SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
For the quarterly period ended NOVEMBER 26, 2004
OR
For the transition period from to
Commission File Number 1-4365
OXFORD INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
(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, including 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 by check mark whether the registrant is an accelerated filer as defined in rule 12b-2 of the Exchange Act. 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.
Title of each class
Number of shares outstanding
as of January 3, 2005
Common Stock, $1 par value
Table of contents
INDEX TO FORM 10-Q
For quarter ended November 26, 2004
PART I.FINANCIAL INFORMATION
Item 1.Condensed Consolidated Financial Statements
Unaudited Condensed Consolidated Statements of Earnings
Unaudited Condensed Consolidated Balance Sheets
Unaudited Condensed Consolidated Statements of Cash Flows
Unaudited Notes to Condensed Consolidated Financial Statements
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.Quantitative and Qualitative Disclosures About Market Risk
Item 4.Controls and Procedures
PART II.OTHER INFORMATION
Item 1.Legal Proceedings
Item 2.Unregistered Sale of Equity Securities and Use of Proceeds
Item 3.Defaults Upon Senior Securities
Item 4.Submission of Matters to a Vote of Security Holders
Item 5.Other Information
Item 6.Exhibits
Signatures
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
Net Sales
Cost of goods sold
Gross Profit
Selling, general and administrative
Amortization of intangibles
Royalties and other operating income
Operating Income
Interest expense, net
Earnings Before Income Taxes
Income taxes
Net Earnings
Basic Earnings Per Share
Diluted Earnings Per Share
Basic Weighted Average Shares Outstanding
Diluted Weighted Average Shares Outstanding
Dividends Declared Per Share
See notes to consolidated financial statements.
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CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED EXCEPT FOR MAY 28, 2004)
Assets
Current Assets:
Cash and cash equivalents
Receivables
Inventories
Prepaid expenses
Total current assets
Property, plant and equipment, net
Goodwill
Intangibles, net
Other noncurrent assets, net
Total Assets
Liabilities and Shareholders’ Equity
Current Liabilities:
Trade accounts payable
Accrued compensation
Additional acquisition cost payable
Other accrued expenses
Dividends payable
Income taxes payable
Short-term debt
Total current liabilities
Long-term debt, less current maturities
Other noncurrent liabilities
Deferred income taxes
Shareholders’ Equity:
Common stock
Additional paid-in capital
Retained earnings
Total Shareholders’ Equity
Total Liabilities and Shareholders’ Equity
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CONDENSED 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
Amortization of intangible assets
Amortization of deferred financing costs and bond discount
Gain on the sale of assets
Equity income
Changes in working capital:
Accrued expenses and other current liabilities
Stock options income tax benefit
Other noncurrent assets
Net cash provided by operating activities
Cash Flows from Investing Activities
Acquisition, net of cash acquired
Decrease in restricted cash
Investment in deferred compensation plan
Purchases of property, plant and equipment
Proceeds from sale of property, plant and equipment
Net cash used in investing activities
Cash Flows from Financing Activities
Payments of short-term debt
Proceeds from (payments of) long-term debt
Payments of debt issuance costs
Proceeds from issuance of common shares
Dividends paid on common shares
Net cash provided by (used in) financing activities
Net change in cash and cash equivalents
Effect of foreign currency translation on cash and cash equivalents
Cash and cash equivalents at the beginning of period
Cash and cash equivalents at the end of period
Supplemental schedule of noncash investing and financing activities:
As of November 26, 2004, approximately $6.9 million of the Ben Sherman acquisition has been financed through the Seller Notes, as discussed in Note 5.
5
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTER ENDED NOVEMBER 26, 2004
Our accounting policies applied during the interim periods presented are consistent with the accounting policies as described in our Fiscal 2004 Form 10-K.
Certain amounts in the prior periods’ financial statements have been reclassified to conform to the current year’s presentation.
Finished goods
Work in process
Fabric, trim and supplies
Total
Trademarks
License agreements
Customer relationships
Covenant not to compete
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed at the date of acquisition for Ben Sherman. The purchase price allocation will be finalized upon finalization of certain preliminary estimates.
