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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
{X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 4, 2003
OR
{ } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number 000-05083
SAUCONY, INC.
(Exact name of registrant as specified in its charter)
Massachusetts 04-1465840
(State or other jurisdiction of (I.R.S. employer identification number)
incorporation or organization)
13 Centennial Drive, Peabody, MA 01960
(Address of principal executive offices, including zip code)
978-532-9000
(Registrant's telephone number, including area code)
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 [ ] No [ X ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Shares Outstanding
Class as of August 8, 2003
----- --------------------
Class A Common Stock-$.33 1/3 Par Value Per Share 2,520,647
Class B Common Stock-$.33 1/3 Par Value Per Share 3,595,838
---------
6,116,485
=========
SAUCONY, INC. AND SUBSIDIARIES
INDEX
Page
----
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements - Unaudited
Condensed Consolidated Balance Sheets as of July 4, 2003
and January 3, 2003..................................................3
Condensed Consolidated Statements of Income for the thirteen and
twenty-six weeks ended July 4, 2003 and July 5, 2002.................4
Condensed Consolidated Statements of Cash Flows for the
twenty-six weeks ended July 4, 2003 and July 5, 2002.................5
Notes to Condensed Consolidated Financial Statements --
July 4, 2003......................................................6-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................................13-23
Item 3. Quantitative and Qualitative Disclosures about Market Risk..........23
Item 4. Controls and Procedures.............................................24
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.................24
Item 6. Exhibits and Reports on Form 8-K....................................25
Signatures...................................................................25
Exhibit Index................................................................26
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS - UNAUDITED
SAUCONY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in thousands, except share and per share amounts)
ASSETS
July 4, January 3,
2003 2003
---- ----
Current assets:
Cash and cash equivalents....................................................$ 36,703 $ 34,483
Accounts receivable.......................................................... 24,558 15,496
Inventories.................................................................. 19,578 27,201
Prepaid expenses and other current assets.................................... 2,887 3,490
--------- ---------
Total current assets....................................................... 83,726 80,670
--------- ---------
Property, plant and equipment, net.............................................. 5,902 5,714
--------- ---------
Other assets.................................................................... 1,138 1,156
--------- ---------
Total assets....................................................................$ 90,766 $ 87,540
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,946 $ 8,543
Accrued expenses and other current liabilities............................... 6,369 7,800
--------- ---------
Total current liabilities.................................................. 13,315 16,343
--------- ---------
Long-term obligations:
Deferred income taxes........................................................ 2,144 1,859
--------- ---------
Minority interest in consolidated subsidiaries.................................. 813 642
--------- ---------
Stockholders' equity:
Preferred stock, $1.00 par value per share; authorized
500,000 shares; none issued................................................ -- --
Common stock:
Class A $.333 par value per share, authorized 20,000,000 shares
(issued July 4, 2003, 2,711,127 and January 3, 2003, 2,711,127).......... 904 904
Class B $.333 par value per share, authorized 20,000,000 shares
(issued July 4, 2003, 4,168,466 and January 3, 2003, 4,106,343).......... 1,389 1,369
Additional paid in capital................................................... 18,245 17,769
Retained earnings............................................................ 60,522 55,945
Accumulated other comprehensive loss......................................... (38) (870)
Common stock held in treasury, at cost
(July 4, 2003, Class A, 190,480, Class B, 582,326
January 3, 2003, Class A 186,080, Class B, 574,726)...................... (6,423) (6,297)
Unearned compensation........................................................ (105) (124)
--------- ---------
Total stockholders' equity................................................. 74,494 68,696
--------- ---------
Total liabilities and stockholders' equity......................................$ 90,766 $ 87,540
========= =========
The accompanying notes are an integral part of these condensed consolidated financial statements.
SAUCONY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THIRTEEN AND TWENTY-SIX WEEKS ENDED JULY 4, 2003 AND JULY 5, 2002
(Unaudited)
(In thousands, except per share amounts)
Thirteen Thirteen Twenty-Six Twenty-Six
Weeks Weeks Weeks Weeks
Ended Ended Ended Ended
July 4, 2003 July 5, 2002 July 4, 2003 July 5, 2002
------------ ------------ ------------ ------------
Net sales....................................................$ 34,472 $ 36,453 $ 73,540 $ 71,240
Other revenue ............................................... 68 33 163 97
--------- --------- --------- ---------
Total revenue ............................................... 34,540 36,486 73,703 71,337
--------- --------- --------- ---------
Costs and expenses
Cost of sales............................................. 21,044 24,046 44,916 46,934
Selling expenses.......................................... 4,938 5,106 9,870 10,067
General and administrative expenses....................... 4,967 4,661 10,955 9,393
Plant closing and other credits ............................. -- (59) -- (59)
--------- --------- --------- ---------
Total costs and expenses................................ 30,949 33,754 65,741 66,335
--------- --------- --------- ---------
Operating income............................................. 3,591 2,732 7,962 5,002
Non-operating income (expense)
Interest income........................................... 53 67 127 155
Interest expense.......................................... (3) (1) (5) (3)
Foreign currency gains (losses).............................. 73 (19) 58 (44)
Other..................................................... 28 43 17 44
--------- --------- --------- ---------
Income before income taxes and minority interest............. 3,742 2,822 8,159 5,154
Provision for income taxes................................... 1,468 1,216 3,218 2,183
Minority interest in income of consolidated subsidiaries..... 42 57 106 121
--------- --------- --------- ---------
Net income...................................................$ 2,232 $ 1,549 $ 4,835 $ 2,850
========= ========= ========= =========
Per share amounts:
Weighted average common shares and equivalents outstanding:
Basic:
Class A common stock.................................. 2,521 2,567 2,522 2,567
Class B common stock.................................. 3,564 3,532 3,553 3,525
--------- --------- --------- ---------
6,085 6,099 6,075 6,092
========= ========= ========= =========
Diluted:
Class A common stock.................................. 2,521 2,567 2,522 2,567
Class B common stock.................................. 3,778 3,647 3,756 3,601
--------- --------- --------- ---------
6,299 6,214 6,278 6,168
========= ========= ========= =========
Earnings per share:
Basic:
Class A common stock..................................$ 0.35 $ 0.24 $ 0.75 $ 0.44
========= ========= ========= =========
Class B common stock..................................$ 0.38 $ 0.26 $ 0.83 $ 0.49
========= ========= ========= =========
Diluted:
Class A common stock..................................$ 0.33 $ 0.24 $ 0.73 $ 0.44
========= ========= ========= =========
Class B common stock..................................$ 0.37 $ 0.26 $ 0.80 $ 0.48
========= ========= ========= =========
Cash dividends per share of common stock
Class A common stock..................................$ 0.040 $ -- $ 0.040 $ --
========= ========= ========= =========
Class B common stock..................................$ 0.044 $ -- $ 0.044 $ --
========= ========= ========= =========
The accompanying notes are an integral part of these condensed consolidated financial statements.
SAUCONY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE TWENTY-SIX WEEKS ENDED JULY 4, 2003 AND JULY 5, 2002
(Unaudited)
(In thousands)
July 4, July 5,
2003 2002
---- ----
Cash flows from operating activities:
Net income.................................................................$ 4,835 $ 2,850
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization.............................................. 664 898
Provision for bad debts and discounts...................................... 2,731 2,662
Deferred income tax expense................................................ 543 284
Litigation settlement benefit.............................................. (566) --
Gain on sale of equipment.................................................. -- (73)
Marketable securities - unrealized losses.................................. -- 38
Other...................................................................... 295 39
Changes in operating assets and liabilities, net of effect
of acquisitions, dispositions and foreign currency adjustments:
Decrease (increase) in assets:
Accounts receivable.................................................... (10,769) (14,272)
Inventories............................................................ 8,468 2,991
Prepaid expenses and other current assets.............................. 354 45
Increase (decrease) in liabilities:
Accounts payable....................................................... (1,645) 357
Accrued expenses....................................................... (1,697) 1,824
-------- --------
Total adjustments............................................................ (1,622) (5,207)
-------- --------
Net cash provided (used) by operating activities................................ 3,213 (2,357)
-------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment................................... (825) (215)
Proceeds from the sale of equipment.......................................... -- 80
Change in deposits and other................................................. -- 17
Marketable securities - realized gains....................................... -- (4)
-------- --------
Net cash used by investing activities........................................... (825) (122)
-------- --------
Cash flows from financing activities:
Net short-term borrowings.................................................... -- 610
Repayment of long-term debt and capital lease obligations.................... -- (79)
Common stock repurchased..................................................... (126) --
Receipt of payment on notes receivable....................................... -- 312
Issuances of common stock, including options................................. 341 94
-------- --------
Net cash provided by financing activities....................................... 215 937
Effect of exchange rate changes on cash and cash equivalents.................... (383) (208)
-------- --------
Net increase (decrease) in cash and cash equivalents............................ 2,220 (1,750)
Cash and equivalents at beginning of period..................................... 34,483 22,227
-------- --------
Cash and equivalents at end of period...........................................$ 36,703 $ 20,477
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes, net of refunds...............................................$ 3,598 $ 374
======== ========
Interest...................................................................$ 5 $ 3
======== ========
Non-cash investing and financing activities:
Property purchased under capital leases......................................$ -- $ --
======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements.
