ITEM 1. BUSINESS
(a) General Development of Business
OshKosh B'Gosh, Inc. (together with its subsidiaries, the "Company") was founded in 1895 and was incorporated in the state of Delaware in 1929. The Company designs, manufactures, sources and sells apparel for the children's wear, youth wear, and men's wear markets. While its heritage is in the men's workwear market, the Company is currently best known for its line of high quality children's wear. The children's wear and youth wear business represented approximately 92% of consolidated Company revenues for 1995. The success of the children's wear business can be attributed to the Company's core themes: quality, durability, style, trust and Americana.
These themes have propelled the Company to the position of market leader in the branded children's wear industry. The Company also leverages the economic value of the OshKosh B'Gosh name via both domestic and international licensing agreements.
The Company's long-term strategy is to provide high quality, high value clothing for the entire family. Toward this end the Company continues to expand its business lines and avenues for marketing its products. In 1990, the Company acquired Essex Outfitters, Inc. ("Essex"), a vertically integrated children's and youth wear retailer marketed under the Boston Trader label through a licensing agreement with Boston Trader Ltd. In 1994, the Company merged the operations of Essex into OshKosh B'Gosh, Inc. and created a new brand name, Genuine Kids , for the line of children's and youth wear formerly marketed under the Boston Trader label. The Genuine Kids line of apparel is sourced from third party manufacturers, primarily offshore, and sold primarily through a chain of 92 domestic retail stores.
OshKosh B'Gosh International Sales, Inc. was created in 1985 for the sale of OshKosh B'Gosh products to foreign distributors. In 1990, the Company formed OshKosh B'Gosh Europe, S.A. in conjunction with a joint venture with Poron Diffusion, S.A. to provide further access to European markets.
In 1992 the Company acquired Poron's 49% interest in OshKosh B'Gosh Europe, S.A. During 1993 OshKosh B'Gosh made moves to strategically position itself for international expansion. OshKosh B'Gosh/Asia Pacific Ltd. was created in Hong Kong to oversee licensees and distributors in the Pacific Rim, to assist international licensees with the sourcing of product, and to expand the Company's presence in that region. OshKosh B'Gosh U.K. Ltd. and OshKosh B'Gosh Deutschland GmbH, incorporated in the United Kingdom and Germany respectively, were established to increase sales emphasis in those countries.
The Company's chain of 80 domestic OshKosh B'Gosh factory outlet stores sells irregular and first quality OshKosh B'Gosh merchandise throughout the United States. In 1994, the
Company opened an OshKosh B'Gosh showcase store in New York City bringing total domestic stores to 81. In addition, Oshkosh B'Gosh Europe opened showcase stores in London and Paris during 1994. The showcase stores are designed to reinforce awareness and demand for OshKosh B'Gosh as a global brand. In 1993, the Company distributed its first children's wear mail order catalog. Due to low sales volume the decision was made to discontinue the catalog sales as of December 31, 1995.
The Company has been expanding its utilization of off- shore sourcing as a cost-effective means to produce its products and to this end leased a production facility in Honduras in 1990 through its wholly owned subsidiary Manufacturera International Apparel S.A. As a part of the Company's ongoing review of its internal manufacturing capacity, operational effectiveness, and alternative sourcing opportunities, during 1995 the Company decided to close two of its operating facilities and downsize an operating facility.
For the last nine years the Company has licensed its name for use on footwear. In 1995, the Company began sourcing footwear itself and distributed its first footwear line in the fall of 1995.
(b) Financial Information About Industry Segments
The Company is engaged in only one line of business, namely, the apparel industry.
(c) Narrative Description of Business
Products
The Company designs, manufactures, sources and markets a broad range of children's clothing as well as lines of youth wear and men's casual and work wear clothing under the OshKosh, OshKosh B'Gosh, Baby B'Gosh , Genuine Kids or OshKosh Men's Wear labels. The products are distributed primarily through better quality department and specialty stores, 173 Company owned domestic stores, direct mail catalogs and foreign retailers. The children's wear and youth wear business, which is the largest segment of the business, accounted for approximately 92% of 1995 sales compared to approximately 94% of such sales in both 1994 and 1993.
The children's wear and youth wear business is targeted to reach the middle to upper middle segment of the sportswear market. Children's wear is in size ranges from newborn/infant to girls 6X and boys 7. Youth wear is in size ranges girls 7 to 16 and boys 8 to 16.
