
Selling, General and Administrative Expenses
We include in SG&A, costs incurred subsequent to the receipt of finished goods at our distribution facilities, such as the cost of warehousing, picking, packing, shipping and handling goods for delivery to customers. In addition, SG&A includes product design costs, selling costs, royalty costs, advertising, promoting and marketing expenses and general and administrative expenses.
Distribution Network Costs, Including Shipping and Handling
Distribution network costs, including shipping and handling, are included as a component of SG&A. Revenues received from customers for shipping and handling are included in net revenue.
Advertising
All costs associated with advertising, promoting and marketing of our products are expensed during the periods when the activities take place. Costs associated with cooperative advertising programs under which we agree to share costs of customers’ advertising and promotion expenditures are expensed when the related revenues are recognized. Advertising, promotion and marketing expenses are included in SG&A.
Seasonality
Although our various product lines are sold on a year-round basis, the demand for specific products or styles may be highly seasonal. For example, the demand for golf and Tommy Bahama products is higher in the spring and summer seasons. Products are sold prior to each of our retail selling seasons, including spring, summer, fall and holiday. 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. The percentage of net sales distribution by quarter for Fiscal 2004 were 22%, 23%, 25% and 30%, respectively, and the net earnings by quarter for Fiscal 2004 were 17%, 17%, 24% and 42%, respectively.
FUTURE LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations is our primary source of liquidity. Our projected capital expenditures for all of Fiscal 2005 are approximately $20 million. We anticipate that cash flows from operations supplemented with our amended U.S. Revolver will be sufficient to fund our future liquidity requirements for Fiscal 2005.
We have no off-balance sheet arrangements.
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FORWARD OUTLOOK
We anticipate Fiscal 2005 sales in the range of $1.285 billion to $1.325 billion and earnings per diluted share in the range of $2.70 to $2.85. For the second quarter of Fiscal 2005, we anticipate sales in the range of $305 million to $315 million and earnings per diluted share in the range of $0.48 to $0.52.
UNITED STATES SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Forward-looking statements reflect our current expectations and are not guarantees of performance. These statements are based on our management’s beliefs and assumptions, which in turn are based on currently available information. Important assumptions relating to these forward looking statements include, among others, assumptions regarding demand for our products, expected pricing levels, raw material costs, the timing and cost of planned capital expenditures, expected outcomes of pending litigation, competitive conditions, general economic conditions and expected synergies in connection with acquisitions and joint ventures, including the acquisition of Ben Sherman. These assumptions could prove inaccurate. Forward-looking statements also involve risks and uncertainties, which could cause actual results to differ materially from those contained in any forward-looking statement. Many of these risks are beyond our ability to control or predict. Such risks include, but are not limited to, all of the risks discussed under “Risk Factors” and the following:
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Other risks or uncertainties may be detailed from time to time in our future Securities and Exchange Commission filings. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. We disclaim any intention, obligation or duty to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
ADDITIONAL INFORMATION
For additional information concerning our operations, cash flows, liquidity and capital resources, this analysis should be read in conjunction with theConsolidated Financial Statements and the Notes to Consolidated Financial Statements contained in our Fiscal 2004 Form 10-K.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
INTEREST RATE RISK
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Interest rate risk is managed through the maintenance of a portfolio of variable and fixed rate debt composed of short and long-term instruments. The objective is to maintain a cost-effective mix that management deems appropriate. We do not engage in hedging activities with respect to such risk.
We finance our capital needs through available cash, operating cash flow, letters of credit and bank revolving credit facilities.
At August 27, 2004, we had variable rate debt of $111.9 million. Our average variable rate borrowings for the three months ended August 27, 2004 were $48.2 million, with an average interest rate of 4.7%. If the three-month average interest rate increased by 10%, our interest expense would have changed by $41,000.
FOREIGN CURRENCY RISK
We receive United States dollars for substantially all of our product sales except Ben Sherman. Sales generated by Ben Sherman’s U.K. operations are denominated in pounds sterling and euros. 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. 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.
In connection with the acquisition of Ben Sherman, we entered into foreign exchange forward contracts to fix the currency exchange rate between the United States dollar and the pound sterling from the agreement date until the closing and funding of the acquisition. The contracts totaled £76 million at an average exchange rate of $1.8118 per £1.00.
Ben Sherman engages in forward exchange contracts for the purchase of finished product from production sources in Asia where the currency denomination of choice is the United States dollar. These contracts are marked to market and are not material.