SAUCONY, INC. AND SUBSIDIARIES
(the "Company")
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 4, 2003
(Unaudited)
(In thousands, except per share amounts)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and, therefore, do not
include all information and footnotes necessary for a fair presentation of
financial position, results of operations and cash flows in conformity with
generally accepted accounting principles. In the opinion of management, all
adjustments (consisting solely of normal recurring adjustments) necessary for a
fair presentation have been included. These interim consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements and the notes, thereto, included in the Company's Annual Report on
Form 10-K, as filed with the Securities and Exchange Commission, for the year
ended January 3, 2003. Operating results for the twenty-six weeks ended July 4,
2003, are not necessarily indicative of the results for the entire year.
NOTE 2 - INVENTORIES
Inventories at July 4, 2003 and January 3, 2003 consisted of the following:
July 4, January 3,
2003 2003
---- ----
Finished goods................$ 19,522 $ 26,528
Work in progress.............. 46 193
Raw materials................. 10 480
----------- -----------
Total.........................$ 19,578 $ 27,201
=========== ===========
NOTE 3 - EARNINGS PER COMMON SHARE
Earnings per Common Share
-------------------------
Thirteen Weeks Ended Thirteen Weeks Ended
July 4, 2003 July 5, 2002
------------ ------------
Basic Diluted Basic Diluted
----- ------- ----- -------
Net income:
Net income available for common
shares and assumed conversions.....................$ 2,232 $ 2,232 $ 1,549 $ 1,549
======== ======== ======== ========
Weighted-average common shares
and equivalents outstanding:
Weighted-average shares outstanding................ 6,085 6,085 6,099 6,099
Effect of dilutive securities:
Employee stock options........................... -- 214 -- 115
-------- -------- -------- --------
6,085 6,299 6,099 6,214
======== ======== ======== ========
Earnings per share:
Net income.........................................$ 0.37 $ 0.35 $ 0.25 $ 0.25
======== ======= ======= ========
Twenty-Six Weeks Ended Twenty-Six Weeks Ended
July 4, 2003 July 5, 2002
------------ ------------
Basic Diluted Basic Diluted
----- ------- ----- -------
Net income:
Net income available for common
shares and assumed conversions.....................$ 4,835 $ 4,835 $ 2,850 $ 2,850
======== ======== ======== ========
Weighted-average common shares
and equivalents outstanding:
Weighted-average shares outstanding................ 6,075 6,075 6,092 6,092
Effect of dilutive securities:
Employee stock options........................... -- 203 -- 76
-------- -------- -------- --------
6,075 6,278 6,092 6,168
======== ======== ======== ========
Earnings per share:
Net income.........................................$ 0.80 $ 0.77 $ 0.47 $ 0.46
======== ======== ======== ========
Options to purchase 209,000 and 336,000 shares of common stock, outstanding at
July 4, 2003 and July 5, 2002, respectively, were not included in the
computations of diluted earnings per share, for the thirteen weeks ended July 4,
2003 and July 5, 2002, since the options were anti-dilutive. Options to purchase
332,000 shares of common stock, outstanding at July 4, 2003 and options to
purchase 468,000 shares of common stock and warrants to purchase 25,000 shares
of common stock, outstanding at July 5, 2002, were not included in the
computations of diluted earnings per share, for the respective twenty-six week
periods, since the options were anti-dilutive.
The Company presents basic and diluted earnings per share using the two-class
method. The two-class method is an earnings allocation formula that determines
earnings per share for each class of common stock according to dividends
declared and participation rights in undistributed earnings.
Basic earnings per share for the Company's Class A and Class B common stock is
calculated by dividing net income by the weighted average number of shares of
Class A and Class B common stock outstanding. Diluted earnings per share for the
Company's Class A and Class B common stock is calculated similarly, except that
the calculation includes the dilutive effect of the assumed exercise of options
issuable under the Company's stock incentive plans and the assumed exercise of
stock warrants.
Net income available to the Company's common stockholders is allocated among our
two classes of common stock, Class A common stock and Class B common stock. The
allocation among each class was based upon the two-class method. Under the
two-class method, earnings per share for each class of common stock is
determined according to dividends declared. Net income allocated to Class A
common stockholders and Class B common stockholders and the calculation of basic
and diluted earnings per share are as follows:
Thirteen Weeks Twenty-Six Weeks
Ended Ended
---------------------------- ----------------------------
July 4, 2003 July 5, 2002 July 4, 2003 July 5, 2002
------------ ------------ ------------ ------------
Net income available to Class A
and Class B Common Stockholders $ 2,232 $ 1,549 $ 4,835 $ 2,850
--------- --------- --------- ---------
Allocation of undistributed net income:
Basic:
Class A common stock.............................$ 874 $ 616 $ 1,896 $ 1,135
Class B common stock............................. 1,358 933 2,939 1,715
--------- --------- --------- ---------
$ 2,232 $ 1,549 $ 4,835 $ 2,850
========= ========= ========= =========
Diluted:
Class A common stock.............................$ 843 $ 604 $ 1,833 $ 1,121
Class B common stock............................. 1,389 945 3,002 1,729
--------- --------- --------- ---------
$ 2,232 $ 1,549 $ 4,835 $ 2,850
========= ========= ========= =========
Weighted average common shares
and equivalents outstanding:
Basic:
Class A common stock 2,521 2,567 2,522 2,567
Class B common stock 3,564 3,532 3,553 3,525
----- ----- ----- -----
6,085 6,099 6,075 6,092
===== ===== ===== =====
Diluted:
Class A common stock 2,521 2,567 2,522 2,567
Class B common stock 3,778 3,647 3,756 3,601
----- ----- ----- -----
6,299 6,214 6,278 6,168
===== ===== ===== =====
Earnings per share:
Basic:
Class A common stock $ 0.35 $ 0.24 $ 0.75 $ 0.44
========= ========= ========= =========
Class B common stock $ 0.38 $ 0.26 $ 0.83 $ 0.49
========= ========= ========= =========
Diluted:
Class A common stock $ 0.33 $ 0.24 $ 0.73 $ 0.44
========= ========= ========= =========
Class B common stock $ 0.37 $ 0.26 $ 0.80 $ 0.48
========= ========= ========= =========
NOTE 4 - STATEMENT OF COMPREHENSIVE INCOME
Thirteen Thirteen Twenty-Six Twenty-Six
Weeks Weeks Weeks Weeks
Ended Ended Ended Ended
July 4, 2003 July 5, 2002 July 4, 2003 July 5, 2002
------------ ------------ ------------ ------------
Net income................................................$ 2,232 $ 1,549 $ 4,835 $ 2,850
Other comprehensive income:
Foreign currency translation adjustments,
net of tax........................................... 578 393 832 416
------- -------- -------- -------
Comprehensive income......................................$ 2,810 $ 1,942 $ 5,667 $ 3,266
======= ======== ======== =======
NOTE 5 - OPERATING SEGMENT DATA
The Company's operating segments are organized based on the nature of products
and consist of the Saucony segment and Other Products segment. The determination
of the reportable segments for the thirteen and twenty-six weeks ended July 4,
2003 and July 5, 2002, as well as the basis of measurement of segment profit or
loss, is consistent with the segment reporting disclosed in the Company's Annual
Report on Form 10-K for the fiscal year ended January 3, 2003.