Total purchase price
Cash
Accounts receivable
Other current assets
Intangibles
Property, plant and equipment
Current liabilities
Deferred taxes
Fair value of net assets acquired
The components of the Intangibles listed in the above table are as follows:
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On June 13, 2003, we acquired all of the capital stock of Viewpoint International, Inc., which we operate as the Tommy Bahama Group. The purchase price for the Tommy Bahama Group could be up to $325 million, consisting of $240 million in cash at closing, $10 million in our common stock (776,400 shares), approximately $3.4 million in transaction costs, and up to $75 million in contingent payments, subject to the Tommy Bahama Group achieving 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.
For each of the four years following the acquisition, the selling stockholders of the Tommy Bahama Group will receive an annual basic contingent payment if the Tommy Bahama Group’s earnings are greater than 90% of the applicable target and will receive the maximum annual basic contingent payment of $12.5 million if the Tommy Bahama Group’s earnings are 100% or greater than the applicable target. If the Tommy Bahama Group’s earnings are between 90% and 100% of the applicable target, 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 the Tommy Bahama Group. 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 $12.88 per share.
All earnout payments to be paid to selling stockholders will be treated as additional purchase price and recorded as goodwill. Approximately 5% of the total value of all consideration that becomes due and payable under the earnout agreement has been designated to be paid toward an Employee Cash Bonus Plan to be distributed to employees of the Tommy Bahama Group under the terms of the plan. The earnout payments designated toward the Employee Cash Bonus Plan are charged to selling, general and administrative expense.
Additionally, 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.
The Year 1 contingent payment was earned in full and was paid during the first quarter of fiscal 2005 in the form of approximately $6.2 million in cash and the remainder in our common stock valued at $12.88 per share for total consideration of approximately $24.6 million. Of this amount approximately $23.4 million was recognized as goodwill with the remainder recognized as selling, general and administrative expense.
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OXFORD INDUSTRIES, INC
The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition for the Tommy Bahama Group.
Other assets
Noncurrent liabilities
These acquisitions helped us achieve one of our key strategic objectives of owning major lifestyle brands. The acquisitions provide strategic benefits through growth opportunities and further diversification of our business over distribution channels, price points, product categories and target customers. The results of operations of Ben Sherman and the Tommy Bahama Group are included in our consolidated statements of earnings from the respective dates of the acquisition.
Pro-Forma financial information:
The pro forma financial information presented below gives effect to the Ben Sherman acquisition as if it had occurred as of the beginning of fiscal 2005 and fiscal 2004 and the Tommy Bahama acquisition as if it had occurred as of the beginning of fiscal 2004. The information presented below is for illustrative purposes only and is not indicative of results that would have been achieved if the acquisitions had occurred as of the beginning of fiscal 2005 and 2004 or results which may be achieved in the future.
Net sales
Net earnings per share
Basic
Diluted
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$280 million U.S. Secured Revolving Credit Facility (“U.S. Revolver”), which accrues interest and letter of credit fees based upon a pricing grid which is tied to certain debt ratios (4.27% at November 26, 2004), requires interest payments monthly with principal due at maturity (July 2009), and is collateralized by substantially all the assets of the Company and Guarantor Subsidiaries (1)
12 million Pounds Sterling Senior Secured Revolving Credit Facility (“U.K. Revolver”), which accrues interest at the lender’s prime rate plus 1.2%, requires interest payments monthly with principal payable on demand, and is collateralized by substantially all the United Kingdom assets of Ben Sherman (2)
$200 million Senior Unsecured Notes (“Senior Unsecured Notes”), which accrue interest at 8.875% and require interest payments semiannually with principal due at maturity (June 2011) (3)
Unsecured Seller Notes (“Seller Notes”), which accrue interest at LIBOR plus 1.2% (6.55% at November 26, 2004), and require interest payments quarterly with principal payable on demand after January 30, 2005 (2)
Other debt, including capital lease obligations with varying terms and conditions, collateralized by the respective assets
Total Debt
Short-term Debt
Total Long-term Debt
The U.S. Revolver, the U.K. Revolver and the Senior Unsecured Notes each include certain debt covenant restrictions that require us or our subsidiaries to maintain certain financial ratios that are customary for similar facilities. On and as of November 26, 2004 we were compliant with all debt covenant restrictions related to all debt agreements.
