##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 Form 10-Q
 þ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 2007
  o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Transition Period From
 To
  
 OAKLEY, INC.
  Washington
(State or other jurisdiction of 
incorporation or organization)
    
    95-3194947
(IRS Employer
Identification No.)One Icon 
Foothill Ranch, California
(Address of principal executive offices)
    
    92610
(Zip Code)
   þ o
  o þ o
 o þ




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##### 



Oakley, Inc.
Index
 PART I.
    
    FINANCIAL INFORMATIONITEM 1.
    
    Financial Statements (Unaudited)Condensed Consolidated Balance Sheets as of September 30, 2007
and December 31, 2006
    
    
    3Condensed Consolidated Statements of Income for the three months
and nine months ended
    September 30, 2007 and 2006
    
    
    4Condensed Consolidated Statements of Comprehensive Income for the
three months and nine months ended
    September 30, 2007 and 2006
    
    
    4Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 2007 and 2006
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6ITEM 2.
    
    Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    18ITEM 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    32ITEM 4.
    
    Controls and Procedures
    
    
    33PART II.
    
    OTHER INFORMATIONITEM 1.
    
    Legal Proceedings
    
    
    34ITEM 1A.
    
    Risk Factors
    
    
    35ITEM 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    36ITEM 6.
    
    Exhibits
    
    
    37Signatures
    
    
    38EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1




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Special Note Regarding Forward-Looking Statements
  
    
    competition and the factors we believe provide a competitive advantage;
    
    the importance of our ability to develop new and/or innovative products;
    
    our proposed merger with Luxottica Group S.p.A.;
    
    the effects of business acquisitions;
    
    product line extensions and new product lines;
    
    the effect of seasonality on our business;
    
    anticipated increases in interest expense and amortization of intangible assets;
    
    our expected effective income tax rate and the effect of interest expense and other
items on our provision for income taxes;
    
    the resolution of uncertain tax positions, including coverage under applicable insurance
policies, and the effect of changes in related income tax liabilities on our results of
operations and financial position;
    
    our beliefs concerning the outcome of litigation and the resolution of claims,
complaints and other legal matters;
    
    our hedging strategy and the anticipated effectiveness thereof;
    
    the anticipated amounts of stock-based compensation expense;
    
    our expectations regarding future performance by the counterparties to foreign exchange
contracts we have entered into;
    
    the amount and timing of future payments under contractual obligations;
    
    the sufficiency of our existing sources of liquidity and anticipated cash flows from
operations to fund our operations, capital expenditures and other working capital
requirements for the next twelve months; and
    
    the circumstances under which we may seek additional financing, our ability to obtain
any such financing and any consideration of acquisition opportunities.
  
    
    the highly competitive markets for our products and our ability to develop innovative
new products and introduce them in a timely manner;
    
    risks associated with our proposed merger with Luxottica, including the satisfaction of
conditions necessary to complete the merger, the outcome of outstanding or future
litigation and the effects of the merger on our business, results of operations and stock
price;
    
    consumer acceptance of our new products and our ability to respond to changing consumer
preferences;
    
    order and demand uncertainty, which may result in cancellations of advance orders, or a
reduction in the rate of reorders placed by retailers, or result in a buildup of inventory;
    
    our ability to attract and retain qualified personnel;
    
    intellectual property infringement claims by others and our ability to protect our
intellectual property;
    
    our dependence on key suppliers for materials we use in our products, including lens
blanks;
 1




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
    
    our ability to successfully integrate acquired businesses into our operations;
    
    our dependence on athletes and personalities for the endorsement of our products; and
    
    risks associated with our international operations, including foreign currency exchange
rate fluctuations and the impact of quotas, tariffs, or other restrictions on the
importation or exportation of our products.
  ® ® ® ® ® ® ® ® ®
 2




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PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 
 OAKLEY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands, except per share amounts)
 September 30,
    
    
    December 31,2007
    
    
    2006ASSETSCurrent AssetsCash and cash equivalents
    
    $
    53,677
    
    
    $
    31,313Accounts
receivable, less allowances of $17,950 (2007) and $15,262 (2006)
    
    
    140,835
    
    
    
    109,168Inventories
    
    
    208,056
    
    
    
    155,377Other receivables
    
    
    4,773
    
    
    
    6,375Deferred income taxes
    
    
    20,814
    
    
    
    17,933Prepaid expenses and other current assets
    
    
    15,670
    
    
    
    13,947Total current assets
    
    
    443,825
    
    
    
    334,113Property and equipment, net
    
    
    207,053
    
    
    
    177,400Deposits
    
    
    3,566
    
    
    
    2,799Goodwill
    
    
    127,555
    
    
    
    64,652Intangible assets
    
    
    115,572
    
    
    
    52,302Other assets
    
    
    3,136
    
    
    
    2,568Total assets
    
    $
    900,707
    
    
    $
    633,834LIABILITIES AND SHAREHOLDERS EQUITYCurrent LiabilitiesLines of credit
    
    $
    205,013
    
    
    $
    38,116Accounts payable
    
    
    48,673
    
    
    
    45,955Accrued expenses and other current liabilities
    
    
    70,122
    
    
    
    57,244Accrued warranty
    
    
    3,126
    
    
    