Thirteen Thirteen Twenty-Six Twenty-Six
Weeks Weeks Weeks Weeks
Ended Ended Ended Ended
July 4, 2003 July 5, 2002 July 4, 2003 July 5, 2002
------------ ------------ ------------ ------------
Revenues:
Saucony...........................................$ 29,874 $ 32,095 $ 62,425 $ 61,050
Other Products.................................... 4,666 4,391 11,278 10,287
--------- --------- --------- --------
Total revenue..................................$ 34,540 $ 36,486 $ 73,703 $ 71,337
========= ========= ========= ========
Income (loss) before income taxes and minority interest:
Saucony...........................................$ 3,794 $ 3,619 $ 7,776 $ 5,847
Other Products.................................... (52) (797) 383 (693)
--------- --------- --------- --------
Total ...............................................$ 3,742 $ 2,822 $ 8,159 $ 5,154
========= ========= ========= ========
NOTE 6 - LITIGATION SETTLEMENT
On May 6, 2003, the United States Bankruptcy Court for the District of Delaware,
upon consideration of the Trustee's Motion for Entry of Order Approving
Settlement with Saucony, Inc., ordered that the proposed settlement entered into
on March 11, 2003, between the trustee, appointed to oversee the liquidation of
assets of a former customer of the Company which filed for bankruptcy protection
on November 4, 1999, and the Company was approved. On May 16, 2003, the Company
paid $530 to settle all preferential claims. As a consequence of the court's
approval of the settlement, the Company recorded a pre-tax benefit of $566 in
the thirteen weeks ending on July 4, 2003 to reduce the amount accrued as of
January 3, 2003. The benefit was recorded in general and administrative
expenses.
NOTE 7 - ASSETS HELD FOR SALE
In February 2002, the Company commenced marketing its Bangor, Maine real
property, which had been previously used for the assembly of our domestic
Saucony footwear. The property is available for immediate sale in its current
condition and the Company expects that the property will be sold during fiscal
2003. The property is being actively marketed for sale at a price that is
reasonable in relation to its current fair value. As of July 4, 2003, the fair
value of the property exceeds the net book value of the property, which was $357
as of July 4, 2003. As a result of the Company's decision to sell the property,
the Bangor, Maine real property has been reclassified to current assets as "Held
For Sale" and is included on the balance sheet at July 4, 2003 under the caption
"Prepaid Expenses and Other Current Assets".
NOTE 8 - GOODWILL AND INTANGIBLE ASSETS
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets", "SFAS 142", eliminates the requirement to amortize goodwill
and indefinite-lived assets, rather, requiring that the Company assesses the
realizability of those assets at least annually or whenever events or changes in
circumstances indicate that the assets may be impaired. Intangible assets with
finite lives continue to be amortized over their useful lives. Goodwill and
intangible assets as of July 4, 2003 and January 3, 2003 are as follows:
July 4, 2003 January 3, 2003
Accumulated Accumulated
Cost Amortization Net Cost Amortization Net
---- ------------ --- ---- ------------ ---
Goodwill...................$ 1,463 $ (551) $ 912 $ 1,463 $ (551) $ 912
Software licenses.......... 1,060 (962) 98 1,060 (928) 132
Capitalized debt
financing costs.......... 87 (56) 31 87 (14) 73
Other...................... 443 (383) 60 381 (378) 3
-------- --------- ------- -------- --------- -------
Total......................$ 3,053 $ (1,952) $ 1,101 $ 2,991 $ (1,871) $ 1,120
======== ========= ======= ======== ========= =======
NOTE 9 - STOCK-BASED COMPENSATION
The Company accounts for employee stock options and share awards under the
intrinsic-value method prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") as interpreted, with
pro-forma disclosures of net earnings and earnings per share, as if the fair
value method of accounting defined in Statement of Financial Accounting
Standards No. 123 ("SFAS 123") applied. SFAS 123 establishes a fair value based
method of accounting for stock-based employee compensation plans. Under the fair
value method, compensation cost is measured at the grant date based on the value
of the award and is recognized over the service period, which is usually the
vesting period.
All stock options granted during the thirteen weeks and twenty-six weeks ended
July 4, 2003 and the thirteen weeks and twenty-six weeks ended July 5, 2002 were
at exercise prices equal to the fair market value of the Company's common stock
at the date of the grant. Accordingly, no compensation cost has been recognized
for such options granted.
In connection with the exercise of options, the Company has realized income tax
benefits of $72 in the thirteen weeks ended July 4, 2003 and, $76 and $5 in the
twenty-six weeks ended July 4, 2003 and July 5, 2002, respectively, that have
been credited to additional paid-in capital.
Had the Company determined the stock-based compensation expense for the
Company's stock options based upon the fair value at the grant date for stock
option awards for the thirteen weeks and twenty-six weeks ended July 4, 2003 and
July 5, 2002, consistent with the provisions of SFAS 123, the Company's net
income and net income per share would have been reduced to the pro forma amounts
indicated below:
Thirteen Weeks Ended Thirteen Weeks Ended
July 4, 2003 July 5, 2002
------------ ------------
Basic Diluted Basic Diluted
----- ------- ----- -------
Net income:
As reported.........................................$ 2,232 $ 2,232 $ 1,549 $ 1,549
Add:Stock-based compensation expense
included in reported net income, net
of related tax benefit.............................. 6 6 6 6
Less:Total stock-based compensation
expense determined under the fair value
based method for all rewards, net of
related tax benefit................................. (248) (248) (177) (177)
------- -------- -------- -------
Pro forma net income .................................$ 1,990 $ 1,990 $ 1,378 $ 1,378
======= ======== ======== =======
Thirteen Weeks Ended Thirteen Weeks Ended
July 4, 2003 July 5, 2002
------------ ------------
Basic Diluted Basic Diluted
----- ------- ----- -------
Pro forma earnings per share:
As reported.........................................$ 0.37 $ 0.35 $ 0.25 $ 0.25
Add:Stock-based compensation expense
included in reported net income, net
of related tax benefit.............................. 0.00 0.00 0.00 0.00
Less: Total stock-based compensation
expense determined under the fair
value based method for all rewards,
net of related tax benefit.......................... (0.04) (0.03) (0.02) (0.03)
------- ------- -------- -------
Pro forma net income per share........................$ 0.33 $ 0.32 $ 0.23 $ 0.22
======= ======= ======== =======
Twenty-Six Weeks Twenty-Six Weeks
Ended Ended
July 4, 2003 July 5, 2002
------------ ------------
Basic Diluted Basic Diluted
----- ------- ----- -------
Net income:
As reported.........................................$ 4,835 $ 4,835 $ 2,850 $ 2,850
Add:Stock-based compensation expense
included in reported net income,
net of related tax benefit.......................... 11 11 13 13
Less:Total stock-based compensation
expense determined under the fair
value based method for all rewards,
net of related tax benefit.......................... (395) (395) (321) (321)
------- -------- -------- -------
Pro forma net income .................................$ 4,451 $ 4,451 $ 2,542 $ 2,542
======= ======== ======== =======
Twenty-Six Weeks Twenty-Six Weeks
Ended Ended
July 4, 2003 July 5, 2002
------------ ------------
Basic Diluted Basic Diluted
----- ------- ----- -------
Pro forma earnings per share:
As reported.........................................$ 0.80 $ 0.77 $ 0.47 $ 0.46
Add:Stock-based compensation expense
included in reported net income,
net of related tax.................................. 0.00 0.00 0.00 0.00
Less: Total stock-based compensation
expense determined under the fair
value based method for all rewards,
net of related tax benefit.......................... (0.07) (0.06) (0.05) (0.05)
------- ------- -------- -------
Pro forma net income per share........................$ 0.73 $ 0.71 $ 0.42 $ 0.41
======= ======= ======== =======
The fair value of options at date of grant was estimated using the Black-Scholes
option-pricing model with the following weighted average assumptions:
Twenty-Six Weeks Twenty-Six Weeks
Ended Ended
July 4, 2003 July 5, 2002
------------ ------------
Expected life (years)................ 5.0 3.2
Risk-free interest rate.............. 2.8% 3.8%
Expected volatility.................. 66.6% 67.3%
Expected dividend yield.............. 1.4% 0.0%
Pro forma net income available to the Company's common stockholders is allocated
among our two classes of common stock, Class A common stock and Class B common
stock. The allocation among each class was based upon the two-class method.
