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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 2, 2004
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 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 6, 2004
----- --------------------
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 4,008,528
---------
6,529,175
=========
SAUCONY, INC. AND SUBSIDIARIES
INDEX
Page
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements - Unaudited......................................3
Condensed Consolidated Balance Sheets as of July 2, 2004
and January 2, 2004...................................................3
Condensed Consolidated Statements of Income for the
thirteen and twenty-six weeks ended July 2, 2004 and July 4, 2003.....4
Condensed Consolidated Statements of Cash Flows for the
twenty-six weeks ended July 2, 2004 and July 4, 2003..................5
Notes to Condensed Consolidated Financial Statements --
July 2, 2004.......................................................6-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.....................................13-24
Item 3. Quantitative and Qualitative Disclosures about Market Risk...........24
Item 4. Controls and Procedures...........................................24-25
Part II. OTHER INFORMATION
Item 2. Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities............................................25
Item 4. Submission of Matters to a Vote of Security Holders...............25-26
Item 5. Other Information...................................................26
Item 6. Exhibits and Reports on Form 8-K.....................................26
Signature.....................................................................27
Exhibit Index.................................................................28
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS - UNAUDITED
SAUCONY, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheet
(In thousands, except share and per share amounts)
ASSETS
July 2,
2004 January 2
(Unaudited) 2004
----------- ----------
Current assets:
Cash and cash equivalents.....................................$ 14,266 $ 41,781
Short-term investments........................................ 4,870 5,788
Accounts receivable........................................... 30,751 19,167
Inventories................................................... 27,565 22,421
Deferred income taxes......................................... 1,781 2,340
Prepaid expenses and other current assets..................... 1,141 1,329
----------- ----------
Total current assets........................................ 80,374 92,826
----------- ----------
Property, plant and equipment, net............................... 7,888 6,201
----------- ----------
Other assets:
Goodwill, net................................................. 912 912
Deferred charges, net......................................... 138 124
Other......................................................... 116 130
----------- ----------
Total other assets.......................................... 1,166 1,166
----------- ----------
Total assets.....................................................$ 89,428 $ 100,193
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capitalized lease obligations..............$ 70 $ --
Accounts payable.............................................. 11,977 9,259
Accrued expenses and other current liabilities................ 11,161 9,544
----------- ----------
Total current liabilities................................... 23,208 18,803
----------- ----------
Long-term obligations:
Capitalized lease obligations, net of current portion......... 186 --
Deferred income taxes......................................... 2,059 2,016
----------- ----------
Total long-term obligations................................. 2,245 2,016
----------- ----------
Minority interest in consolidated subsidiary..................... 374 320
----------- ----------
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 2, 2004, 2,520,647 and January 2, 2004, 2,711,127) 840 904
Class B, $.333 par value per share, authorized 20,000,000 shares
(issued July 2, 2004, 4,007,335 and January 2, 2004, 4,210,560) 1,336 1,403
Additional paid in capital.................................... 16,727 19,010
Retained earnings............................................. 44,249 63,655
Accumulated other comprehensive income........................ 449 505
Common stock held in treasury, at cost
(January 2, 2004, Class A, 190,480, Class B, 582,326)...... -- (6,423)
----------- ----------
Total stockholders' equity.................................. 63,601 79,054
----------- ----------
Total liabilities and stockholders' equity.......................$ 89,428 $ 100,193
=========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