The Company's children's wear and youth wear business includes a broad range of product categories organized primarily in a collection format whereby the products in that collection share a primary design theme which is carried out through fabric design, screenprint, embroidery, and trim applications. The Company also offers basic denim products
with multiple wash treatments. The product offerings for each season will typically consist of a variety of clothing items including bib overalls, pants, jeans, shorts, and shortalls (overalls with short pant legs), shirts, blouses and knit tops, skirts, jumpers, sweaters, dresses, playwear and fleece.
The men's wear line is the original business that started the Company in 1895. The current line comprises the traditional bib overalls, several styles of waistband-work, carpenter, and painters-pants, five pocket jeans, work shirts and flannel shirts as well as coats and jackets. The line is designed with a full array of sizes up to and including size 60 inch waists and 5x size shirts.
Most products are designed by an in-house staff. Product design requires long lead times, with products generally being designed a year in advance of the time they actually reach the retail market. In general, the Company's products are traditional in nature and not intended to be "designer" items.
In designing new products and styles, the Company attempts to incorporate current trends and consumer preferences in its traditional product offerings.
In selecting fabrics and prints for its products, the Company seeks, where possible, to obtain exclusive rights to the fabric design from its suppliers in order to provide the Company with some protection from imitation by competitors for a limited period of time.
Raw Materials, Manufacturing, and Sourcing
All raw materials used in the manufacture of Company products are purchased from unaffiliated suppliers. The Company procures and purchases its raw materials directly for its owned manufacturing facilities and may also procure and retain ownership of fabric relating to garments cut and assembled by contract manufacturers. In other circumstances, fabric is procured by the contract manufacturer directly but in accordance with the Company's specifications. In 1995, approximately 74% of the Company's direct expenditures for raw materials (fabric) were from its five largest suppliers, with the largest such supplier accounting for approximately 24% of total raw material expenditures. Fabric and various non- fabric items, such as thread, zippers, rivets, buckles and snaps are purchased from a variety of independent suppliers. The fabric and accessory market in which OshKosh B'Gosh purchases its raw materials is composed of a substantial number of suppliers with similar products and capabilities, and is characterized by a high degree of competition. As is customary in its industry, the Company has no long-term contracts with its suppliers. To date, the Company has experienced little difficulty in satisfying its requirements for raw materials, considers its sources of supply to be adequate, and believes that it would be able to obtain sufficient raw materials should any one of its product suppliers become unavailable.
Production administration is primarily coordinated from the Company's headquarters facility in Oshkosh with most production taking place in its one Wisconsin, six Tennessee, and four Kentucky plants. Overseas labor is also accessed through a leased sewing plant in Honduras, where cut apparel pieces are received from the United States and are reimported by OshKosh B'Gosh as finished goods. In addition, product is produced by contractors in 16 countries and imported into the United States.
The majority of the product engineering and sample making, allocation of production among plants and independent suppliers, material purchases and invoice payments is done through the Company's Oshkosh headquarters. All designs and specifications utilized by independent manufacturers are provided by the Company. While no long-term, formal arrangements exist with these manufacturers, the Company considers these relationships to be satisfactory. The Company believes it could obtain adequate alternative production capacity if any of its independent manufacturers become unavailable.
Because higher quality apparel manufacturing is generally labor intensive (sewing, pressing, finishing and quality control), the Company has continually sought to upgrade its manufacturing and distribution facilities. Economies are therefore realized by technical advances in areas like computer-assisted design, computer-controlled fabric cutting, computer evaluation and matching of fabric colors, automated sewing processes, and computer-assisted inventory control and shipping. In order to realize economies of operation within the domestic production facilities, cutting operations are located in two of the Company's eleven plants, with all product washing, pressing and finishing done in one facility in Tennessee and all screenprint and embroidery done in one facility in Kentucky. Quality control inspections of both semi-finished and finished products are required at each plant, including those of independent manufacturers, to assure compliance.
Customer orders for fashion products are booked from three to six months in advance of shipping. Because most Company production of styled products is scheduled to fill orders already booked, the Company believes that it is better able to plan its production and delivery schedules than would be the case if production were in advance of actual orders. In order to secure necessary fabrics on a timely basis and to obtain manufacturing capacity from independent suppliers, the Company must make substantial advance commitments, sometimes as much as five to seven months prior to receipt of customer orders. Inventory levels therefore depend on Company judgment of market demand.