    3,153Income taxes payable
    
    
    534
    
    
    
    1,167Current portion of long-term debt
    
    
    25
    
    
    
    8,732Total current liabilities
    
    
    327,493
    
    
    
    154,367Deferred income taxes
    
    
    17,939
    
    
    
    17,457Other long-term liabilities
    
    
    25,654
    
    
    
    3,119Total liabilities
    
    
    371,086
    
    
    
    174,943Commitments and contingencies (Note 7)Shareholders EquityPreferred stock, par value $.01 per share; 10,000 shares
authorized; no shares issued
    
    
    
    
    
    
    Common
stock, par value $.01 per share; 200,000 shares authorized; 69,698 (2007) and 68,972 (2006) issued and
outstanding
    
    
    697
    
    
    
    690Additional paid-in capital
    
    
    57,128
    
    
    
    41,711Retained earnings
    
    
    447,673
    
    
    
    405,120Accumulated other comprehensive income
    
    
    24,123
    
    
    
    11,370Total shareholders equity
    
    
    529,621
    
    
    
    458,891Total liabilities and shareholders equity
    
    $
    900,707
    
    
    $
    633,834
  3




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OAKLEY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited, in thousands, except per share data)
 Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net sales
    
    $
    263,789
    
    
    $
    210,219
    
    
    $
    726,115
    
    
    $
    565,501Cost of goods sold
    
    
    117,284
    
    
    
    97,120
    
    
    
    319,895
    
    
    
    257,164Gross profit
    
    
    146,505
    
    
    
    113,099
    
    
    
    406,220
    
    
    
    308,337Operating expenses:Research and development
    
    
    7,140
    
    
    
    6,281
    
    
    
    19,791
    
    
    
    17,298Selling
    
    
    61,520
    
    
    
    50,975
    
    
    
    187,981
    
    
    
    150,718Shipping and warehousing
    
    
    6,044
    
    
    
    5,448
    
    
    
    16,881
    
    
    
    15,359General and administrative
    
    
    30,972
    
    
    
    24,318
    
    
    
    93,639
    
    
    
    67,996Total operating expenses
    
    
    105,676
    
    
    
    87,022
    
    
    
    318,292
    
    
    
    251,371Operating income
    
    
    40,829
    
    
    
    26,077
    
    
    
    87,928
    
    
    
    56,966Interest expense
    
    
    3,586
    
    
    
    584
    
    
    
    9,536
    
    
    
    1,952Interest income
    
    
    (596
    )
    
    
    (321
    )
    
    
    (1,386
    )
    
    
    (1,228
    )Income before provision for income taxes
    
    
    37,839
    
    
    
    25,814
    
    
    
    79,778
    
    
    
    56,242Provision for income taxes
    
    
    14,143
    
    
    
    8,472
    
    
    
    28,887
    
    
    
    19,122Net income
    
    $
    23,696
    
    
    $
    17,342
    
    
    $
    50,891
    
    
    $
    37,120Basic net income per common share
    
    $
    0.34
    
    
    $
    0.25
    
    
    $
    0.74
    
    
    $
    0.54Basic weighted-average common shares
    
    
    69,074
    
    
    
    68,267
    
    
    
    68,808
    
    
    
    68,431Diluted net income per common share
    
    $
    0.34
    
    
    $
    0.25
    
    
    $
    0.73
    
    
    $
    0.54Diluted weighted-average common shares
    
    
    70,304
    
    
    
    68,827
    
    
    
    69,908
    
    
    
    69,017Dividends declared per common share
    
    $
    
    
    
    $
    0.16
    
    
    $
    
    
    
    $
    0.16
 
 OAKLEY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited, in thousands)
 Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net income
    
    $
    23,696
    
    
    $
    17,342
    
    
    $
    50,891
    
    
    $
    37,120Other comprehensive income:Net
unrealized gains (losses) on derivative instruments, net of tax
    
    
    (618
    )
    
    
    133
    
    
    
    (577
    )
    
    
    (221
    )Foreign currency translation adjustments
    
    
    7,044
    
    
    
    (1,062
    )
    
    
    13,330
    
    
    
    3,003Other comprehensive income
    
    
    6,426
    
    
    
    (929
    )
    
    
    12,753
    
    
    
    2,782Comprehensive income
    
    $
    30,122
    
    
    $
    16,413
    
    
    $
    63,644
    
    
    $
    39,902
  4




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OAKLEY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
 Nine months endedSeptember 30,2007
    
    
    2006Cash Flows from Operating ActivitiesNet income
    
    $
    50,891
    
    
    $
    37,120Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation
    
    
    28,160
    
    
    
    24,002Amortization
    
    
    7,718
    
    
    
    3,514Changes in fair value of derivative instruments
    
    
    496
    
    
    
    3,702Provision for bad debts
    
    
    1,469
    
    
    
    1,136Stock-based compensation expense
    
    
    5,009
    
    
    
    3,236Excess tax benefits related to stock-based compensation
    
    
    (2,830
    )
    
    
    (445
    )Loss on disposition of equipment
    
    
    985
    
    
    
    13Deferred income taxes, net
    
    
    1,204
    
    
    
    3Changes in assets and liabilities, net of effects of
business acquisitions:Accounts receivable
    