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Net earnings as reported
Deduct: Employee compensation expense, net of related tax effects
Pro forma net earnings
Basic earnings per share as reported
Pro forma basic earnings per share
Diluted earnings per share as reported
Pro forma diluted earnings per share
Nov. 26,
2004
Nov. 28,
2003
Basic and diluted earnings available to shareholders (numerator):
Shares (denominator):
Weighted average shares outstanding
Dilutive securities:
Options
Total assuming conversion
Per share amounts:
Basic earnings per common share
Diluted earnings per common share
During the first six months and the second quarter of fiscal 2005 and fiscal 2004, all options to purchase shares of our common stock were included in the computation of diluted earnings per share.
We effected a two-for-one share split in the form of a 100% stock dividend, payable December 1, 2003, to shareholders of record on November 17, 2003. All share and per share data appearing in the consolidated financial statements and related notes reflect this stock split.
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Accumulated other comprehensive income of $7.0 million and $6.0 million for the quarter and six months ended November 26, 2004 is comprised of the effects of foreign currency translation gains (loss), net of income taxes of $2.1 million and $1.8 million respectively which is included as a component of retained earnings in the condensed consolidated balance sheet. Comprehensive income for the quarter and six months ended November 26, 2004 was $16.1 million and $21.3 million, respectively. Net earnings and comprehensive income were equivalent for all other periods.
Menswear Group
Womenswear Group
Tommy Bahama Group
Corporate and Other
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Depreciation and amortization
Earnings before taxes
May 28,
13
In December 2004, the FASB issued FASB Statement No. 123 (Revised 2004) “Share-Based Payment: an Amendment of FASB Statements No. 123 and 95” (“FAS 123R”). FAS 123R is applicable for all interim and fiscal periods beginning after June 15, 2005. Therefore, we will adopt it during fiscal 2006. FAS 123R sets accounting requirements for “share-based” compensation to employees, requires companies to recognize in the income statement the grant-date fair value of stock options and other equity-based compensation issued to employees and disallows the use of the intrinsic value method of accounting for stock compensation. We are currently evaluating the impact that this statement will have on our results of operations.
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Oxford Industries, Inc.
Unaudited Condensed Consolidated Balance Sheet
November 26, 2004
Other assets net
Short-terrm debt
Long term debt, less current maturities
Total Shareholders’/invested equity
15
Oxford Industries, Inc
Condensed Consolidated Balance Sheet
May 28, 2004
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November 28, 2003
Other assets, net
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Unaudited Condensed Consolidated Statement of Earnings
Quarter Ended November 26, 2004
Royalties and other income
Interest expense (income), net
Income from equity investment
Quarter Ended November 28, 2003
Interest (income) expense, net
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Six Months Ended November 26, 2004
Six Months Ended November 28, 2003
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Unaudited Condensed Consolidated Statement of Cash Flow
Adjustments to reconcile net earnings to net cash (used in) provided by operating activities:
Loss (gain) on sale of assets
Changes in working capital
Income for equity investment in subsidiaries
Net cash (used in) provided by operating activities
Acquisitions net of cash acquired
Investment in subsidiaries
Investment in deferred comp plan
Net cash (used in) provided by investing activities
Proceeds (payments) of long-term debt
Equity contribution received
(Payments) proceeds of loan to subsidiaries
Proceeds from issuance of common stock
Debt issue costs
Change in intercompany payable
Dividends on common stock
20
Acquisitions
Principal payments of long-term debt
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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 “Unaudited Condensed Consolidated Financial Statements” and the “Unaudited Notes to Condensed Consolidated Financial Statements” contained in this report and the “Consolidated Financial Statements,” “Notes to Consolidated Financial Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in our fiscal 2004 Form 10-K.