Trademarks
The Company utilizes the OshKosh , OshKosh B'Gosh , Baby B'Gosh or Genuine Kids trademarks on most of its products, either alone or in conjunction with a white triangular
background. In addition, "The Genuine Article " is embroidered on the small OshKosh B'Gosh patch to signify apparel that is classic in design and all-but-indestructible in quality construction. The Company currently uses approximately 24 registered and 22 unregistered trademarks in the United States and has registered trademarks in 84 other countries. These trademarks and universal awareness of the OshKosh B'Gosh name are significant in marketing the products.
Seasonality
Products are designed and marketed primarily for three principal selling seasons:
RETAIL SALES SEASON PRIMARY BOOKING PERIOD SHIPPING PERIOD Spring/Summer August-September January-April Fall/Back-to-School January-February May-August Winter/Holiday April-May September-December
The Company's business is increasingly seasonal, with highest sales and income in the third quarter which is the Company's peak wholesale shipping period and a major retail selling season at its retail outlet stores. The Company's second quarter sales and income are the lowest because of both relatively low domestic wholesale unit shipments and relatively modest retail outlet store sales during this period. The Company anticipates this seasonality trend to continue to impact 1996 quarterly sales and income.
Working Capital
Working capital needs are affected primarily by inventory levels, outstanding accounts receivable and trades payable. The Company maintains a credit agreement with a number of banks which provides a $60 million revolving credit facility and a $40 million revocable demand line of credit for cash borrowings, issuance of commercial paper and letters of credit. The agreement expires in June 1997. There were no outstanding borrowings against these credit arrangements at December 31, 1995. Letters of credit of approximately $19 million were outstanding at December 31, 1995.
Inventory levels are affected by order backlog and anticipated sales. Accounts receivable are affected by payment terms offered. It is general practice in the apparel industry to offer payment terms of ten to sixty days from date of shipment. The Company offers net 30 days terms only.
The Company believes that its working capital requirements and financing resources are comparable with those of other major, financially sound apparel manufacturers.
Sales and Marketing
Company products are sold primarily through better quality department and specialty stores, although sales are also made through direct mail catalog companies, foreign
retailers and other outlets, including 172 Company operated domestic retail and factory outlet stores and one retail showcase store. No one customer accounted for more than 10% of the Company's 1995 sales. The Company's largest ten and largest 100 customers accounted for approximately 42% and 62% of 1995 sales, respectively. In 1995, the Company's products were sold to approximately 3,200 wholesale customers (approximately 9,600 stores) throughout the United States, and a sizeable number of international accounts.
Product sales to better quality department and specialty stores are primarily by an employee sales force with the balance of sales made through manufacturer's representatives or to in-house accounts. In addition to the central sales office in Oshkosh, the Company maintains regional sales offices and product showrooms in Dallas and New York. Most members of the Company's sales force are assigned to defined geographic territories, with some assigned to specific large national accounts. In sparsely populated areas and new markets, manufacturer's representatives represent the Company on a non-exclusive basis.
Direct advertising in consumer and trade publications is the primary method of advertising used. The Company also offers a cooperative advertising program, paying half of its customers' advertising expenditures for their products, generally up to two percent of the higher of the customer's prior or current year's gross purchases from the Company.
Backlog
The dollar amount of backlog of orders believed to be firm as of the end of the Company's fiscal year and as of the preceding fiscal year end is not material for an understanding of the business of the Company taken as a whole.
Competitive Conditions
The apparel industry is highly competitive and consists of a number of domestic and foreign companies. Some competitors have assets and sales greater than those of the Company. In addition, the Company competes with a number of firms that produce and distribute only a limited number of products similar to those sold by the Company or sell only in certain geographic areas being supplied by the Company.
A characteristic of the apparel industry is the requirement that a marketer recognize fashion trends and adequately provide products to meet such trends. Competition within the apparel industry is generally in terms of quality, price, service, style and, with respect to branded product lines, consumer recognition and preference. The Company believes that it competes primarily on the basis of quality, style, and consumer recognition and to a lesser extent on the basis of service and price. The Company is focusing attention on the issue of price and service and has taken and will continue to take steps to reduce costs, become more
competitive in the eyes of value conscious consumers and deliver the service expected by its customers.
The Company's share of the overall children's wear market is quite small. This is due to the diverse structure of the market where there is no truly dominant producer of children's garments across all size ranges and garment types. In the Company's primary channel of distribution, department and specialty stores, it holds the largest share of the branded children's wear market.
Environmental Matters
The Company's compliance with Federal, State, and local environmental laws and regulations had no material effect upon its capital expenditures, earnings, or competitive position. The Company does not anticipate any material capital expenditures for environmental control in either the current or succeeding fiscal years.