    
    (23,098
    )
    
    
    (9,464
    )Inventories
    
    
    (45,748
    )
    
    
    (23,242
    )Other receivables
    
    
    2,615
    
    
    
    (947
    )Prepaid expenses and other current assets
    
    
    (1,279
    )
    
    
    (897
    )Deposits and other assets
    
    
    (1,987
    )
    
    
    (1,783
    )Accounts payable
    
    
    766
    
    
    
    (1,067
    )Accrued expenses and other current liabilities
    
    
    8,033
    
    
    
    16,814Income taxes payable/receivable
    
    
    7,218
    
    
    
    2,271Net cash provided by operating activities
    
    
    39,622
    
    
    
    53,966Cash Flows from Investing ActivitiesAcquisitions of businesses, net of cash acquired
    
    
    (131,679
    )
    
    
    (83,157
    )Purchases of property and equipment
    
    
    (55,711
    )
    
    
    (33,001
    )Proceeds from sales of property and equipment
    
    
    389
    
    
    
    193Other assets
    
    
    (391
    )
    
    
    559Net cash used in investing activities
    
    
    (187,392
    )
    
    
    (115,406
    )Cash Flows from Financing ActivitiesProceeds from bank borrowings
    
    
    293,006
    
    
    
    189,180Repayment of bank borrowings
    
    
    (126,547
    )
    
    
    (170,618
    )Principal payments on long-term debt
    
    
    (8,732
    )
    
    
    (1,139
    )Exercise of stock options
    
    
    7,803
    
    
    
    2,322Excess tax benefits related to stock-based compensation
    
    
    2,830
    
    
    
    445Repurchase of common shares
    
    
    
    
    
    
    (10,351
    )Payment of cash dividends
    
    
    
    
    
    
    (19
    )Net cash provided by financing activities
    
    
    168,360
    
    
    
    9,820Effect of exchange rate changes on cash
    
    
    1,774
    
    
    
    178Net increase (decrease) in cash and cash equivalents
    
    
    22,364
    
    
    
    (51,442
    )Cash and cash equivalents, beginning of period
    
    
    31,313
    
    
    
    82,157Cash and cash equivalents, end of period
    
    $
    53,677
    
    
    $
    30,715
  5




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Oakley, Inc.
Notes to Condensed Consolidated Financial Statements
 Note 1 Basis of Presentation and Significant Accounting Policies
 Basis of Presentation
   Recent Accounting Pronouncements
  Net Income Per Share
  Three months ended September 30,
    
    
    Nine months ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net income
    
    $
    23,696
    
    
    $
    17,342
    
    
    $
    50,891
    
    
    $
    37,120Weighted-average shares outstanding:Basic
    
    
    69,074
    
    
    
    68,267
    
    
    
    68,808
    
    
    
    68,431Effect of dilutive securities
    
    
    1,230
    
    
    
    560
    
    
    
    1,100
    
    
    
    586Diluted
    
    
    70,304
    
    
    
    68,827
    
    
    
    69,908
    
    
    
    69,017Net income per share:Basic
    
    $
    0.34
    
    
    $
    0.25
    
    
    $
    0.74
    
    
    $
    0.54Effect of dilutive securities
    
    
    
    
    
    
    
    
    
    
    (0.01
    )
    
    
    Diluted
    
    $
    0.34
    
    
    $
    0.25
    
    
    $
    0.73
    
    
    $
    0.54
  6




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Oakley, Inc.
Notes to Condensed Consolidated Financial Statements
 Supplemental Cash Flow Information
  Reclassifications
  Note 2  Agreement and Plan of Merger
        7




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Oakley, Inc.
Notes to Condensed Consolidated Financial Statements
 Note 3  Stock-Based Compensation
   Three months ended September 30,
    
    
    Nine months ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Cost of goods sold
    
    $
    198
    
    
    $
    117
    
    
    $
    524
    
    
    $
    322Research and development
    
    
    249
    
    
    
    130
    
    
    
    676
    
    
    
    375Selling
    
    
    281
    
    
    
    172
    
    
    
    756
    
    
    
    476Shipping and warehousing
    
    
    4
    
    
    
    4
    
    
    
    10
    
    
    
    8General and administrative
    
    
    1,071
    
    
    
    666
    
    
    
    3,043
    
    
    
    2,055$
    1,803
    
    
    $
    1,089
    
    
    $
    5,009
    
    
    $
    3,236
  Stock Option Valuation
   Nine months ended September 30,2007
    
    
    2006Weighted-average fair value of options granted
    
    $
    7.56
    
    
    $
    5.76Weighted-average assumptions:Expected volatility
    
    
    31.6
    %
    
    
    34.6
    %Expected term
    
    6.3 years
    
    6.5 yearsRisk-free interest rate
    
    
    4.6
    %
    
    
    5.0
    %Dividend yield
    
    
    1.0
    %
    
    
    1.0
    %
 1995 Stock Incentive Plan
  8




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Oakley, Inc.
Notes to Condensed Consolidated Financial Statements
  Stock Option Awards
  Weighted-
    
    
    Weighted- averageNumber
    
    
    average
    
    
    remaining contractualof shares
    
    
    exercise price
    
    
    term (years)Outstanding at January 1, 2007
    
    
    3,733
    
    
    $
    14.37Granted
    
    
    530
    
    
    