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 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 primarily through our wholesale customers and 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 tables set forth: (1) the line items in the “Unaudited Condensed Consolidated Statements of Earnings,” the dollar amounts of each for the periods indicated and the percentage change relative to the comparable period of the prior year, and (2) as a percentage of net sales. We have calculated all percentages based on actual data, but percentage columns may not add due to rounding. Individual line items of our “Unaudited Condensed Consolidated Statements of Earnings” may not be directly comparable to those of our competitors, as income statement classification of certain expenses may vary by company. The results of operations of Ben Sherman and the Tommy Bahama Group are included in our consolidated statements of earnings from the respective dates of the acquisition.
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Gross profit
Operating income
Earnings before income taxes
ACQUISITION
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, Ben Sherman 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 4 of “Unaudited Notes to Condensed Consolidated Financial Statements.” For further discussion of financing arrangements, see the section below titled “Financing Arrangements” and Note 5 of “Unaudited Notes to Condensed Consolidated Financial Statements.”
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TOTAL COMPANY
Second Quarter
Net sales increased 23.2% from $253.9 million in the second quarter of fiscal 2004 to $312.9 million in the second quarter of fiscal 2005. The increase was primarily due to:
Cost of goods sold for the second quarter of fiscal 2005 was $212.8 million or 68.0% of net sales, compared to $177.0 million or 69.7% of net sales in the second quarter of fiscal 2004. The decline in cost of goods sold, as a percentage of net sales, was primarily due to:
Selling, general and administrative expenses (“SG&A”) increased from $59.2 million or 23.3% of net sales in the second quarter of fiscal 2004 to $80.2 million or 25.6% of net sales in the second quarter of fiscal 2005. The increase in SG&A was primarily due to:
Amortization of intangibles increased from $1.7 million in the second quarter of fiscal 2004 to $2.4 million in the second quarter of fiscal 2005. The increase was primarily due to $0.9 million of amortization of intangibles acquired as part of the Ben Sherman acquisition.
Royalties and other operating income increased from $1.1 million in the second quarter of fiscal 2004 to $3.3 million in the second quarter of fiscal 2005 primarily due to:
Interest expense, net increased from $6.1 million in the second quarter of fiscal 2004 to $6.9 million in the second quarter of fiscal 2005. The increase in interest expense was primarily due to the interest on debt incurred to finance the acquisition of Ben Sherman.
Income taxes. The effective tax rate was approximately 37.5% in the second quarter of fiscal 2004 and 35.0% in the second quarter of fiscal 2005. Variations in the effective tax rate were primarily attributable to:
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First Half
Net sales increased 16.5% from $496.0 million in the first half of fiscal 2004 to $577.7 million in the first half of fiscal 2005. The increase was primarily due to:
Cost of goods sold for the first half of fiscal 2005 was $392.6 million or 68.0% of net sales, compared to $348.3 million or 70.2% of net sales in the first half of fiscal 2004. The decline in cost of goods sold, as a percentage of net sales, was primarily due to the reasons stated above for the second quarter.
SG&A increased from $112.9 million or 22.8% of net sales in the first half of fiscal 2004 to $147.7 million or 25.6% of net sales in the first half of fiscal 2005. The increase in SG&A was primarily due to the reasons stated above for the second quarter.
Amortization of intangibles increased from $3.4 million in the first half of fiscal 2004 to $4.1 million in the first half of fiscal 2005 primarily as a result of the amortization of intangibles acquired as part of the Ben Sherman acquisition.
Royalties and other operating income increased from $2.3 million in the first half of fiscal 2004 to $5.1 million in the first half of fiscal 2005 primarily due to the reasons stated above for the second quarter.
Interest expense, net increased from $11.8 million in the first half of fiscal 2004 to $14.8 million in the first half of fiscal 2005. The increase in interest expense was due to:
Income taxes. The effective tax rate was approximately 37.8% in the first half of fiscal 2004 and 35.0% in the first half of fiscal 2005. Variations in the effective tax rate were primarily due to the reasons stated above for the second quarter.