Employees
At December 31, 1995, the Company employed approximately 6,500 persons. Approximately 41% of the Company's personnel are covered by collective bargaining agreements with the United Garment Workers of America.
The Company considers its relations with its personnel to be good.
ITEM 2.
ITEM 2. PROPERTIES
The Company's principal executive and administrative offices are located in Oshkosh, Wisconsin. Its principal office, manufacturing and distribution operations are conducted at the following locations:
Approximate Floor Area in Principal Location Square Feet Use
Albany, KY 20,000 Manufacturing Byrdstown, TN 32,000 Manufacturing Celina, TN 100,000 Manufacturing Celina, TN 90,000 Laundering/Pressing Columbia, KY 78,000 Manufacturing Columbia, KY 23,000 Manufacturing Dallas, TX (1) 1,995 Sales Offices/Showroom Gainesboro, TN 61,000 Manufacturing Gainesboro, TN 29,000 Warehousing Jamestown, TN 43,000 Manufacturing Liberty, KY 218,000 Manufacturing/ Warehousing Liberty, KY (2) 32,000 Warehousing
New York City, NY (3) 18,255 Sales Offices/Showrooms Oshkosh, WI 99,000 Exec. & Operating Co. Offices Oshkosh, WI 88,000 Manufacturing Oshkosh, WI 128,000 Distribution/ Warehousing Red Boiling Springs,TN 41,000 Manufacturing White House, TN 284,000 Distribution/ Warehousing
All properties are owned by the Registrant with the exception of: (1) Lease expiration date - 1998 , (2) Lease expiration date - 1999, (3) Lease expiration date - 2007.
The Company believes that its properties are well maintained and its manufacturing equipment is in good operating condition and sufficient for current production.
Substantially all of the Company's retail stores occupy leased premises. For information regarding the terms of the leases and rental payments thereunder, refer to the "Leases" note to the consolidated financial statements on page 26 of this Form 10-K.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are not parties to any material pending legal proceedings.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS.
Quarterly Common Stock Data
1995 1994 Stock Price Dividends Stock Price Dividends High Low Per Share High Low Per Share
Class A Common Stock 1st $15 $13-1/2 $ 0.07 $21-3/4 $14-1/2 $ 0.1025 2nd 16-3/4 14 0.07 15 12-1/4 0.1025 3rd 18 15-1/2 0.07 15-1/2 13-1/2 0.1025 4th 17-1/2 11-1/2 0.07 15-1/4 13 0.07
Class B Common Stock 1st $15 $13-1/2 $ 0.06 $22 $16-3/4 $ 0.09 2nd 16-1/2 14-1/4 0.06 17 13-3/4 0.09 3rd 18 16-1/4 0.06 15-1/2 14 0.09 4th 18-3/4 17-1/4 0.06 15-1/4 13-1/2 0.06
The Company's Class A common stock and Class B common stock trade on the Over-The-Counter market and are quoted on NASDAQ under the symbols GOSHA and GOSHB, respectively. The table reflects the "last" price quotation on the NASDAQ National Market System and does not reflect mark-ups, mark- downs, or commissions and may not represent actual transactions.
The Company has paid cash dividends on its common stock each year since 1936. The Company's Certificate of Incorporation requires that when any dividend (other than a dividend payable solely in shares of the Company's stock) is paid on the Company's Class B Common Stock, a dividend equal to 115% of such amount per share must concurrently be paid on each outstanding share of Class A Common Stock. Company management currently expects that quarterly dividends comparable to dividends paid in 1995 will continue.
As of February 16, 1996, there were 1,721 Class A common stock shareholders of record and 176 Class B common stock shareholders of record.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Financial Highlights (Dollars in thousands, except per share amounts)
Year Ended December 31, 1995 1994 1993 1992 1991 Financial Results
Net Sales $ 432,266 $ 363,363 $ 340,186 $346,206 $ 365,173 Net Income 10,947 7,039 4,523 15,135* 23,576 Return on Sales 2.5% 1.9% 1.3% 4.4% 6.5%
Financial Condition
Working Capital $ 95,414 $ 101,946 $ 111,794 $111,075 $ 106,803 Total Assets 208,579 217,211 229,131 226,195 214,963 Shareholders' Equity 150,078 158,814 171,998 175,153 167,380
Data per Common Share
Net Income $ .85 $ .50 $ .31 $ 1.04* $ 1.62 Cash Dividends Declared Class A .28 .3775 .5125 .5125 .5125 Class B .24 .33 .45 .45 .45 Shareholders' Equity 12.05 11.76 11.79 12.01 11.48
* After a charge of $601 or $.04 per share to reflect cummulative effect of change in accounting for nonpension postretirement benefits.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
Results of Operations
The following table sets forth, for the periods indicated, selected Company income statement data expressed as a percentage of net sales and the percentage change in dollar amounts compared to the previous years.