    20.95Exercised
    
    
    (619
    )
    
    
    12.61Forfeited/expired
    
    
    (64
    )
    
    
    15.06Outstanding at September 30, 2007
    
    
    3,580
    
    
    
    15.64
    
    
    
    6.7Vested at September 30, 2007 or expected to vest in the future
    
    
    3,399
    
    
    
    15.54
    
    
    
    6.6Exercisable at September 30, 2007
    
    
    1,847
    
    
    
    14.14
    
    
    
    5.0
  Restricted Stock Awards
  Weighted-averageNumber
    
    
    grant dateof shares
    
    
    fair valueNonvested shares at January 1, 2007
    
    
    463
    
    
    $
    15.76Granted
    
    
    124
    
    
    
    23.78Vested
    
    
    (59
    )
    
    
    16.52Forfeited
    
    
    (8
    )
    
    
    19.51Nonvested shares at September 30, 2007
    
    
    520
    
    
    
    17.53
  Performance Unit Awards
  9




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Oakley, Inc.
Notes to Condensed Consolidated Financial Statements
  Note 4  Acquisitions
 Eye Safety Systems, Inc.
   Accounts receivable
    
    $
    3,244Inventory
    
    
    922Other current assets
    
    
    160Property and equipment
    
    
    792Identified intangible assets
    
    
    63,665Goodwill
    
    
    46,833Total assets acquired
    
    
    115,616Current liabilities
    
    
    1,241Net assets acquired
    
    $
    114,375
  The Bright Eyes Group
   10




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Oakley, Inc.
Notes to Condensed Consolidated Financial Statements
  Cash
    
    $
    953Accounts receivable
    
    
    888Inventory
    
    
    2,137Other current assets
    
    
    750Property and equipment
    
    
    1,283Identified intangible assets
    
    
    5,253Goodwill
    
    
    8,852Total assets acquired
    
    
    20,116Current liabilities
    
    
    2,563Long-term liabilities
    
    
    572Deferred income tax liability
    
    
    1,535Net assets acquired
    
    $
    15,446
  Supplemental Pro Forma Information
  Three months ended September 30,
    
    
    Nine months ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Pro forma net sales
    
    $
    263,789
    
    
    $
    226,499
    
    
    $
    730,753
    
    
    $
    607,337Pro forma net income
    
    
    23,696
    
    
    
    20,478
    
    
    
    51,079
    
    
    
    44,102Pro forma basic net income per share
    
    $
    0.34
    
    
    $
    0.30
    
    
    $
    0.74
    
    
    $
    0.64Pro forma diluted net income per share
    
    $
    0.34
    
    
    $
    0.30
    
    
    $
    0.73
    
    
    $
    0.64
  Note 5 Supplemental Financial Statement Data
 Inventories
  September 30,
    
    
    December 31,2007
    
    
    2006Raw materials
    
    $
    41,415
    
    
    $
    24,223Finished goods
    
    
    166,641
    
    
    
    131,154$
    208,056
    
    
    $
    155,377
 11




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Oakley, Inc.
Notes to Condensed Consolidated Financial Statements
 Property and equipment
  September 30,
    
    
    December 31,2007
    
    
    2006Land
    
    $
    8,953
    
    
    $
    8,953Buildings and improvements
    
    
    79,834
    
    
    
    72,251Leasehold improvements
    
    
    83,370
    
    
    
    64,183Equipment and furniture
    
    
    261,840
    
    
    
    232,484Tooling
    
    
    40,223
    
    
    
    36,320474,220
    
    
    
    414,191Accumulated depreciation and amortization
    
    
    (267,167
    )
    
    
    (236,791
    )$
    207,053
    
    
    $
    177,400
 Intangible Assets
  September 30, 2007
    
    
    December 31, 2006Gross carrying
    
    
    Accumulated
    
    
    Gross carrying
    
    
    Accumulatedamount
    
    
    amortization
    
    
    amount
    
    
    amortizationDefinite-lived intangible assets:Covenants not to compete
    
    $
    10,426
    
    
    $
    (6,427
    )
    
    $
    7,102
    
    
    $
    (4,943
    )Distribution rights
    
    
    3,567
    
    
    
    (2,728
    )
    
    
    3,567
    
    
    
    (2,532
    )Patents
    
    
    4,361
    
    
    
    (3,298
    )
    
    
    4,359
    
    
    
    (2,849
    )Customer relationships
    
    
    60,694
    
    
    
    (3,470
    )
    
    
    16,020
    
    
    
    (728
    )Sub-licenses
    
    
    1,300
    
    
    
    (217
    )
    
    
    1,300
    
    
    
    (119
    )Trade name
    
    
    8,935
    
    
    
    (990
    )
    
    
    1,235
    
    
    
    (240
    )Technology
    
    
    9,600
    
    
    
    (988
    )
    
    
    
    
    
    
    Other
    
    
    12,266
    
    
    
    (2,916
    )
    
    
    9,234
    
    
    
    (1,904
    )$
    111,149
    
    
    $
    (21,034
    )
    
    $
    42,817
    
    
    $
    (13,315
    )Indefinite-lived intangible assets:Trade names
    
    $
    25,457
    
    
    