Under the two-class method, pro forma earnings per share for each class of
common stock is determined according to dividends declared. Pro forma net income
allocated to Class A common stockholders and Class B common stockholders and the
calculation of pro forma basic and diluted earnings per share are as follows:
Thirteen Weeks Twenty-Six Weeks
Ended Ended
July 4, 2003 July 5, 2002 July 4, 2003 July 5, 2002
------------ ------------ ------------ ------------
Net income available to Class A
and Class B Common Stockholders
Net income..........................................$ 2,232 $ 1,549 $ 4,835 $ 2,850
Add: Stock-based compensation expense
included in reported net income, net
of related tax benefit....................... 6 6 11 13
Less: Total stock-based compensation expense
determined under the fair value based
method for all awards, net of related tax
benefit...................................... (248) (177) (395) (321)
--------- --------- --------- ---------
Pro forma net income................................$ 1,990 $ 1,378 $ 4,451 $ 2,542
========= ========= ========= =========
Pro forma net income allocated:
Basic:
Class A common stock.............................$ 779 $ 548 $ 1,746 $ 1,013
Class B common stock............................. 1,211 830 2,705 1,529
--------- --------- --------- ---------
$ 1,990 $ 1,378 $ 4,451 $ 2,542
========= ========= ========= =========
Diluted:
Class A common stock.............................$ 752 $ 538 $ 1,687 $ 1,000
Class B common stock............................. 1,238 840 2,764 1,542
--------- --------- --------- ---------
$ 1,990 $ 1,378 $ 4,451 $ 2,542
========= ========= ========= =========
Basic:
Class A common stock.............................$ 0.31 $ 0.21 $ 0.69 $ 0.39
========= ========= ======== =========
Class B common stock.............................$ 0.34 $ 0.23 $ 0.76 $ 0.43
========= ========= ======== =========
Diluted:
Class A common stock.............................$ 0.30 $ 0.21 $ 0.67 $ 0.39
========= ========= ======== =========
Class B common stock.............................$ 0.33 $ 0.23 $ 0.74 $ 0.43
========= ========= ======== =========
NOTE 10 - RECENT ACCOUNTING PRONOUNCEMENTS
SFAS 150
In May 2003, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 150. "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity" ("SFAS 150"). SFAS 150
establishes standards for how an issuer classifies and measures in its statement
of financial position certain financial instruments with characteristics of both
liabilities and equity. SFAS 150 requires than an issuer classify a financial
instrument that is within its scope as a liability, or an asset in some
circumstances, because that financial instrument embodies an obligation of the
issuer. SFAS 150 is effective for financial instruments entered into or modified
after May 31, 2003, and with one exception, is effective at the beginning of the
first interim period beginning after June 15, 2003. The effect of adopting SFAS
150 will be recognized as a cumulative effect of a change in an accounting
principle as of the beginning of the interim period of adoption. Restatement of
prior periods is not permitted. The adoption of SFAS 150 is not expected to have
an impact of the Company's financial position, results of operations or cash
flows.
SFAS 149
In April 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS 149"). SFAS 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 149 requires that
contracts with comparable characteristics be accounted for similarly. In
particular, SFAS 149 (1) clarifies under what circumstances a contract with an
initial net investment meets the characteristic of a derivative discussed in
paragraph 6(b) of SFAS 133, (2) clarifies when a derivative contains a financing
component, (3) amends the definition of an underlying to conform it to language
used in Financial Accounting Standards Interpretation No. 45, "Guarantors of
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others", and (4) amends certain other existing
accounting pronouncements. SFAS 149 is effective for contracts entered into or
modified after June 30, 2003, except as stated in paragraph 40. This statement
is also effective for hedging relationships designated after June 30, 2003,
except as stated in paragraph 40. The adoption of SFAS 149 did not have a
material impact on the Company's financial position, results of operations or
cash flows.
FIN 45
In November 2002, the Financial Accounting Standards Board issued Financial
Accounting Standards Board Interpretation No. 45, "Guarantors of Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on the disclosures to be
made by a guarantor in its interim and annual financial statements about
obligations under specified guarantees that have been issued. The interpretation
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The disclosure requirements of FIN 45 are effective for
financial statements of interim or annual periods ending after December 15,
2002. The recognition of a guarantor's obligation should be applied
prospectively to guarantees issued after December 15, 2002. The adoption of FIN
45 did not have a material impact on the Company's financial position, results
of operations or cash flows.
FIN 46
In January 2003, the Financial Accounting Standards Board issued Financial
Accounting Standards Board Interpretation No. 46, "Consolidation of Variable
Interest Entities" ("FIN 46"). FIN 46 explains how to identify variable interest
entities and how to determine when a business enterprise should include the
assets, liabilities, non-controlling interests and results of activities of a
variable interest entity in its consolidated financial statements. The
interpretation requires existing unconsolidated variable interest entities to be
consolidated by their primary beneficiaries if the entities do not effectively
disperse risks among parties involved. Variable interest entities that
effectively disperse risks will not be consolidated unless a single party holds
an interest or combination of interest that effectively recombines risks that
were previously dispersed. FIN 46 applies immediately to variable interest
entities created after January 31, 2003 and to variable interest entities in
which an enterprise obtains an interest after that date. The interpretation
applies in the first fiscal year or interim period beginning after June 15, 2003
to variable interest entities in which an enterprise holds a variable interest
that is acquired before February 1, 2003. The adoption of FIN 46 did not have a
material impact on the Company's financial position, results of operations or
cash flows.
NOTE 11 - SUBSEQUENT EVENT - SHARE PURCHASE AGREEMENT
On July 24, 2003, the Company entered into a Share Purchase Agreement with the
minority shareholder of Saucony Canada, Inc. whereby the Company increased its
ownership percentage of Saucony Canada, Inc to 95% from 85%. The purchase price
is estimated at $539,000 and is valued at the net book value of Saucony Canada,
Inc., as of July 4, 2003.
NOTE 12 - DIVIDENDS
On July 16, 2003, the Company paid its first regular quarterly cash dividends,
in the amount of $0.040 per share on the Class A Common Stock and $0.044 per
share on the Class B Common Stock, to all stockholders of record at the close of
business on June 18, 2003. As provided in the Company's corporate charter, cash
dividends paid on Class B Common Stock are in an amount equal to 110% of the
amount paid on Class A Common Stock. The Company's credit facilities contain
restrictions that may limit the Company's ability to pay a regular cash
dividend.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Note Regarding Forward-Looking Statements
You should read the following discussion together with the condensed
consolidated financial statements and related notes appearing elsewhere in this
Quarterly Report on Form 10-Q. This Item contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934 that involve risks and uncertainties. All
statements other than statements of historical fact included in this report are
forward-looking statements. When we use the words "will", "believes",
"anticipates", "intends", "estimates", "expects", "projects" and similar
expressions in this report, we intend to identify forward-looking statements,
although not all forward-looking statements contain these identifying words.
Actual results may differ materially from those included in such forward-looking
statements. Important factors which could cause actual results to differ
materially include those set forth in our Annual Report on Form 10-K for the
fiscal year ended January 3, 2003 under "Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations - Certain Other
Factors That May Affect Future Results" filed by us with the Securities and
Exchange Commission on April 3, 2003, which discussion is filed as Exhibit 99.1
to this Quarterly Report on Form 10-Q and incorporated herein by this reference.
The forward-looking statements provided by us in this Quarterly Report on Form
10-Q represent our estimates as of the date this report is filed with the
Securities and Exchange Commission. We anticipate that subsequent events and
developments will cause these estimates to change. However, while we may elect
to update our forward-looking statements in the future, we specifically disclaim
any obligation to do so. The forward-looking statements contained in this report
should not be relied upon as representing our estimates as of any date
subsequent to the date this report is filed with the Securities and Exchange
Commission.
Our discussion and analysis of our financial condition and results of operations
are based upon our 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 amount of assets and
liabilities at the date of the financial statements and revenues and expenses
during the reporting period. Actual results may differ materially from these
estimates. Critical accounting policies are those policies that are reflective
of significant judgments and uncertainties and could potentially result in
materially different results under different assumptions and conditions. Our
most critical accounting policies involve: revenue recognition, accounts
receivable - allowances for doubtful accounts, inventories, property, plant and
equipment, impairment of long-lived assets, income taxes, stock-based
compensation, hedge accounting for derivatives and contingencies. For a more
detailed explanation of our critical accounting policies, refer to our Annual
Report on Form 10-K for the year ended January 3, 2003, as filed with the
Securities and Exchange Commission on April 3, 2003.
Highlights
Dollar amounts throughout this Item 2 are in thousands, except per share
amounts.