As a Percentage of Net Sales Percentage Change in For the Years Ended Dollar Amounts December 31, from Fiscal Year 1995 1994 1993 1995 to 1994 1994 to 1993 Net sales 100.0% 100.0% 100.0% 19.0% 6.8% Cost of products sold 68.2% 71.4% 72.0% 13.6% 5.9% Gross profit 31.8% 28.6% 28.0% 32.3% 9.1% Selling, general, and administrative expenses 27.6% 26.1% 23.1% 25.6% 21.0% Restructuring & plant closings 0.6% --- 3.2% --- -100.0% Operating income 3.6% 2.5% 1.7% 73.0% 51.0% Other income - net 1.1% 1.1% 1.0% 17.2% 19.0% Income before income taxes 4.7% 3.6% 2.7% 55.8% 39.5% Income taxes 2.2% 1.7% 1.4% 56.1% 24.1% Net income 2.5% 1.9% 1.3% 55.5% 55.6%
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Net sales in 1995 were $432.3 million, an increase of $68.9 million (19%) over 1994 sales of $363.4 million. The Company's 1995 domestic wholesale business of approximately $255 million was 9% more than 1994 sales of approximately $234 million, with a corresponding increase in unit shipments of approximately 11.7%. The average unit selling price during 1995 was down slightly due primarily to product mix (i.e., consumer preference towards garments with lighter weight fabrics). The increase in domestic wholesale unit shipments was the result of a number of factors. Improved product design during 1994 contributed to better "sell-thrus" and margins for a majority of our wholesale customers, and resulted in significantly higher spring 1995 (shipped primarily during the Company's first quarter) and fall back- to-school (shipped primarily during the Company's third quarter) children's fashion shipments. In addition, Company initiatives undertaken during 1994, and continuing during 1995, resulted in significantly improved shipping performance to customers on spring and fall back-to-school orders. Difficulties experienced by the Company in coordinating the transition of its sourcing strategy (which calls for increasing sourcing of its product from offshore contractors) resulted in the inability of the Company to make timely deliveries on certain holiday orders to customers. This resulted in a slowdown in the rate of unit shipment growth during the fourth quarter of 1995. Company management is implementing adjustments to its sourcing plan and anticipates improved shipping performance in 1996.
With a relatively weak apparel market in general, the Company does not anticipate the unit shipment growth experienced during 1995 to continue in 1996. The Company's preliminary outlook for 1996 indicates that unit shipments of domestic wholesale products will be generally flat as compared with 1995.
Company retail sales at its OshKosh B'Gosh branded outlet stores and Genuine Kids stores were approximately $138.4 million for 1995, a 39.2% increase over 1994 retail sales of approximately $99.4 million. This retail sales increase was primarily driven by the opening of an additional 35 retail stores during 1995. In addition, the Company's comparable store sales for 1995 were up approximately 3.6%. At year end, the Company operated 81 OshKosh B'Gosh branded stores and 92 Genuine Kids stores. Current Company plans for 1996 call for the opening of approximately 14 new retail stores and the closing of 8 to 10 unprofitable stores. Accordingly, the Company anticipates a slowdown in its retail sales growth for 1996 as compared to 1995 and 1994.
The Company's gross profit margin as a percent of sales increased to 31.8% in 1995 compared with 28.6% in 1994. This gross profit margin improvement was due to the impact of the Company's increased retail sales at higher gross margins relative to its domestic wholesale business, as well as
improvement in the wholesale business gross profit margin. The Company's restructuring and plant closing initiatives over the past two years, including redirection to a higher volume of product sourced offshore, improved internal manufacturing efficiencies, as well as more focused attention to product design, have also contributed to the Company's increased gross profit margin experienced during 1995. With the anticipated growth of the Company's retail business during 1996, along with the continuing effects of its internal manufacturing capacity reduction initiatives, the Company anticipates further improvement in its gross profit margins during 1996.