    
    
    
    $
    22,800
  Estimated amortizationexpenseFiscal 2007
    
    $
    10,369Fiscal 2008
    
    
    9,801Fiscal 2009
    
    
    9,001Fiscal 2010
    
    
    8,716Fiscal 2011
    
    
    8,318Thereafter
    
    
    51,628
 Goodwill
  Wholesale
    
    
    U. S. RetailSegment
    
    
    Segment
    
    
    
    TotalBalance, December 31, 2006
    
    $
    37,344
    
    
    $
    27,308
    
    
    $
    64,652Goodwill additions
    
    
    58,816
    
    
    
    1,276
    
    
    
    60,092Foreign currency translation adjustments
    
    
    2,811
    
    
    
    
    
    
    
    2,811Balance, September 30, 2007
    
    $
    98,971
    
    
    $
    28,584
    
    
    $
    127,555
 12




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##### Table of Contents



Oakley, Inc.
Notes to Condensed Consolidated Financial Statements
 Accrued Expenses and Other Current Liabilities
  September 30,
    
    
    December 31,2007
    
    
    2006Accrued employee compensation and benefits
    
    $
    28,850
    
    
    $
    24,197Derivative financial instruments
    
    
    2,343
    
    
    
    674Other liabilities
    
    
    38,929
    
    
    
    32,373$
    70,122
    
    
    $
    57,244
 Accrued Warranty
  Nine months ended September 30,2007
    
    
    2006Warranty liability, beginning of period
    
    $
    3,153
    
    
    $
    3,068Provision for warranty expense
    
    
    1,692
    
    
    
    2,965Warranty claims and costs
    
    
    (1,696
    )
    
    
    (2,884
    )Changes due to foreign currency translation
    
    
    (23
    )
    
    
    14Warranty liability, end of period
    
    $
    3,126
    
    
    $
    3,163
 Comprehensive Income
  September 30,
    
    
    December 31,2007
    
    
    2006Unrealized gains (losses) on derivative financial instruments
    
    $
    (1,387
    )
    
    $
    (810
    )Foreign currency translation adjustments
    
    
    25,510
    
    
    
    12,180$
    24,123
    
    
    $
    11,370
 Note 6  Income Taxes
    13




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##### Table of Contents



Oakley, Inc.
Notes to Condensed Consolidated Financial Statements
    Note 7  Commitments and Contingencies
 Indemnities, Commitments and Guarantees
  Litigation
   14




---



##### Table of Contents



Oakley, Inc.
Notes to Condensed Consolidated Financial Statements
   Note 8  Derivative Financial Instruments
   Cash Flow Hedges
   15




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##### Table of Contents



Oakley, Inc.
Notes to Condensed Consolidated Financial Statements
  Weighted-averageU.S. Dollar
    
    
    rate per
    
    
    
    
    
    
    Fair ValueCurrency
    
    Equivalent
    
    
    US $1.00
    
    
    Maturity Dates
    
    Gain (Loss)British pound
    
    $
    17,671
    
    
    
    0.5090
    
    
    Oct. 2007  Oct. 2008
    
    $
    (625
    )Canadian dollar
    
    
    15,651
    
    
    
    1.0310
    
    
    Oct. 2007  Jun. 2008
    
    
    (588
    )Euro
    
    
    17,296
    
    
    
    0.7450
    
    
    Oct. 2007  Dec. 2008
    
    
    (1,115
    )Japanese yen
    
    
    18,105
    
    
    
    112.1250
    
    
    Oct. 2007  Mar. 2009
    
    
    (15
    )$
    68,723
    
    
    
    
    
    
    
    
    
    
    $
    (2,343
    )
 Other Derivatives
   Note 9  Related Party Information
    16




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##### Table of Contents



Oakley, Inc.
Notes to Condensed Consolidated Financial Statements
 Note 10  Segment Information
  Wholesale
    
    
    U.S. Retail
    
    
    ConsolidatedThree months ended September 30, 2007:Net sales to external customers
    
    $
    200,484
    
    
    $
    63,305
    
    
    $
    263,789Intersegment sales
    
    
    11,204
    
    
    
    
    
    
    
    11,204Operating income
    
    
    26,939
    
    
    
    13,890
    
    
    
    40,829Acquisitions of property and equipment
    
    
    12,036
    
    
    
    8,585
    
    
    
    20,621Depreciation and amortization
    
    
    9,310
    
    
    
    2,995
    
    
    
    12,305Three months ended September 30, 2006:Net sales to external customers
    
    $
    163,396
    
    
    $
    46,823
    
    
    $
    210,219Intersegment sales
    
    
    11,132
    
    
    
    
    
    
    
    11,132Operating income
    
    
    16,494
    
    
    
    9,583
    
    
    
    26,077Acquisitions of property and equipment
    
    
    7,265
    
    
    
    6,032
    
    
    
    13,297Depreciation and amortization
    
    
    7,036
    
    
    
    2,480
    
    
    
    9,516Nine months ended September 30, 2007:Net sales to external customers
    
    $
    554,978
    
    
    $
    171,137
    
    
    $
    726,115Intersegment sales
    
    
    31,747
    
    
    
    
    
    
    