Thirteen Weeks and Twenty-Six Weeks Ended
July 4, 2003 Compared to Thirteen Weeks and
Twenty-Six Weeks Ended July 5, 2002
-----------------------------------
Increase (Decrease)
Thirteen Weeks Twenty-Six Weeks
-------------- ----------------
Net sales.............................................$ (1,981) (5.4%) $ 2,300 3.2%
Gross profit......................................... 1,021 8.2% 4,318 17.8%
Selling, general and administrative expenses......... 138 1.4% 1,365 7.0%
$ Change
--------
Thirteen Weeks Twenty-Six Weeks
-------------- ----------------
Operating income......................................... $859 $2,960
Income before income taxes and minority interest......... 920 3,005
Net income............................................... 683 1,985
Percent of Net Sales
--------------------
Thirteen Weeks Twenty-Six Weeks
Ended Ended
------------------- -------------------
July 4, July 5, July 4, July 5,
2003 2002 2003 2002
---- ---- ---- ----
Gross profit......................................... 39.0% 34.0% 38.9% 34.1%
Selling, general and administrative expenses......... 28.7 26.8 28.3 27.3
Operating income..................................... 10.4 7.5 10.8 7.0
Income before income taxes........................... 10.9 7.7 11.1 7.2
Net income........................................... 6.5 4.2 6.6 4.0
The following table sets forth the approximate contribution to net sales (in
dollars and as a percentage of consolidated net sales) attributable to our
Saucony segment and our Other Products segment for the thirteen and twenty-six
weeks ended July 4, 2003 and July 5, 2002:
Thirteen Weeks Ended
--------------------
July 4, 2003 July 5, 2002
------------ ------------
Saucony..........................$ 29,828 86.5% $ 32,075 88.0%
Other Products................... 4,644 13.5% 4,378 12.0%
--------- ------ --------- ------
Total............................$ 34,472 100.0% $ 36,453 100.0%
========= ===== ========= =====
Twenty-Six Weeks Ended
----------------------
July 4, 2003 July 5, 2002
------------ ------------
Saucony..........................$ 62,313 84.7% $ 60,982 85.6%
Other Products................... 11,227 15.3% 10,258 14.4%
--------- ------ --------- ------
Total............................$ 73,540 100.0% $ 71,240 100.0%
========= ===== ========= =====
Thirteen Weeks Ended July 4, 2003 Compared to Thirteen Weeks Ended July 5, 2002
- -------------------------------------------------------------------------------
Consolidated Net Sales
Net sales decreased $1,981, or 5%, to $34,472 in the thirteen weeks ended July
4, 2003 from $36,453 in the thirteen weeks ended July 5, 2002.
On a geographic basis, domestic net sales decreased $1,981, or 7%, to $27,139 in
the thirteen weeks ended July 4, 2003 from $29,120 in the thirteen weeks ended
July 5, 2002. International net sales remained constant at $7,333 in the
thirteen weeks ended July 4, 2003 compared to the thirteen weeks ended July 5,
2002.
Saucony Brand Segment
Worldwide net sales of Saucony branded footwear and Saucony branded apparel
decreased $2,247, or 7%, to $29,828 in the thirteen weeks ended July 4, 2003
from $32,075 in the thirteen weeks ended July 5, 2002, due primarily to an 8%
decrease in worldwide footwear unit volume and lower domestic and international
wholesale per pair average selling prices, partially offset by favorable
currency exchange resulting from a weaker U.S. dollar against European and
Canadian currencies. The overall average domestic wholesale per pair selling
price for domestic footwear decreased 4% in the thirteen weeks ended July 4,
2003 compared to the thirteen weeks ended July 5, 2002, due to a change in the
product mix of our technical and special makeup footwear sold in the thirteen
weeks ended July 4, 2003 to lower priced products.
Domestic net sales decreased $2,319, or 9%, to $22,684 in the thirteen weeks
ended July 4, 2003 from $25,003 in the thirteen weeks ended July 5, 2002, due
primarily to a 6% decrease in footwear unit volumes and, to a lesser extent,
lower wholesale per pair average selling prices. The footwear unit volume
decrease in the thirteen weeks ended July 4, 2003 was due primarily to a 53%
decrease in closeout footwear unit volumes due primarily to improved inventory
management and a 17% decrease in Original footwear unit volumes. Due to shifts
in consumer preferences, the decline in Originals footwear unit volume may
continue through the balance of fiscal 2003. These decreases were partially
offset by a 7% increase in technical footwear unit volumes. The average
wholesale per pair selling prices for domestic footwear decreased due to a
change in both the technical and special make up footwear product mix to lower
priced products. Sales of closeout footwear accounted for approximately 3% of
domestic Saucony net sales in the thirteen weeks ended July 4, 2003 compared to
5% in the thirteen weeks ended July 5, 2002. The Originals footwear accounted
for 21% of domestic footwear unit volume in the thirteen weeks ended July 4,
2003 versus 24% in the thirteen weeks ended July 5, 2002.
International net sales increased $72, or 1%, to $7,144 in the thirteen weeks
ended July 4, 2003 from $7,072 in the thirteen weeks ended July 5, 2002, due
primarily to favorable currency exchange resulting from a weaker U.S. dollar
against European and Canadian currencies, partially offset by a 16% decrease in
footwear unit volumes and lower average wholesale per pair selling prices.
International distributor footwear unit volumes decreased 29%, due primarily to
a 50% decrease in Originals footwear unit volumes sold in Japan and, to a lesser
extent, an overall 12% decrease in footwear unit volumes sold throughout our
international distribution channel, excluding Japan. Distributor sales into the
Japanese footwear market accounted for 7% of international sales in the thirteen
weeks ended July 4, 2003, compared to 12% in the thirteen weeks ended July 5,
2002. Footwear unit volumes at our European and Canadian subsidiaries, decreased
3% in the thirteen weeks ended July 4, 2003 versus the thirteen weeks ended July
5, 2002, with the decreased footwear unit volume occurring in Canada. The
footwear average wholesale per pair selling price decreased primarily due to a
change in the product mix for technical footwear to lower priced products.
Other Products Segment
Worldwide sales of Other Products increased $266, or 6%, to $4,644 in the
thirteen weeks ended July 4, 2003 from $4,378 in the thirteen weeks ended July
5, 2002, due primarily to increased sales at our factory outlet stores and, to a
lesser extent, increased sales of Spot-bilt brand footwear, partially offset by
an 11% decrease in sales of our Hind brand apparel.
Domestic net sales of Other Products increased $338, or 8%, to $4,455 in the
thirteen weeks ended July 4, 2003 from $4,117 in the thirteen weeks ended July
5, 2002. Sales at our factory outlet division stores increased 28%, due
primarily to the addition of three factory outlet stores in the thirteen weeks
ended July 4, 2003. Spot-bilt brand sales increased 142% in the thirteen weeks
ended July 4, 2003, due primarily to increased footwear unit volumes from new
product introductions. Hind apparel sales decreased 11% due primarily to a 28%
decrease in the average wholesale per item selling price of our Hind apparel,
partially offset by a 26% increase in unit volume. Both the increase in Hind
apparel unit volume and the decrease in average wholesale per item selling price
of our Hind apparel were due to higher closeout unit volumes sold in the
thirteen weeks ended July 4, 2003.
International net sales of Other Products decreased $72, or 28%, to $189 in the
thirteen weeks ended July 4, 2003 from $261 in the thirteen weeks ended July 5,
2002, due primarily to decreased Hind apparel sales in Canada and Europe.
Costs and Expenses
Our gross margin in the thirteen weeks ended July 4, 2003 increased 5.0% to
39.0% from 34.0% in the thirteen weeks ended July 5, 2002, due primarily to
lower Saucony footwear product costs and lower provisions for obsolete Saucony
footwear and Hind brand apparel. Other factors contributing to the margin
increase were favorable currency exchange due to the impact of a weaker U.S.
dollar against European and Canadian currencies and lower overall sales of
low-margin closeout footwear.