TRADE POLICY RISK
Under the terms of bilateral agreements between most of the major apparel exporting countries and the United States, most categories of our products are subject to quotas limiting the quantity of such products that may be imported into the United States. Utilization of these quotas is typically controlled at origin by an export license or visa system administered by the exporting country and is monitored and enforced by United States Customs and Border Protection at the time of importation. Since we own or directly control only a small portion of the quota we need, we rely on our suppliers and vendors to secure the visas or licenses required to ship our products. If our suppliers and vendors fail to secure the necessary visas or licenses as agreed with us, our supply chain could be disrupted.
If an exporting country fails to properly administer its quota and issues visas or export licenses in excess of the quantity permitted under the terms of its bilateral agreement with the United States, the goods covered by such export license or visa could be denied entry into the United States. Such a denial could disrupt our supply chain.
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Since the quotas under the bilateral agreements described above are country-specific, the United States has established detailed country of origin criteria that a product must meet to be eligible to use a particular country’s quota. If we, or our vendors or suppliers, fail to comply with these country of origin requirements or fail to be able to document our compliance with such requirements, our products may be denied entry into the United States. Such a denial could disrupt our supply chain.
The 1994 Agreement on Textiles and Clothing among World Trade Organization (“WTO”) countries mandates the elimination of textile and apparel product quotas for WTO countries, including the United States, on January 1, 2005. As a result, there will be changes in the international textile and apparel trade, which may significantly impact our sourcing patterns, could disrupt our supply chain and could put us at a disadvantage to our competitors.
Some of the impact of quota elimination may begin in the latter part of calendar 2004. Historically, exporting countries have been permitted under the terms of their bilateral agreements with the United States to borrow a limited amount of quota from the following year. Since there will be no quota in calendar 2005, none is available for this type of borrowing in calendar 2004. The unavailability of this type of quota borrowing could lead to quota shortages in the latter part of calendar 2004, which could cause disruption in our supply chain.
In addition, notwithstanding quota elimination, under the terms of China’s WTO accession agreement, the United States and other WTO members may re-impose quotas on specific categories of products in the event it is determined that imports from China have surged and are threatening to create a market disruption for such categories of products (so called “safeguard quota”). China is a major source of production for us, and the re-imposition of safeguard quotas on China following the elimination of the existing quota regime on January 1, 2005 could cause disruption in our supply chain.
Furthermore, under long-standing statutory authority applicable to imported goods in general, the United States may unilaterally impose additional duties: (i) when imported merchandise is sold at less than fair value and causes material injury, or threatens to cause material injury, to the domestic industry producing a comparable product (generally known as “anti-dumping” duties); or (ii) when foreign producers receive certain types of governmental subsidies, and when the importation of their subsidized goods causes material injury, or threatens to cause material injury, to the domestic industry producing a comparable product (generally known as “countervailing” duties). The imposition of anti-dumping or countervailing duties on products we import would increase the cost of those products to us. We may not be able to pass on any such cost increase to our customers. There are numerous free trade agreements pending, including the United States-Central American Free Trade Agreement that, if adopted, could put us as a disadvantage to some of our competitors.
ITEM 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure that information that we are required to disclose in our Securities Exchange Act of 1934 (the “Securities Exchange Act”) reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
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Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective.
There have not been any changes in our internal controls over financial reporting (as such term is defined in Rule 13a-15 and 15d-15 under the Securities Exchange Act) during the fiscal quarter ended August 27, 2004 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
(b) Reports on Form 8-K.
We filed a current report on Form 8-K on July 28, 2004 furnishing our year end earnings release.
We filed a current report on Form 8-K on August 2, 2004 furnishing our press release regarding the completion of our Ben Sherman acquisition.
We filed a current report on Form 8-K on August 13, 2004 furnishing certain financial information relating to Ben Sherman prepared in accordance with United Kingdom GAAP.
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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.
Exhibit 10.1 Oxford Industries, Inc. Long Term Incentive Plan.Exhibit 10.2 Oxford Industries, Inc Employee Stock Purchase Plan.Exhibit 31.1 Section 302 Certification by Chief Executive Officer.Exhibit 31.2 Section 302 Certification by Chief Financial Officer.Exhibit 32.1 Section 906 Certification by the Chief Executive Officer.Exhibit 32.2 Section 906 Certification by the Chief Financial Officer.
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