    31,747Operating income
    
    
    54,747
    
    
    
    33,181
    
    
    
    87,928Acquisitions of property and equipment
    
    
    34,947
    
    
    
    20,764
    
    
    
    55,711Depreciation and amortization
    
    
    27,398
    
    
    
    8,480
    
    
    
    35,878Nine months ended September 30, 2006:Net sales to external customers
    
    $
    443,918
    
    
    $
    121,583
    
    
    $
    565,501Intersegment sales
    
    
    26,123
    
    
    
    
    
    
    
    26,123Operating income
    
    
    33,063
    
    
    
    23,903
    
    
    
    56,966Acquisitions of property and equipment
    
    
    18,908
    
    
    
    14,093
    
    
    
    33,001Depreciation and amortization
    
    
    21,975
    
    
    
    5,541
    
    
    
    27,516Identifiable assets as of September 30, 2007
    
    $
    754,392
    
    
    $
    146,315
    
    
    $
    900,707Identifiable assets as of December 31, 2006
    
    
    508,886
    
    
    
    124,948
    
    
    
    633,834
 17




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Overview
 ® ® ® ® ® ® ®
  ® ® ®
 September 30,
    
    
    December 31,
    
    
    September 30,2007
    
    
    2006
    
    
    2006United States:Oakley Stores
    
    
    75
    
    
    
    65
    
    
    
    58Sunglass Icon
    
    
    128
    
    
    
    121
    
    
    
    115Oliver Peoples
    
    
    3
    
    
    
    2
    
    
    
    2The Optical Shop of Aspen
    
    
    21
    
    
    
    20
    
    
    
    18227
    
    
    
    208
    
    
    
    193International:Oakley Stores
    
    
    22
    
    
    
    15
    
    
    
    10Bright Eyes
    
    
    32
    
    
    
    
    
    
    
    54
    
    
    
    15
    
    
    
    10281
    
    
    
    223
    
    
    
    203
 Recent Developments
 Agreement and Plan of Merger
  18




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##### Table of Contents



Acquisitions
   19




---



##### Table of Contents



Footwear Restructuring
  Change in Accounting for Uncertain Tax Positions
    20




---



##### Table of Contents



Critical Accounting Policies
  Revenue Recognition
     Inventory Sale and Purchase Transactions with the Same Third Party
   21




---



##### Table of Contents



Inventories
  Impairment of Goodwill and Long-Lived Assets
   Stock-Based Compensation
  Income Taxes and Uncertain Tax Positions
  22




---



##### Table of Contents



Results of Operations
 Three months ended September 30, 2007 and 2006
 Net sales
   Net sales by product category
    Net sales by geographic region
  23




---



##### Table of Contents



Gross profit
   Operating expenses
    24




---



##### Table of Contents



Operating income
  Interest expense and interest income
  Income taxes
   25




---



##### Table of Contents



Net income
  Nine months ended September 30, 2007 and 2006
 Net sales
  Net sales by product category
    Net sales by geographic region
    26




---



##### Table of Contents



Gross profit
   Operating expenses
      27




---



##### Table of Contents



Operating income
  Interest expense and interest income
  Income taxes
  Net income
  Liquidity and Capital Resources
   28




---



##### Table of Contents



Credit Agreement
    29




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##### Table of Contents



Contractual Obligations
  Oct. - Dec.Total
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    ThereafterLines of credit
    
    $
    205,013
    
    
    $
    205,013
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Long-term debt
    
    
    25
    
    
    
    25
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Letters of credit
    
    
    1,957
    
    
    
    1,957
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating leases
    
    
    230,952
    
    
    
    10,487
    
    
    
    37,920
    
    
    
    37,010
    
    
    
    33,699
    
    
    
    29,439
    
    
    
    82,397Endorsement contracts (1)
    
    
    5,555
    
    
    
    1,732
    
    
    
    2,847
    
    
    
    462
    
    
    
    256
    
    
    
    258
    
    
    
    Product purchase commitments (2)
    
    
    110,000
    
    
    
    56,106
    
    
    
    27,594
    
    
    
    8,800
    
    
    
    8,750
    
    
    
    8,750
    
    
    
    Capital purchase commitments
    
    
    1,507
    
    
    
    1,507
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Additional consideration forbusiness acquired
    
    
    2,000
    
    
    
    
    
    
    
    1,000
    
    
    
    1,000
    
    
    
    
    
    
    
    
    
    
    
    $
    557,009
    
    
    $
    276,827
    
    
    $
    69,361
    
    
    $
    47,272
    
    
    $
    42,705
    
    
    $
    38,447
    
    
    $
    82,397
 
 (1)
    
    We have entered into endorsement contracts with selected athletes and others who
endorse our products. Under these contracts, we have agreed to pay certain incentives
based on specific achievements in addition to minimum annual payments. The amounts listed
above for endorsement contracts represent approximate amounts of minimum payments required
under these contracts. Actual amounts paid under these contracts may differ from the
amounts listed as a result of the conditional components of these obligations.(2)
    
    Amounts listed for purchase obligations represent contractual agreements, letters of
credit and open purchase orders for products or services to be incurred in the ordinary
course of business, which are enforceable and legally binding and specify all significant
terms. Seasonality
  Inflation
  Non-GAAP Financial Measures
   30