OUR SEGMENTS
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
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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:
Total Net Sales
Total Operating Income
SEGMENT RESULTS
The Menswear Group reported a 57.0% increase in net sales from $115.3 million in the second quarter of fiscal 2004 to $181.1 million in the second quarter of fiscal 2005. The increase was primarily due to:
The Menswear Group reported a 76.6% increase in operating income from $10.2 million in the second quarter of fiscal 2004 to $18.0 million in the second quarter of fiscal 2005. The increase in operating income was primarily due to the higher gross margins in our Ben Sherman business.
The Menswear Group reported a 29.7% increase in net sales from $231.1 million in the first half of fiscal 2004 to $299.8 million in the first half of fiscal 2005. The change was primarily due to:
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The Menswear Group reported a 36.9% increase in operating income from $19.7 million in the first half of fiscal 2004 to $27.0 million in the first half of fiscal 2005. The increase in operating income was primarily due to the higher gross margins in our Ben Sherman business.
The Womenswear Group reported a 27.1% decline in net sales from $61.8 million in the second quarter of fiscal 2004 to $45.1 million in the second quarter of fiscal 2005. The change was primarily due to the unit sales decline of 28.7%, primarily in the discount distribution channel, notably with Wal-Mart which has narrowed its womenswear assortment, reduced rack space devoted to women’s apparel and placed greater emphasis on direct sourcing. The decline in unit sales was partially offset by an increase of 1.3% in the average selling price per unit, primarily due to product mix within the discount distribution channel.
The Womenswear Group reported an 89.0% decline in operating profit from $1.9 million in the second quarter of fiscal 2004 to $0.2 million in the second quarter of fiscal 2005. The change was primarily due to the significant decrease in sales, which was slightly offset by operating expense reductions.
The Womenswear Group reported a 21.8% decline in net sales from $124.8 million in the first half of fiscal 2004 to $97.6 million in the first half of fiscal 2005. The change was primarily due to the unit sales decline of 25.0% due to the same reasons as described above for the second quarter. The decline in unit sales was partially offset by an increase of 2.6% in the average selling price per unit. The reasons for the increase in the average selling price per unit were the same as described above for the second quarter.
The Womenswear Group reported a 114.8% decline in operating income from a profit of $5.1 million in the first half of fiscal 2004 to a loss of $0.8 million in the first half of fiscal 2005. The decrease was primarily due to:
The Tommy Bahama Group reported a 13.2% increase in net sales from $76.4 million in the second quarter of fiscal 2004 to $86.5 million in the second quarter of fiscal 2005. The increase was primarily due to:
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The Tommy Bahama Group reported a 21.9% decline in operating income from $7.6 million in the second quarter of fiscal 2004 to $5.9 million in the second quarter of fiscal 2005. The decline in operating income was primarily due to:
The Tommy Bahama Group reported a 28.8% increase in net sales from $139.7 million in the first half of fiscal 2004 to $180.0 million in the first half of fiscal 2005. The increase was primarily due to:
The Tommy Bahama Group reported a 22.8% increase in operating income from $14.5 million in the first half of fiscal 2004 to $17.8 million in the second half of fiscal 2005. The benefit of the increase in sales resulting from owning Tommy Bahama for the entire period noted above was partially offset by the increase in operating expenses described above for the second quarter.
The Corporate and Other operating loss increased from $2.6 million in the second quarter of fiscal 2004 to $3.3 million in the second quarter of fiscal 2005. The increase in the operating loss was primarily due to increased employment costs.
The Corporate and Other operating loss increased from $5.5 million in the first half of fiscal 2004 to $5.8 million in the first half of fiscal 2005. The increase in the operating loss was primarily due to increased employment costs partially offset by LIFO inventory accounting.
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LIQUIDITY AND CAPITAL RESOURCES
Financing Arrangements
U.S. Revolver
In connection with the Ben Sherman acquisition on July 30, 2004, 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. 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 the covenants as of November 26, 2004. At November 26, 2004, gross availability under the U.S. Revolver totaled $280.0 million, against which approximately $129.8 million in letters of credit and $116.7 million in direct borrowings were outstanding.