Selling, general, and administrative expenses for 1995 (excluding the $2.7 million charge for plant closures recorded during the third quarter) increased $24.3 million over 1994. As a percent of net sales, these costs increased to 27.6% as compared to 26.1% in 1994. The primary reason for the increase in the Company's selling, general, and administrative expenses is the Company's expansion of its retail business. In addition, the Company's expansion of its international operations have added to these costs.
During the third quarter of 1995, the Company recorded a pretax charge for plant closings of $2.7 million. This plant closing charge (net of income tax benefit) reduced net income by $1.6 million ($.13 per share) in 1995. As a part of the Company's ongoing review of its manufacturing capacity, operational effectiveness, and alternative sourcing opportunities, the Company decided to close its Hermitage Springs and McEwen, Tennessee facilities and downsize its Oshkosh, Wisconsin sewing facility.
During the fourth quarter of 1995, the Company substantially completed its downsizing of the Oshkosh sewing facility. The Hermitage Springs and McEwen facilities were closed in January, 1996. The Hermitage Springs facility was also sold in early 1996.
The $2.7 million pretax charge for plant closings included approximately $1.9 million of severance and related costs pertaining to workforce reductions, as well as $750,000 for facility closings and the write-down of the related assets. The Company anticipates that the plant closings (net of income tax benefit) will require cash expenditures of approximately $1.1 million. Of this amount, $375,000 was expended in the fourth quarter of 1995. The Company believes that these plant closings, along with its other restructuring initiatives carried out over the past two years, will result in reduced cost of products and improved gross profit margins. During 1993, the Company recorded a pretax restructuring charge of $10.8 million. The restructuring charge including approximately $3.3 million for facility closings, write-down of the related assets, and severance costs pertaining to workforce reductions. The restructuring charge also reflected the Company's decision to market its Trader Kids line of children's apparel under the new name of Genuine Kids and the resulting costs of the Company's decision not to renew its Boston Trader license arrangement beyond 1994, as well as
expenses to consolidate its retail operations. Accordingly, the restructuring charge included approximately $7.5 million for write-off of unamortized trademark rights and expenses related to consolidating the Company s retail operations.
During 1994, the Company implemented its restructuring plan. The Company closed its McKenzie, Tennessee facility and reached satisfactory agreements with all affected workforce concerning severance arrangements. The Company began to market a portion of its children's wear line under the Genuine Kids label, discontinuing the Trader Kids line of children's apparel. The Company also successfully consolidated the operations of its retail business into its Oshkosh office.
During 1995, the Company finalized its 1993 restructuring plan by closing its Marrowbone, Kentucky and Dover, Tennessee facilities. The Dover facility has been sold, and the Company reached satisfactory agreements with the workforce concerning severance arrangements.
There were no material changes in cost to fully implement the Company's 1993 restructuring plan. The Company's cash expenditures (net of income tax benefit) to carry out this restructuring plan were approximately $4.4 million.
Interest expense for 1995 was $1.8 million compared to $1.0 million in 1994. This increase is the result of additional Company borrowings to finance the Company's stock repurchase program.
The Company licenses the use of its trade names to selected licensees in the U.S. and in foreign countries. The Company's net royalty income was $4.4 million in 1995, a $1.0 million increase over 1994 net royalty income of $3.4 million. Net royalty income from domestic licensees was approximately $2.3 million in 1995 as compared to $2.4 million in 1994. Net royalty income from foreign licensees was approximately $2.1 million in 1995 as compared to $1.0 million in 1994. The increase in royalty income from foreign licensees is the result of both the addition of new licensees during 1994 and 1995 as well as the increased royalties from existing licensees.
The Company's effective tax rate for 1995 was 45.8% compared to 45.7% in 1994. The relatively high effective tax rates for both years result primarily from the Company's foreign operating losses (principally in Europe), which provide no tax benefit. Company management believes that the $11.4 million deferred tax asset at December 31, 1995 can be fully realized through reversals of existing taxable, temporary differences, and the Company's history of substantial taxable income which allows the opportunity for carrybacks of current or future losses.
Net income per share of $.85 in 1995 was a 70% increase over 1994 net income per share of $.50. While the Company's domestic wholesale and retail operations demonstrated progress during 1995, its European subsidiaries continued to struggle. The Company incurred a loss from its European subsidiaries of
approximately $4.6 million in 1995 as compared to an approximate $1.7 million loss in 1994. Management is currently instituting a number of changes including elimination of independent European design and sourcing functions. Beginning with the fall 1996 product line, the European subsidiaries will function primarily as distributors of U.S. designed and sourced products. Management believes that these changes will serve to improve European operating results primarily during the second half of 1996. Management is also evaluating alternative product sales and marketing options for Europe.