---



##### Table of Contents



Change in fairFootwear
    
    
    value of foreign
    
    
    Calculation ofReported
    
    
    restructuring
    
    
    currency
    
    
    non-GAAP grossunder GAAP
    
    
    charges
    
    
    derivatives
    
    
    margin (1)Three months ended September 30, 2007Net sales
    
    $
    263,789
    
    
    $
    
    
    
    $
    
    
    
    $
    263,789Cost of goods sold
    
    
    117,284
    
    
    
    
    
    
    
    
    
    
    
    117,284Gross profit
    
    $
    146,505
    
    
    $
    
    
    
    $
    
    
    
    $
    146,505Gross profit as a % of net sales
    
    
    55.5
    %Non-GAAP gross margin
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    55.5
    %Three months ended September 30, 2006Net sales
    
    $
    210,219
    
    
    $
    (22
    )
    
    $
    
    
    
    $
    210,241Cost of goods sold
    
    
    97,120
    
    
    
    157
    
    
    
    295
    
    
    
    96,668Gross profit
    
    $
    113,099
    
    
    $
    (179
    )
    
    $
    (295
    )
    
    $
    113,573Gross profit as a % of net sales
    
    
    53.8
    %Non-GAAP gross margin
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    54.0
    %Nine months ended September 30, 2007Net sales
    
    $
    726,115
    
    
    $
    
    
    
    $
    
    
    
    $
    726,115Cost of goods sold
    
    
    319,895
    
    
    
    
    
    
    
    
    
    
    
    319,895Gross profit
    
    $
    406,220
    
    
    $
    
    
    
    $
    
    
    
    $
    406,220Gross profit as a % of net sales
    
    
    55.9
    %Non-GAAP gross margin
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    55.9
    %Nine months ended September 30, 2006Net sales
    
    $
    565,501
    
    
    $
    (1,847
    )
    
    $
    
    
    
    $
    567,348Cost of goods sold
    
    
    257,164
    
    
    
    1,490
    
    
    
    3,702
    
    
    
    251,972Gross profit
    
    $
    308,337
    
    
    $
    (3,337
    )
    
    $
    (3,702
    )
    
    $
    315,376Gross profit as a % of net sales
    
    
    54.5
    %Non-GAAP gross margin
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    55.6
    %
 
 (1)
    
    We do not use non-GAAP net sales or non-GAAP cost of goods sold separately as non-GAAP
financial measures. Non-GAAP net sales and non-GAAP cost of goods sold are presented herein
solely for the purpose of illustrating the computation of non-GAAP gross margin. 31




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures about Market Risk
 Foreign Currency Exchange Rate Risk
   Weighted-averageU.S. Dollar
    
    
    rate per
    
    
    
    
    
    
    Fair ValueCurrency
    
    Equivalent
    
    
    US $1.00
    
    
    Maturity Dates
    
    
    Gain (Loss)British pound
    
    $
    17,671
    
    
    
    0.5090
    
    
    Oct. 2007  Oct. 2008
    
    $
    (625
    )Canadian dollar
    
    
    15,651
    
    
    
    1.0310
    
    
    Oct. 2007  Jun. 2008
    
    
    (588
    )Euro
    
    
    17,296
    
    
    
    0.7450
    
    
    Oct. 2007  Dec. 2008
    
    
    (1,115
    )Japanese yen
    
    
    18,105
    
    
    
    112.1250
    
    
    Oct. 2007  Mar. 2009
    
    
    (15
    )$
    68,723
    
    
    
    
    
    
    
    
    
    
    $
    (2,343
    )
   Interest Rate Risk
  32




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##### Table of Contents



Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control over Financial Reporting
  33




---



##### Table of Contents



Part II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
    34




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##### Table of Contents



Item 1A. Risk Factors
  If we do not complete the proposed Merger with Luxottica, our business could be adversely affected
and the price of our common stock may decline significantly.
  
    
    the receipt of approvals under the antitrust or similar laws of South Africa;
    
    the absence of any order or injunction prohibiting the consummation of the Merger; and
    
    the filing of an articles of merger with the Secretary of State of the State of
Washington.
   
    
    The price of our common stock has increased significantly since we announced the Merger.
The Merger Price represents a premium of approximately 16% over $25.23, which was the
closing share price of our common stock on the New York Stock Exchange on June 20, 2007,
the date on which the Merger was first announced. The closing share price of our common
stock was $28.45 on June 21, 2007 and $29.27 on November 6, 2007. If the conditions to the
Merger set forth in the Merger Agreement are not met, the Merger may not occur, and the
price of our common stock may decline significantly.
    
    In the event the proposed Merger is terminated by Luxottica, our remedies against
Luxottica with respect to certain breaches of the Merger Agreement, if any, may not be
adequate to cover our damages.
    
    We have incurred substantial transaction costs, and expect to incur additional
transaction costs, that will not be recovered if the Merger is not completed.
    
    We cannot predict the outcome of any legal proceedings that have been or may be
instituted against us, members of our Board of Directors, management and others relating to
the Merger, including any settlement of such proceedings that may be subject to court
approval. The resolution of any litigation or other legal process, regardless of its merit,
could be costly and divert the efforts and attention of our management.
    