On November 19, 2004, we amended the agreements governing our lockbox activities associated with the U.S. Revolver. In accordance with accounting principles generally accepted in the United States, the terms of the new agreements resulted in the reclassification of all debt outstanding under our $280 million U.S. Revolver from a current liability to a non-current obligation on our balance sheet as of November 26, 2004. As a result of these agreements and the resulting reclassification, certain of our financial ratios, including but not limited to the current ratio, in current and future periods may not necessarily be comparable to prior periods.
U.K. Revolver
On July 30, 2004, Ben Sherman 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. Ben Sherman is in compliance with these covenants as of November 26, 2004.
Senior Unsecured Notes
On May 16, 2003, we completed a $200 million private placement of our Senior Unsecured Notes to finance the acquisition of the Tommy Bahama Group. 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 of our existing and future direct and indirect domestic wholly owned restricted subsidiaries. Among other restrictions, the 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 certain financial ratios and covenants. We are in compliance with these covenants as of November 26, 2004.
Seller Notes
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 approximately $6.9 million and are payable on demand beginning six months after July 30, 2004. The Seller Notes bear interest at the annual rate of LIBOR plus 1.2% payable on the last day of September, December, March and June until the principal has been paid in full.
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Operating Activities
During the first half of fiscal 2005, we generated cash from operating activities of $14.7 million primarily from net earnings and non-cash charges offset by a net increase in working capital after giving effect to the acquisition of Ben Sherman.
During the first half of fiscal 2004, we generated cash from operating activities of $13.3 million primarily from net earnings and non-cash charges offset by a net increase in working capital after giving effect to the acquisition of Tommy Bahama.
Investing Activities
During the first half of fiscal 2005, investing activities used $146.5 million in cash, principally for the acquisition of Ben Sherman as well as payments related to the Tommy Bahama earn-out agreement. Capital expenditures of $6.5 million were primarily related to new Tommy Bahama retail stores as well as leasehold improvements and office equipment associated with the Tommy Bahama corporate offices.
During the first half of fiscal 2004, investing activities used $26.0 million in cash, principally for the acquisition of the Tommy Bahama Group net of the reduction in restricted proceeds from the sale of the Senior Unsecured Notes. Capital expenditures of $7.3 million were primarily related to new Tommy Bahama retail stores, computer equipment and software.
Financing Activities
During the first half of fiscal 2005, financing activities generated $103.2 million in cash. This represents the proceeds from increased U.S. Revolver debt and proceeds from the issuance of common stock upon the exercise of employee stock options, partially offset by payments on the U.K. Revolver during the period, deferred financing paid to amend our U.S. Revolver and dividends on our common shares.
During the first half of fiscal 2004, financing activities used $5.9 million in cash. This represents payments on debt issuance costs related to the issuance of our Senior Unsecured Notes and dividends partially offset by proceeds from the issuance of common shares upon the exercise of employee stock options.
We have no off-balance sheet financing arrangements.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of operations are based upon our Unaudited Condensed 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 judgments 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
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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 the significant estimates, assumptions and judgments that underlie their critical accounting policies or methods used in the preparation of financial statements. See the “Summary of Critical Accounting Policies” contained in our fiscal 2004 Form 10-K. There have been no significant changes in our critical accounting policies as disclosed in our fiscal 2004 Form 10-K.
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. Because 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 percentage of net earnings by quarter for fiscal 2004 were 17%, 17%, 24% and 42%, respectively.
FUTURE LIQUIDITY, CAPITAL RESOURCES AND RESULTS OF OPERATIONS
Cash flow from operations is our primary source of liquidity. Our projected capital expenditures for all of fiscal 2005 are approximately $18 million. We anticipate that cash flows from operations supplemented with borrowings as necessary under our amended U.S. Revolver and U.K. Revolver will be sufficient to fund our liquidity requirements for the remainder of fiscal 2005.