In March, 1995, the Financial Accounting Standards Board issued its Statement No. 121 entitled "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". This standard requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Statement No. 121 also addresses the accounting for long-lived assets that are expected to be disposed of. The Company will adopt Statement No. 121 during 1996. The effect of applying this new standard has not yet been fully determined.
Year Ended December 31, 1994 Compared to Year Ended December 31, 1993
Net sales in 1994 were $363.4 million, an increase of $23.2 million (6.8%) over 1993 sales of $340.2 million. The Company's 1994 domestic wholesale business of approximately $234 million was 9% less than 1993 sales of approximately $257 million, with a corresponding decline in unit shipments of approximately 6.7%. The decrease in domestic wholesale unit shipments related primarily to the effects of the competitive environment in the children's wear business combined with the effects of prior years' poor shipping performance and perceived weakness in product design.
Company retail sales at its OshKosh B'Gosh branded outlet stores and Genuine Kids stores were approximately $99.4 million for 1994, a 52.5% increase over 1993 retail sales of approximately $65.2 million. This retail sales increase was primarily driven by the opening of an additional 46 retail stores during 1994. In addition, the Company's comparable store sales for 1994 were up approximately 3.6%. At December 31, 1994, the Company operated 61 OshKosh B'Gosh branded stores and 77 Genuine Kids stores.
The Company's gross profit margin as a percent of sales improved to 28.6% in 1994 compared with 28.0% in 1993. This gross profit margin improvement was due primarily to the impact of the Company's increased retail sales at higher gross margins relative to its domestic wholesale business. The favorable impact of the Company's retail gross margins was offset in part by the domestic wholesale gross margin, which was down in 1994 primarily as a result of the adverse impact
of reduced unit volume on our manufacturing operations and slightly lower pricing to wholesale customers.
Selling, general, and administrative expenses for 1994 increased $16.5 million over 1993. As a percent of net sales, selling, general, and administrative expenses were 26.1% in 1994, up from 23.1% in 1993. The primary reason for the increased selling, general, and administrative expenses is the Company's aggressive expansion of its retail business. In addition, the Company's increasing focus on its international operations resulted in an increase in 1994's selling, general, and administrative expenses of approximately $2.7 million. Also, the Company's catalog division, initiated in the second half of 1993, added approximately $1.6 million to selling, general, and administrative expenses in 1994.
During the fourth quarter of 1993, the Company recorded a pretax restructuring charge of $10.8 million. Restructuring costs (net of income tax benefit) reduced net income by $7.1 million ($.49 per share) in 1993.
The Company's effective tax rate for 1994 was 45.7% compared to 51.3% in 1993. The relatively high effective tax rates for both years result primarily from the Company's foreign operating losses, which provide no tax benefit. In addition, the high 1993 effective tax rate was the result of substantially lower U.S. income before income taxes in 1993 (which resulted in part from the restructuring charge).
Seasonality
The Company's business is increasingly seasonal, with highest sales and income in the third quarter, which is the Company's peak wholsesale shipping period and a major retail selling season at its retail outlet stores. The Company's second quarter sales and income are the lowest both because of relatively low domestic wholesale unit shipments and relatively modest retail outlet store sales during this period. The Company anticipates this seasonality trend to continue to impact 1996 quarterly sales and income.
Financial Position, Capital Resources, and Liquidity
The Company's financial strength is demonstrated by its balance sheet. At December 31, 1995 and 1994, the Company did not have any outstanding long-term debt.
At December 31, 1995, the Company's cash and cash equivalents were $2.4 million compared to $10.5 million at the end of 1994 and $17.9 million at the end of 1993. The decrease in cash and cash equivalents is primarily due to the Company s stock repurchase program which was completed in 1995. Net working capital at the end of 1995 was $95.4 million, compared to $101.9 million at 1994 year end and $111.8 million at 1993 year end. Cash provided by operations was approximately $19.5 million in 1995, compared to $22.1 million in 1994, and $21.6 million in 1993.
Accounts receivable at December 31, 1995 were $24.7 million compared to $23.9 million at December 31, 1994. Inventories at the end of 1995 were $95.7 million, up $1.8 million from 1994. Management believes that year end 1995 inventory levels are generally appropriate for anticipated 1996 business activity.
Capital expenditures were approximately $9.7 million in 1995 and $9.9 million in 1994. Capital expenditures for 1996 are currently budgeted at approximately $10 million.