    Our managements and employees attention may be diverted from the day-to-day operations
of our business, which could disrupt our relationships with suppliers or customers.
    
    We may experience difficulty in attracting new employees or in retaining current
employees.
 35




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##### Table of Contents



Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
  Issuer Purchases of Equity Securities
   (a)
    
    (b)
    
    (c)
    
    (d)Total number of shares
    
    Approximate dollarpurchased as part of
    
    value of shares that mayTotal number of
    
    Average price
    
    publicly announced
    
    yet be purchased underPeriod
    
    shares purchased
    
    paid per share
    
    program
    
    the programJuly 1  31, 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    23,299,000August 1  31, 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,299,000September 1  30, 2007
    
    
    5,363
    (1)
    
    $
    28.92
    
    
    
    
    
    
    
    23,299,000Total
    
    
    5,363
    
    
    $
    28.92
    
    
    
    
 
 (1)
    
    Represents all of the shares of our common stock withheld from, or delivered by, employees in
order to satisfy applicable tax withholding obligations in connection with the vesting of
restricted stock. These repurchases were not made pursuant to any publicly announced plan or
program. 36




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##### Table of Contents



Item 6. Exhibits
 2.1
    
    
    Agreement and Plan of Merger, dated June 20, 2007, by and among Luxottica
Group S.p.A., Norma Acquisition Corp. and Oakley, Inc., previously filed as
Exhibit 2.1 to the Registrants Current Report on Form 8-K dated June 21,
2007, is incorporated herein by reference.3.1
    
    
    Articles of Incorporation of the Company, previously filed with the
Registration Statement on Form S-1 of Oakley, Inc. (Registration No.
33-93080), is incorporated herein by reference.3.2
    
    
    Amendment No. 1 to the Articles of Incorporation, as filed with the Secretary
of State of the State of Washington on September 26, 1996, previously filed
with the Form 10-K of Oakley, Inc. for the year ended December 31, 1996, is
incorporated herein by reference.3.3
    
    
    Amended and Restated Bylaws of the Company (includes complete text of Bylaws;
amends Section 1 and Sections 3a through 3f of Article IV of the Bylaws of
the Company), previously filed with the Form 10-K of Oakley, Inc. for the
year ended December 31, 1998, is incorporated herein by reference.10.1
    
    
    Amendment to Employment Agreement, dated as of September 19, 2007, by and
between Oakley, Inc. and D. Scott Olivet, filed as Exhibit 10.1 to the
Registrants Current Report on Form 8-K/A dated September 20, 2007, is
incorporated herein by reference.10.2
    
    
    Shared Services Agreement, made as of September 20, 2007, by and between
Oakley, Inc. and Red.com, Inc. dba Red Digital Cinema Camera Company, filed
as Exhibit 10.1 to the Registrants Current Report on Form 8-K dated
September 20, 2007, is incorporated herein by reference.31.1
    
    
    Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    
    Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    
    Certification of CEO and CFO pursuant to Section 1350 of Chapter 63 of Title
18 of the United States Code, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
 37




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##### Table of Contents



SIGNATURES
  Oakley, Inc.November 7, 2007
    
    /s/ D. Scott OlivetD. Scott OlivetChief Executive OfficerNovember 7, 2007
    
    /s/ Richard ShieldsRichard ShieldsChief Financial Officer
 38




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##### Table of Contents



EXHIBIT INDEX
 2.1
    
    
    Agreement and Plan of Merger, dated June 20, 2007, by and among Luxottica
Group S.p.A., Norma Acquisition Corp. and Oakley, Inc., previously filed as
Exhibit 2.1 to the Registrants Current Report on Form 8-K dated June 21,
2007, is incorporated herein by reference.3.1
    
    
    Articles of Incorporation of the Company, previously filed with the
Registration Statement on Form S-1 of Oakley, Inc. (Registration No.
33-93080), is incorporated herein by reference.3.2
    
    
    Amendment No. 1 to the Articles of Incorporation, as filed with the Secretary
of State of the State of Washington on September 26, 1996, previously filed
with the Form 10-K of Oakley, Inc. for the year ended December 31, 1996, is
incorporated herein by reference.3.3
    
    
    Amended and Restated Bylaws of the Company (includes complete text of Bylaws;
amends Section 1 and Sections 3a through 3f of Article IV of the Bylaws of
the Company), previously filed with the Form 10-K of Oakley, Inc. for the
year ended December 31, 1998, is incorporated herein by reference.10.1
    
    
    Amendment to Employment Agreement, dated as of September 19, 2007, by and
between Oakley, Inc. and D. Scott Olivet, filed as Exhibit 10.1 to the
Registrants Current Report on Form 8-K/A dated September 20, 2007, is
incorporated herein by reference.10.2
    
    
    Shared Services Agreement, made as of September 20, 2007, by and between
Oakley, Inc. and Red.com, Inc. dba Red Digital Cinema Camera Company, filed
as Exhibit 10.1 to the Registrants Current Report on Form 8-K dated
September 20, 2007, is incorporated herein by reference.31.1
    
    
    Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    
    Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    
    Certification of CEO and CFO pursuant to Section 1350 of Chapter 63 of Title
18 of the United States Code, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
 39