We anticipate Fiscal 2005 sales in the range of $1.285 billion to $1.310 billion and earnings per diluted share in the range of $2.60 to $2.75. For the third quarter of Fiscal 2005, we anticipate sales in the range of $350 million to $365 million and earnings per diluted share in the range of $0.65 to $0.71. For the fourth quarter of Fiscal 2005, we anticipate sales in the range of $355 million to $370 million and earnings per diluted share in the range of $1.06 to $1.15.
The statements in this section are forward-looking statements subject to the risks and uncertainties described below in “Cautionary Statements Regarding Forward-Looking Statements.”
CAUTIONARY STATEMENTS REGARDING FORWARD LOOKING STATEMENTS
Our Securities and Exchange Commission filings and public announcements often include forward-looking statements about future events. 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. 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. These beliefs and assumptions could prove inaccurate. Forward-looking statements involve risks and uncertainties. Should one or more of
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these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. Many of these risks and uncertainties are beyond our ability to control or predict. Such risks and uncertainties include, but are not limited to, all of the risks discussed under “Risk Factors” in our fiscal 2004 Form 10-K, including the following:
Other risks or uncertainties may be detailed from time to time in our future Securities and Exchange Commission filings.
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, except as required by law.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
INTEREST RATE RISK
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 generally do not engage in hedging activities with respect to such risk and do not enter into such transactions on a speculative basis.
We finance our capital needs through available cash, operating cash flow, letters of credit and bank revolving credit facilities.
At November 26, 2004, we had variable rate debt of $123.6 million. Our average variable rate borrowings for the six months ended November 26, 2004 were $78.5 million, with an average interest rate of 4.4%. If the six-month average interest rate increased by 10%, our interest expense would have changed by $163,711.
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.
Ben Sherman engages in forward exchange contracts for the purchase of finished products 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. The requirement for visas or licenses was eliminated effective for goods exported from their country of origin on or after January 1, 2005. Thus, the requirement only applies to goods exported on or before December 31, 2004, some of which might still be in transit.
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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, entry of the goods covered by such export license or visa could be delayed. The United States has announced that any goods exported during 2004 in excess of the applicable quota limit will not be permitted entry into the United States until February 1, 2005 at which time a “staged entry” process will begin. The staged entry process could, depending on the extent of any overshipment, take several months to complete. Such a delay could disrupt our supply chain.
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 mandated the elimination of textile and apparel product quotas for WTO countries, including the United States, on January 1, 2005. As a result, the international textile and apparel trade is undergoing a significant realignment which is changing our sourcing patterns, could disrupt our supply chain and could put us at a disadvantage to our competitors.
The elimination of quota could impact some shipments during the first part of calendar 2005. 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 is no quota in calendar 2005, none was available for this type of borrowing in calendar 2004. The unavailability of this type of quota borrowing may have created quota shortages in the latter part of calendar 2004, which could have caused exporting countries to ship goods in excess of their 2004 limit. Any such overshipment would be subject to the staged entry process described above 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 or may surge 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.
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ITEM 4. CONTROLS AND PROCEDURES
The Company’s Principal Executive Officer and Principal 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, our Principal Executive Officer and the Principal Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in our 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 Principal Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
There have not been any changes in the our internal controls over financial reporting (as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act) during the fiscal quarter ended November 26, 2004 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the ordinary course of business, we may become subject to litigation or claims. There are no material pending legal proceedings, proceedings known to be contemplated by governmental authorities or changes in items previously disclosed involving us during the quarter ended November 26, 2004, requiring disclosure under Item 103 of Regulation S-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company’s Annual Meeting of Shareholders held on October 4, 2004, the shareholders:
For
Withheld:
For:
Against:
Abstention:
Broker Non-Vote:
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS
(a) Exhibits.
31.1 Section 302 Certification by Principal Executive Officer.
31.2 Section 302 Certification by Principal Financial Officer.
32.1 Section 906 Certification by Principal Executive Officer.
32.2 Section 906 Certification by Principal Financial Officer.
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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.
Dated January 5, 2005
/s/ Thomas Caldecot Chubb III
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