The ratio of selling, general and administrative expenses to net sales increased
1.9% to 28.7% in the thirteen weeks ended July 4, 2003 from 26.8% in the
thirteen weeks ended July 5, 2002. The increase in the ratio resulted from lower
sales in the thirteen weeks ended July 4, 2003 and, to a lesser extent,
increased selling, general and administrative spending. In absolute dollars,
selling, general and administrative expenses increased $138, or 1%, to $9,905 in
the thirteen weeks ended July 4, 2003 from $9,767 in the thirteen weeks ended
July 5, 2002. Increased spending in the thirteen weeks ended July 4, 2003 was
due primarily to increased incentive compensation, increased insurance costs,
increased administrative and selling payroll and increased employee healthcare
costs, partially offset by lower provisions for bad debt expense due primarily
to a litigation settlement which reduced bad debt expense by $566 and, to a
lesser extent, lower depreciation expense and reduced variable selling expenses.
Interest Income
Interest income decreased to $53 in the thirteen weeks ended July 4, 2003 from
$67 in the thirteen weeks ended July 5, 2002 due to lower interest rates in the
thirteen weeks ended July 4, 2003.
Interest Expense
Interest expense increased to $3 in the thirteen weeks ended July 4, 2003 from
$1 in the thirteen weeks ended July 5, 2002 due to borrowings by our Canadian
subsidiary under its bank credit facility.
Income Before Tax and Minority Interest
Thirteen Weeks Ended
--------------------
July 4, July 5,
2003 2002
---- ----
Segment
Saucony............................$ 3,794 $ 3,619
Other Products..................... (52) (797)
--------- --------
Total..............................$ 3,742 $ 2,822
========= ========
Income before tax and minority interest increased $920 in the thirteen weeks
ended July 4, 2003 to $3,742 compared to $2,822 in the thirteen weeks ended July
5, 2002, due primarily to increased pre-tax income realized by our Other
Products segment. The improvement in our Other Products segment income before
tax and minority interest was due primarily to improved profitability of our
Hind apparel brand due to improved margins and lower operating expenses and
improved profitability at our factory outlet stores due to increased sales and
improved gross margins. Income before tax and minority interest for our Saucony
segment increased due to improved gross margins.
Income Taxes
The provision for income taxes increased to $1,468 in the thirteen weeks ended
July 4, 2003 from $1,216 in the thirteen weeks ended July 5, 2002, due primarily
to higher pre-tax income realized by our Hind apparel brand and factory outlet
stores and higher pre-tax income realized by our Saucony segment. The effective
tax rate decreased 3.9% to 39.2% in the thirteen weeks ended July 4, 2003 from
43.1% in the thirteen weeks ended July 5, 2002 due to a shift in the composition
of domestic and foreign pre-tax earnings.
Minority Interest in Net Income of Consolidated Subsidiary
Minority interest expense represents a minority shareholders' allocable share of
our Canadian subsidiary's earnings after deducting for income tax. Minority
interest expense decreased to $42 in the thirteen weeks ended July 4, 2003
compared to $57 in the thirteen weeks ended July 5, 2002 due to lower sales,
increased operating expenses and foreign currency losses on forward currency
contracts.
Net Income
Net income for the thirteen weeks ended July 4, 2003 increased to $2,232, or
$0.37 per diluted share, compared to $1,549, or $0.25 per diluted share, in the
thirteen weeks ended July 5, 2002. Weighted average common shares and equivalent
shares used to calculate diluted earnings per share were 6,299 and 6,214,
respectively, in the thirteen weeks ended July 4, 2003 and July 5, 2002.
Twenty-six Weeks Ended July 4, 2003 Compared to Twenty-six Weeks Ended July 5,
2002
- --------------------------------------------------------------------------------
Consolidated Net Sales
Net sales increased $2,300, or 3%, to $73,540 in the twenty-six weeks ended July
4, 2003 from $71,240 in the twenty-six weeks ended July 5, 2002.
On a geographic basis, domestic net sales increased $1,355, or 2%, to $56,715 in
the twenty-six weeks ended July 4, 2003 from $55,360 in the twenty-six weeks
ended July 5, 2002. International net sales increased $945, or 6%, to $16,825 in
the twenty-six weeks ended July 4, 2003 from $15,880 in the twenty-six weeks
ended July 5, 2002.
Saucony Brand Segment
Worldwide net sales of Saucony branded footwear and Saucony branded apparel
increased $1,331, or 2%, to $62,313 in the twenty-six weeks ended July 4, 2003
from $60,982 in the twenty-six weeks ended July 5, 2002, due primarily to a 3%
increase in footwear unit volume and favorable currency exchange resulting from
a weaker U.S. dollar against European and Canadian currencies, partially offset
by lower domestic wholesale per pair average selling prices. The average
domestic wholesale per pair selling price for domestic footwear decreased 5% in
the twenty-six weeks ended July 4, 2003 compared to the twenty-six weeks ended
July 5, 2002, due to an increase in Originals and special makeup footwear unit
volumes, which are sold at prices below our technical footwear and a change in
the product mix of our technical and special makeup footwear sold in the
twenty-six weeks ended July 4, 2003 to lower priced products.
Domestic net sales increased $379, or 1%, to $46,340 in the twenty-six weeks
ended July 4, 2003 from $45,961 in the twenty-six weeks ended July 5, 2002, due
primarily to a 6% increase in footwear unit volumes, partially offset by lower
wholesale per pair average selling prices. The footwear unit volume increase in
the twenty-six weeks ended July 4, 2003 was due primarily to a 29% increase in
special makeup footwear unit volumes, a 10% increase in technical footwear unit
volumes and, to a lesser extent, an 8% increase in Originals footwear unit
volumes. These increases were partially offset by a 61% decrease in closeout
footwear unit volumes. The decrease in closeout footwear unit volumes was due
primarily to improved inventory management. The average wholesale per pair
selling prices for domestic footwear decreased due to a change in the product
mix to increased Originals and special makeup footwear unit volumes, and a
change in the technical footwear product mix to lower priced product. Sales of
closeout footwear accounted for approximately 2% of domestic Saucony net sales
in the twenty-six weeks ended July 4, 2003 compared to 7% in the twenty-six
weeks ended July 5, 2002. The Originals footwear accounted for 22% of domestic
footwear unit volume in both the twenty-six weeks ended July 4, 2003 and the
twenty-six weeks ended July 5, 2002.
International net sales increased $952, or 6%, to $15,973 in the twenty-six
weeks ended July 4, 2003 from $15,021 in the twenty-six weeks ended July 5,
2002, due primarily to favorable currency exchange resulting from a weaker U.S.
dollar against European and Canadian currencies and increased sales of Saucony
apparel, partially offset by a 7% decrease in footwear unit volumes and lower
average wholesale per pair selling prices. International distributor footwear
unit volumes decreased 18%, due to a 41% decrease in Originals footwear unit
volumes sold in Japan, partially offset by an overall 9% increase in footwear
unit volumes sold throughout our international distribution channel, excluding
Japan. Distributor sales into the Japanese footwear market accounted for 7% of
international sales in the twenty-six weeks ended July 4, 2003, compared to 11%
in the twenty-six weeks ended July 5, 2002. Footwear unit volumes at our
European and Canadian subsidiaries, increased 1% in the twenty-six weeks ended
July 4, 2003 versus the twenty-six weeks ended July 5, 2002, with the majority
of the increased footwear unit volume occurring in Europe. The footwear average
wholesale per pair selling price decreased due to a change in the international
distributors product mix for technical footwear to lower priced product,
partially offset by a change in product mix to increased technical footwear sold
at our European subsidiaries.
Other Products Segment
Worldwide sales of Other Products increased $969, or 9%, to $11,227 in the
twenty-six weeks ended July 4, 2003 from $10,258 in the twenty-six weeks ended
July 5, 2002, due primarily to a 13% increase in sales of our Hind brand apparel
and, to a lesser extent, increased sales at our factory outlet stores and
increased Spot-bilt brand footwear sales.
Domestic net sales of Other Products increased $976, or 10%, to $10,375 in the
twenty-six weeks ended July 4, 2003 from $9,399 in the twenty-six weeks ended
July 5, 2002. Hind apparel sales increased 15% due primarily to a 45% increase
in Hind apparel unit volume, partially offset by a 21% decrease in the average
wholesale per item selling price of our Hind apparel. Both the increase in Hind
apparel unit volume and the decrease in average wholesale per item selling price
of our Hind apparel were due to higher closeout unit volumes sold in the
twenty-six weeks ended July 4, 2003. Sales at our factory outlet division
increased 8% due primarily to the addition of three factory outlet stores in the
twenty-six weeks ended July 4, 2003. Spot-bilt brand sales increased 44% in the
twenty-six weeks ended July 4, 2003, due primarily to increased footwear unit
volumes.