The Company's stock repurchase program announced in 1994 was completed in 1995. A total of 2,150,000 shares of Class A common stock were acquired under the repurchase program, requiring a cash outlay of approximately $16.8 million in 1995 and $15.0 million in 1994.
The Company has a credit agreement with participating banks. This arrangement provides a $60 million revolving credit facility and a $40 million revocable demand line of credit for cash borrowings, issuance of commercial paper, and letters of credit. The agreement expires in June, 1997. The Company believes that these credit facilities, along with cash generated from operations, will be sufficient to finance the Company's seasonal working capital needs as well as its capital expenditures, remaining plant closing costs, and business development needs.
Dividends on the Company's Class A and Class B common stock totaled $.28 per share and $.24 per share, respectively, in 1995 compared to $.3775 per share and $.33 per share on the Company's Class A and Class B common stock, respectively, in 1994. The dividend payout rate was 33% of net income in 1995 and 75% in 1994.
Inflation
The effects of inflation on the Company's operating results and financial condition were not significant.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Page Financial Statements: Reports of Independent Auditors 17 Consolidated Balance Sheets - December 31, 1995 and 1994 18 Consolidated Statements of Income - years ended December 31, 1995, 1994, and 1993 19 Consolidated Statements of Changes in Shareholders' Equity - years ended December 31, 1995, 1994, and 1993 20 Consolidated Statements of Cash Flows - years ended December 31, 1995, 1994, and 1993 21 Notes to Consolidated Financial Statements 22
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors OshKosh B'Gosh, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of OshKosh B'Gosh, Inc. and subsidiaries (the Company) as of December 31, 1995 and 1994, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1995. Our audits also included the financial statement schedule listed in the Index at Item 14. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We beleive that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at December 31, 1995 and 1994, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/S/ ERNST & YOUNG LLP
Milwaukee, Wisconsin ERNST & YOUNG LLP February 2, 1996
OSHKOSH B'GOSH, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (Dollars in thousands, except share and per share amounts)
December 31, 1995 1994 ASSETS Current assets Cash and cash equivalents $ 2,418$ 10,514 Accounts receivable, less allowances of $3,970 in 1995 and $3,700 in 1994 24,691 23,857 Inventories 95,743 93,916 Prepaid expenses and other current assets 3,127 2,510 Deferred income taxes 11,400 11,510 Total current assets 137,379 142,307 Property, plant, and equipment, net 65,011 69,829 Other assets 6,189 5,075
Total assets $208,579 $217,211
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities Accounts payable $ 13,910$ 9,436 Accrued liabilities 28,055 30,925 Total current liabilities 41,965 40,361 Deferred income taxes 2,700 2,869 Employee benefit plan liabilities 13,836 15,167 Commitments - - Shareholders' equity Preferred stock, par value $.01 per share: Authorized - 1,000,000 shares; Issued and outstanding - None - - Common stock, par value $.01 per share: Class A, authorized - 30,000,000 shares; Issued and outstanding - 11,189,387 shares in 1995, 12,233,787 shares in 1994 112 122 Class B, authorized - 3,750,000 shares; Issued and outstanding - 1,266,413 shares in 1995, 1,267,713 shares in 1994 13 13 Retained earnings 149,720 158,933 Cumulative foreign currency translation adjustments 233 (254) Total shareholders' equity 150,078 158,814
Total liabilities and shareholders' equity $208,579 $217,211
See notes to consolidated financial statements.
OSHKOSH B'GOSH, INC. AND SUBSIDIARIES
Consolidated Statements of Income (Dollars and shares in thousands, except per share amounts)
Year Ended December 31, 1995 1994 1993
Net sales $432,266 $363,363 $340,186 Cost of products sold 294,770 259,416 244,926
Gross profit 137,496 103,947 95,260
Selling, general, and administrative expenses 119,295 94,988 78,492 Restructuring and plant closings 2,700 - 10,836
Operating income 15,501 8,959 5,932
Other income (expense): Interest expense (1,772) (1,034) (626) Interest income 1,383 1,048 1,114 Royalty income, net of expenses4,443 3,442 3,417 Miscellaneous 633 543 (545)
Other income - net 4,687 3,999 3,360
Income before income taxes 20,188 12,958 9,292
Income taxes 9,241 5,919 4,769
Net income $ 10,947 $ 7,039 $ 4,523
Weighted average common shares outstanding 12,865 14,144 14,586
Net income per common share $.85 $.50 $.31
See notes to consolidated financial statements.