International net sales of Other Products decreased $7, or 1%, to $852 in the
twenty-six weeks ended July 4, 2003 from $859 in the twenty-six weeks ended July
5, 2002, due primarily to decreased Hind apparel sales in Canada.
Costs and Expenses
Our gross margin in the twenty-six weeks ended July 4, 2003 increased 4.8% to
38.9% from 34.1% in the twenty-six weeks ended July 5, 2002, due primarily to
lower Saucony footwear product costs, lower sales of low-margin closeout
footwear, lower provisions for Hind apparel and Saucony footwear inventories and
favorable currency exchange due to the impact of a weaker U.S. dollar against
European and Canadian currencies.
The ratio of selling, general and administrative expenses to net sales increased
1.0% to 28.3% in the twenty-six weeks ended July 4, 2003 from 27.3% in the
twenty-six weeks ended July 5, 2002. The increase in the ratio resulted from
increased selling, general and administrative spending in the twenty-six weeks
ended July 4, 2003. In absolute dollars, selling, general and administrative
expenses increased $1,365, or 7%, to $20,825 in the twenty-six weeks ended July
4, 2003 from $19,460 in the twenty-six weeks ended July 5, 2002. Increased
spending in the twenty-six weeks ended July 4, 2003 was due primarily to
increased incentive compensation, increased insurance costs, increased
administrative and selling payroll, increased employee healthcare costs,
increased print media advertising and higher professional fees, partially offset
by lower provisions for bad debt expense due to a litigation settlement which
reduced bad debt expense by $566, lower depreciation expense, reduced variable
selling expenses and decreased athlete and event sponsorship.
Interest Income
Interest income decreased to $127 in the twenty-six weeks ended July 4, 2003
from $155 in the twenty-six weeks ended July 5, 2002 due to lower interest rates
in the twenty-six weeks ended July 4, 2003.
Interest Expense
Interest expense increased to $5 in the twenty-six weeks ended July 4, 2003 from
$3 in the twenty-six weeks ended July 5, 2002 due to borrowings by our Canadian
subsidiary under its bank credit facility.
Income Before Tax and Minority Interest
Twenty-Six Weeks Ended
----------------------
July 4, July 5,
2003 2002
---- ----
Segment
Saucony............................$ 7,776 $ 5,847
Other Products..................... 383 (693)
--------- ---------
Total..............................$ 8,159 $ 5,154
========= =========
Income before tax and minority interest increased $3,005 in the twenty-six weeks
ended July 4, 2003 to $8,159 compared to $5,154 in the twenty-six weeks ended
July 5, 2002, due primarily to increased pre-tax income realized by our Saucony
segment due to higher sales, improved gross margins and improved gross margins.
The improvement in our Other Products segment income before tax and minority
interest was due primarily to improved profitability at our Hind apparel brand
due to increased sales and lower operating expenses and, to a lesser extent,
improved profitability at our factory outlets stores due to increased sales and
improved gross margins.
Income Taxes
The provision for income taxes increased to $3,218 in the twenty-six weeks ended
July 4, 2003 from $2,183 in the twenty-six weeks ended July 5, 2002, due
primarily to higher pre-tax income realized by our Saucony segment and higher
pre-tax income realized by our Hind apparel brand and at our factory outlet
stores. The effective tax rate decreased 3.0% to 39.4% in the twenty-six weeks
ended July 4, 2003 from 42.4% in the twenty-six weeks ended July 5, 2002 due to
a shift in the composition of domestic and foreign pre-tax earnings.
Minority Interest in Net Income of Consolidated Subsidiary
Minority interest expense represents a minority shareholders' allocable share of
our Canadian subsidiary's earnings after deducting for income tax. Minority
interest expense decreased to $106 in the twenty-six weeks ended July 4, 2003
compared to $121 the thirteen weeks ended July 5, 2002 due to increased
operating expenses and foreign currency losses on forward currency contracts.
Net Income
Net income for the twenty-six weeks ended July 4, 2003 increased to $4,835, or
$0.77 per diluted share, compared to $2,850 or $0.46 per diluted share, in the
twenty-six weeks ended July 5, 2002. Weighted average common shares and
equivalent shares used to calculate diluted earnings per share were 6,278 and
6,168, respectively, in the twenty-six weeks ended July 4, 2003 and July 5,
2003.
Liquidity and Capital Resources
As of July 4, 2003, our cash and cash equivalents totaled $36,703, an increase
of $2,220 from January 3, 2003. The increase is due primarily to the generation
of $3,213 of cash from operations and the receipt of $341 from the issuance of
shares of our common stock. The cash generated from operations in the twenty-six
weeks ended July 4, 2003 was due primarily to $4,835 of net income and an $8,468
decrease in inventories, partially offset by an $8,604 increase in accounts
receivable, a $1,645 decrease in accounts payable and a $1,697 decrease in
accrued expenses. The increase in cash from operations was offset in part by a
decrease in cash from investing activities due to the purchase of capital
assets, including computer technology upgrades, facility improvements and the
expansion of our factory outlet stores of $825 and a decrease in cash from
financing activities due to the repurchase of shares of our common stock of
$126.
Our accounts receivable at July 4, 2003 increased $8,604 from January 3, 2003,
net of the provision for bad debts and discounts and the litigation settlement,
due to increased sales of our Saucony footwear products in the twenty-six weeks
ended July 4, 2003 compared to the twenty-six weeks ended January 3, 2003. Our
days sales outstanding for accounts receivable improved to 61 days in the
twenty-six weeks ended July 4, 2003 from 68 days in the twenty-six weeks ended
July 5, 2002 due to a shift in the domestic sales mix to products and programs
which offer less dating. Day's sales outstanding is defined as the number of
average daily net sales in our accounts receivable as of the period end date and
is calculated by dividing the end of period accounts receivable by the average
daily net sales for the period. The provision for bad debts and discounts,
excluding the litigation settlement, increased to $2,731 in the twenty-six weeks
ended July 4, 2003 from $2,662 in the twenty-six weeks ended July 5, 2002 due to
higher discounts in the twenty-six weeks ended July 4, 2003. Inventories
decreased $8,468 in the twenty-six weeks ended July 4, 2003 from January 3,
2003, due primarily to improvements in our supply chain and lower seasonal
inventory requirements. Our inventory turns increased to 3.8 turns in the
twenty-six weeks ended July 4, 2003 from 3.5 turns in the twenty-six weeks ended
July 5, 2002. The number of day's sales in inventory decreased to 79 days in the
twenty-six weeks ended July 4, 2003 from 100 days in the twenty-six weeks ended
July 5, 2002. The inventory turns ratio is calculated as our cost of sales for a
period divided by our average inventory during the period. Day's sales in
inventory is defined as the number of average daily cost of sales in our
inventory as of the period end date and is calculated by dividing the end of
period inventory by the average daily cost of sales for the period.
Principal factors, other than net income, accounts receivable, provision for bad
debts and discounts and inventory, affecting our operating cash flows in the
twenty-six weeks ended July 4, 2003 included a $1,645 decrease in accounts
payable, due to payments made for inventory received in the fourth quarter of
fiscal 2002 and lower inventory levels, a $1,697 decrease in accrued expenses,
due primarily to the payment of fiscal 2002 incentive compensation, the payment
of freight and import duty accrued for inventory purchased in the fourth quarter
of fiscal 2002 and decreased income tax accruals due to higher income tax
payments, the payment of $530 to settle litigation with the court appointed
trustee of a former customer of ours and a $354 decrease in prepaid expenses.
On July 16, 2003, we paid our first regular quarterly cash dividends, in the
amount of $0.040 per share on our Class A Common Stock and $0.044 per share on
our Class B Common Stock, to all stockholders of record at the close of business
on June 18, 2003. As provided in our corporate charter, cash dividends paid on
our Class B Common Stock are in an amount equal to 110% of the amount paid on
our Class A Common Stock. Our credit facilities contain restrictions that may
limit our ability to pay a regular cash dividend.
Our liquidity is contingent upon a number of factors, principally our future
operating results. Management believes that our current cash and cash
equivalents, credit facilities and internally generated funds are adequate to
meet our working capital requirements and to fund our capital investment needs
and debt service payments. During the twenty-six weeks ended July 4, 2003, we
generated $3,213 in cash from operations, due primarily to decreased
inventories. In the twenty-six weeks ended July 5, 2002, we used $2,357 in cash
to fund operations, due primarily to an increase in accounts receivable. At July
4, 2003 and July 5, 2002, we had no borrowings outstanding under our credit
facilities.
INFLATION AND CURRENCY RISK
The effect of inflation on our results of operations over the past three years
has been minimal. The impact of currency fluctuation on our purchase of
inventory from foreign suppliers has been minimal as the transactions were
denominated in U.S. dollars. We are, however, subject to currency fluctuation
risk with respect to the operating results of our foreign subsidiaries and
certain foreign currency denominated payables. We have entered into forward
foreign exchange contracts to minimize various transaction currency risks. We
believe that our forward foreign currency contracts function as economic hedges
of our cash flows and that our foreign exchange management program effectively
minimizes various transaction currency risks.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS 150
In May 2003, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 150. "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity." SFAS 150 establishes standards
for how an issuer classifies and measures in its statement of financial position
certain financial instruments with characteristics of both liabilities and
equity. SFAS 150 requires than an issuer classify a financial instrument that is
within its scope as a liability, or an asset in some circumstances, because that
financial instrument embodies an obligation of the issuer. SFAS 150 is effective
for financial instruments entered into or modified after May 31, 2003, and with
one exception, is effective at the beginning of the first interim period
beginning after June 15, 2003. We will recognize the effect of adopting SFAS 150
as a cumulative effect of a change in an accounting principle as of the
beginning of the interim period of adoption. Restatement of prior periods is not
permitted. We do not expect the adoption of SFAS 150 to have an impact on our
financial position, results of operations or cash flows.
SFAS 149
In April 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS 149 amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts, collectively referred to as
derivatives, and for hedging activities under Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS 149 requires that contracts with comparable characteristics be
accounted for similarly. In particular, SFAS 149 (1) clarifies under what
circumstances a contract with an initial net investment meets the characteristic
of a derivative discussed in paragraph 6(b) of SFAS 133, (2) clarifies when a
derivative contains a financing component, (3) amends the definition of an
underlying to conform it to language used in Financial Accounting Standards
Interpretation No. 45, "Guarantors of Accounting And Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others" and (4)
amends other existing accounting pronouncements. SFAS 149 is effective for
contracts entered into or modified after June 30, 2003, except as stated in
paragraph 40. This statement is also effective for hedging relationships
designated after June 30, 2003, except as stated in paragraph 40. We have not
determined the impact of adopting SFAS 149 on our financial position, results of
operations or cash flows
FIN 45
In November 2002, the Financial Accounting Standards Board issued Financial
Accounting Standards Board Interpretation No. 45, "Guarantors of Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." FIN 45 elaborates on the disclosures to be made by a
guarantor in its interim and annual financial statements about our obligations
under specified guarantees that have been issued. The interpretation also
clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The disclosure requirements of FIN 45 are effective for
financial statements of interim or annual periods ending after December 15,
2002. The recognition of a guarantor's obligation should be applied
prospectively to guarantees issued after December 15, 2002. The adoption of FIN
45 did not have a material impact on our financial position, results of
operations or cash flows.
FIN 46
In January 2003, the Financial Accounting Standards Board issued Financial
Accounting Standards Board Interpretation No. 46, "Consolidation of Variable
Interest Entities." FIN 46 explains how to identify variable interest entities
and how to determine when a business enterprise should include the assets,
liabilities, non-controlling interests and results of activities of a variable
interest entity in its consolidated financial statements. The interpretation
requires existing unconsolidated variable interest entities to be consolidated
by their primary beneficiaries if the entities do not effectively disperse risks
among parties involved. Variable interest entities that effectively disperse
risks will not be consolidated unless a single party holds an interest or
combination of interest that effectively recombines risks that were previously
dispersed. FIN 46 applies immediately to variable interest entities created
after January 31, 2003 and to variable interest entities in which an enterprise
obtains an interest after that date. The interpretation applies in the first
fiscal year or interim period beginning after June 15, 2003 to variable interest
entities in which an enterprise holds a variable interest that is acquired
before February 1, 2003. The adoption of FIN 46 did not have a material impact
on our financial positions, results of operations or cash flows.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have performed an analysis to assess the potential effect of reasonably
possible near-term changes in inflation and foreign currency exchange rates. The
effect of inflation on our results of operations over the past three years has
been minimal. The impact of currency fluctuation on the purchase of inventory by
us from foreign suppliers has been non-existent as all the transactions were
denominated in U.S. dollars. However, we are subject to currency fluctuation
risk with respect to the operating results of our foreign subsidiaries and some
foreign currency denominated payables. We have entered into certain forward
foreign exchange contracts to minimize the transaction currency risk.
ITEM 4. CONTROLS AND PROCEDURES
Our management, with the participation of our chief executive officer and chief
financial officer, evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act)
as of July 4, 2003. Based on this evaluation, our chief executive officer and
chief financial officer concluded that, as of July 4, 2003, our disclosure
controls and procedures were (1) designed to ensure that material information
relating to our company, including our consolidated subsidiaries, is made known
to our chief executive officer and chief financial officer by others within
those entities, particularly during the period in which this report was being
prepared and (2) effective, in that they provide reasonable assurance that
information required to be disclosed by us in the reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the SEC's rules and forms.
No change in our internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal
quarter ended July 4, 2003 that has materially affected, or is reasonably likely
to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At our 2003 Annual Meeting of Stockholders held on May 21, 2003, the following
matters were acted upon by our stockholders:
1. The election of John H. Fisher, Charles A. Gottesman, Robert J. LeFort,
Jr., Jonathan O. Lee and John J. Neuhauser as directors.
2. The approval of our 2003 Stock Incentive Plan and the authorization of an
aggregate of 1,750,000 shares of our Common Stock, which may be either
Class A Common Stock or Class B Common Stock, for issuance under the plan.
The results of the voting on these matters presented to stockholders at the
meeting is set forth below:
Votes Votes
For Withheld
--- --------
1. Election of Directors
John H. Fisher 2,243,731 264,326
Charles A. Gottesman 2,243,731 264,326
Jonathan O. Lee 2,309,941 198,116
Robert J. LeFort, Jr. 2,309,941 198,116
John J. Neuhauser 2,309,941 198,116
Votes Votes
For Against
--- -------
2. Approval of the 2003
Stock Incentive Plan 1,499,732 478,988
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
The Exhibits filed as part of this Quarterly Report on Form 10-Q are listed
on the Exhibit Index immediately preceding such Exhibits, which Exhibit
Index is incorporated herein by reference.
b. Reports on Form 8-K
On April 30, 2003, we furnished a Current Report on Form 8-K dated the same
date. The report contains a copy of our press release announcing our
earnings for the period ended April 4, 2003. We furnished the report
pursuant to Item 12 (Results of Operations and Financial Conditions) using
Item 9 (Regulation FD Disclosure), in accordance with the procedural
guidance in SEC Release No. 33-8216.
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Saucony, Inc.
Date: August 18, 2003 By: /s/ Michael Umana
- ----- --------------- ---------------------
Michael Umana
Executive Vice President, Finance
Chief Financial Officer
(Duly authorized officer and
principal financial officer)
EXHIBIT INDEX
Exhibit No. Description
10.1 - 2003 Stock Incentive Plan is incorporated herein by reference to Exhibit
99.1 to the Registrant's Registration Statement on Form S-8 (File No.
333-105886) filed with the Securities and Exchange Commission on June 6,
2003.
10.2 - Saucony, Inc. Non-Qualified Retirement Plan, as amended, is incorporated
herein by reference to Exhibit 4.1 to the Registrant's Registration
Statement on Form S-8 (File No. 333-105910) filed with the Securities and
Exchange Commission on June 6, 2003.
10.3 - Amendment to Amended and Restated Credit Agreement, dated August 30,
2002, between Saucony, Inc. and HSBC Bank USA (as successor in interest to
State Street Bank and Trust Company).
31.1 - Certification of President and Chief Executive Officer pursuant to
Exchange Act Rule 13a-14(a).
31.2 - Certification of Chief Financial Officer pursuant to Exchange Act Rule
13a-14(a).
32.1 - Certification of President and Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbannes-Oxley Act of 2002.
32.2 - Certification of the Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbannes-Oxley Act
of 2002.
99.1 - "Certain Factors That May Affect Future Results", as set forth within
"Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operation" of the Registrant's Annual Report on Form 10-K for
the fiscal year ended January 3, 2003 filed with the Securities and
Exchange Commission on April 3, 2003.