SAUCONY, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
For the thirteen and twenty-six weeks ended July 2, 2004 and July 4, 2003
(Unaudited)
(in thousands, except per share amounts)
Thirteen Thirteen Twenty-Six Twenty-Six
Weeks Weeks Weeks Weeks
Ended Ended Ended Ended
July 2, July 4, July 2, July 4,
2004 2003 2004 2003
Net sales..................................................$ 43,979 $ 34,472 $ 90,948 $ 73,540
Other revenue ............................................. 103 68 282 163
---------- ---------- ---------- ----------
Total revenue ............................................. 44,082 34,540 91,230 73,703
---------- ---------- ---------- ----------
Costs and expenses
Cost of sales........................................... 25,908 21,044 53,820 44,916
Selling expenses........................................ 6,311 4,938 12,369 9,870
General and administrative expenses..................... 6,512 4,967 12,590 10,955
---------- ---------- ---------- ----------
Total costs and expenses.............................. 38,731 30,949 78,779 65,741
---------- ---------- ---------- ----------
Operating income........................................... 5,351 3,591 12,451 7,962
Non-operating income (expense)
Interest income......................................... 57 53 126 127
Interest expense........................................ (5) (3) (5) (5)
Foreign currency........................................ (217) 73 (361) 58
Other................................................... 14 28 17 17
---------- ---------- ----------- -----------
Income before income taxes and minority interest........... 5,200 3,742 12,228 8,159
Provision for income taxes................................. 2,129 1,468 4,888 3,218
Minority interest in income of consolidated subsidiaries... 26 42 64 106
---------- ---------- ---------- ----------
Net income.................................................$ 3,045 $ 2,232 $ 7,276 $ 4,835
========== ========== ========== ==========
Per share amounts:
Earnings per share:
Basic:
Class A common stock................................$ 0.44 $ 0.35 $ 1.07 $ 0.75
========== ========== ========== ==========
Class B common stock................................$ 0.49 $ 0.38 $ 1.18 $ 0.83
========== ========== ========== ==========
Diluted:
Class A common stock................................$ 0.41 $ 0.33 $ 0.98 $ 0.73
========== ========== ========== ==========
Class B common stock................................$ 0.45 $ 0.37 $ 1.08 $ 0.80
========== ========== ========== ==========
Weighted average common shares and equivalents outstanding:
Basic:
Class A common stock................................ 2,521 2,521 2,521 2,522
Class B common stock................................ 3,992 3,564 3,896 3,553
---------- ---------- ---------- ----------
6,513 6,085 6,417 6,075
========== ========== ========== ==========
Diluted:
Class A common stock................................ 2,521 2,521 2,521 2,522
Class B common stock................................ 4,527 3,778 4,430 3,756
---------- ---------- ---------- ----------
7,048 6,299 6,951 6,278
========== ========== ========== ==========
Cash dividends per share of common stock:
Class A common stock................................$ 0.050 $ 0.040 $ 4.100 $ 0.040
Class B common stock................................$ 0.055 $ 0.044 $ 4.110 $ 0.044
The accompanying notes are an integral part of these consolidated financial statements.
SAUCONY, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
For the Twenty-Six Weeks Ended July 2, 2004 and July 4, 2003
(Unaudited)
(In thousands)
July 2, July 4,
2004 2003
---- ----
Cash flows from operating activities:
Net income.................................................................$ 7,276 $ 4,835
-------- ---------
Adjustments to reconcile net income to net cash
(used) provided by operating activities:
Depreciation and amortization.............................................. 736 664
Provision for bad debts and discounts...................................... 3,580 2,731
Deferred income tax expense ............................................... 598 543
Litigation settlement ..................................................... -- (566)
Tax benefit on stock option exercises........................................... 1,107 76
Other...................................................................... 12 219
Changes in operating assets and liabilities, net of effect
foreign currency adjustments:
(Increase) decrease in assets:
Accounts receivable.................................................... (15,111) (10,769)
Inventories............................................................ (5,251) 8,468
Prepaid expenses and other current assets.............................. 181 354
Increase (decrease) in liabilities:
Accounts payable....................................................... 2,722 (1,645)
Accrued expenses....................................................... 1,602 (1,697)
-------- ---------
Total adjustments............................................................ (9,824) (1,622)
-------- ---------
Net cash (used) provided by operating activities................................ (2,548) 3,213
-------- ---------
Cash flows from investing activities:
Purchases of property, plant and equipment................................... (2,101) (825)
Sales of short-term investments.............................................. 5,769 --
Purchases of short-term investments......................................... (4,863) --
Change in deposits and other................................................. (42) --
-------- ---------
Net cash used by investing activities........................................ (1,237) (825)
-------- ---------
Cash flows from financing activities:
Repayment of capitalized lease obligations................................... (23) --
Dividends paid on common stock............................................... (26,595) --
Common stock repurchased..................................................... -- (126)
Issuances of common stock, stock option exercises............................ 2,550 341
Issuances of common stock, stock purchase warrant exercises.................. 352 --
-------- ---------
Net cash (used) provided by financing activities................................ (23,716) 215
Effect of exchange rate changes on cash and cash equivalents.................... (14) (383)
-------- ---------
Net (decrease) increase in cash and cash equivalents............................ (27,515) 2,220
Cash and equivalents at beginning of period..................................... 41,781 34,483
-------- ---------
Cash and equivalents at end of period...........................................$ 14,266 $ 36,703
======== =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes, net of refunds...............................................$ 1,952 $ 3,598
======== =========
Interest...................................................................$ 5 $ 5
======== =========
Non-cash investing and financing activities:
Property purchased under capital leases......................................$ 279 $ --
======== =========
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 2, 2004
(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. The balance sheet amounts at January 2,
2004 in the accompanying financial statements are derived from the Company's
audited financial statements for the fiscal year then ended, included in the
Company's Annual Report on Form 10-K for such fiscal year. 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 2, 2004. Operating results for the
thirteen and twenty-six weeks ended July 2, 2004 are not necessarily indicative
of the results for the entire year.
NOTE 2 - INVENTORIES
Inventories at July 2, 2004 and January 2, 2004 consisted of the following:
July 2, January 2,
2004 2004
---- ----
Finished goods.......................$ 27,487 $ 22,322
Raw material and supplies............ 46 34
Work in progress..................... 32 65
----------- -----------
Total................................$ 27,565 $ 22,421
=========== ===========
NOTE 3 - EARNINGS PER COMMON SHARE
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
presented:
Thirteen Weeks Twenty-Six Weeks
Ended Ended
-------------------------- --------------------------
July 2, 2004 July 4, 2003 July 2, 2004 July 4, 2003
------------ ------------ ------------ ------------
Net income available to Class A
and Class B common stockholders $ 3,045 $ 2,232 $ 7,276 $ 4,835
--------- --------- --------- ---------
Allocation of undistributed net income:
Basic:
Class A common stock.............................$ 1,111 $ 874 $ 2,695 $ 1,896
Class B common stock............................. 1,934 1,358 4,581 2,939
--------- --------- --------- ---------
$ 3,045 $ 2,232 $ 7,276 $ 4,835
========= ========= ========= =========
Diluted:
Class A common stock.............................$ 1,023 $ 843 $ 2,481 $ 1,833
Class B common stock............................. 2,022 1,389 4,795 3,002
--------- --------- --------- ---------
$ 3,045 $ 2,232 $ 7,276 $ 4,835
========= ========= ========= =========
Weighted average common shares
and equivalents outstanding:
Basic:
Class A common stock 2,521 2,521 2,521 2,522
Class B common stock 3,992 3,564 3,896 3,553
--------- --------- -------- --------
6,513 6,085 6,417 6,075
========= ========= ======== ========
Diluted:
Class A common stock 2,521 2,521 2,521 2,522
Class B common stock 4,527 3,778 4,430 3,756
--------- --------- -------- --------
7,048 6,299 6,951 6,278
========= ========= ======== ========
Earnings per share:
Basic:
Class A common stock $ 0.44 $ 0.35 $ 1.07 $ 0.75
========= ========= ======== =========
Class B common stock $ 0.49 $ 0.38 $ 1.18 $ 0.83
========= ========= ======== =========
Diluted:
Class A common stock $ 0.41 $ 0.33 $ 0.98 $ 0.73
========= ========= ======== =========
Class B common stock $ 0.45 $ 0.37 $ 1.08 $ 0.80
========= ========= ======== =========
On February 17, 2004, the Company's Board of Directors declared a special cash
dividend of $4.00 per share on each of the Company's Class A and Class B common
stock. On March 17, 2004 the Company paid the special dividend to stockholders
of record at the close of business on March 3, 2004. The increase in the
weighted average common shares and equivalents in the thirteen and twenty-six
weeks ended July 2, 2004, compared to the thirteen and twenty-six weeks ended
July 4, 2003 was due to increased Class B common shares outstanding and the
impact of our special dividend which increased the dilutive effect of
outstanding options. The increase in Class B common shares outstanding was due
to the issuance of approximately 386,000 Class B common shares due to the
exercise of stock options and stock purchase warrants. Options outstanding at
March 1, 2004, the ex-dividend date for the special dividend, were increased due
to customary dilutive adjustments in the number of outstanding options to
purchase Class B common stock, and the exercise price of such options, in
proportion to changes in the market price of our Class B common stock on that
date. As a consequence of the special dividend, the number of options to
purchase our Class B common stock was increased by approximately 288,000
options, which increase was in proportion to changes in the market price of our
Class B common stock as of March 1, 2004, the ex-dividend date. The aggregate
dividend payout for the special dividend amounted to $25,990.
Options to purchase 209,000 shares of common stock outstanding at July 4, 2003
were not included in the computations of diluted earnings per share, for the
thirteen week period then-ended, since the options were anti-dilutive. Options
to purchase 332,000 shares of common stock outstanding at July 4, 2003 were not
included in the computations of diluted earnings per share, for the twenty-six
week period then-ended, since the options were anti-dilutive. All of the options
to purchase shares of common stock outstanding at July 2, 2004 were included in
the computations of diluted earnings per share for the thirteen and twenty-six
week periods then-ended.
NOTE 4 - STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 148 ("SFAS 148") Accounting for
Stock-Based Compensation - Transition and Disclosure, an amendment of Statement
of Financial Accounting Standards No. 123 ("SFAS 123") encourages, but does not
require, companies to record compensation expense for stock-based employee
compensation plans at fair value. 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 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 twenty-six weeks ended July 2, 2004 and the
twenty-six weeks ended July 4, 2003 were at exercise prices equal to or greater
than 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 $71 and $72 for the thirteen weeks ended July 2, 2004 and July 4,
2003, respectively, and $1,107 and $76 in the twenty-six weeks ended July 2,
2004 and July 4, 2003, respectively, that have been credited to additional
paid-in capital.
Had the Company determined the stock-based compensation expense for the
Company's stock options based upon the fair value at the grant date for stock
option awards for the thirteen weeks and twenty-six weeks ended July 2, 2004 and
July 4, 2003, consistent with the fair value method provisions of SFAS 123, the
Company's net income and net income per share would have been reduced to the pro
forma amounts indicated below:
Thirteen Weeks Ended Thirteen Weeks Ended
July 2, 2004 July 4, 2003
----------------------- -----------------------
Basic Diluted Basic Diluted
-------- --------- --------- ----------
Net income:
As reported........................................$ 3,045 $ 3,045 $ 2,232 $ 2,232
Add:Stock-based compensation expense
included in reported net income, net
of related tax benefit............................. -- -- 6 6
Less:Total stock-based compensation
expense determined under the fair value
based method for all awards, net of
related tax benefit................................ (349) (349) (248) (248)
-------- --------- --------- ---------
Pro forma net income ................................$ 2,696 $ 2,696 $ 1,990 $ 1,990
======== ========= ========= =========
Pro forma net income allocated:
Class A common stock.............................$ 983 $ 906 $ 782 $ 760
Class B common stock............................. 1,713 1,790 1,208 1,230
-------- --------- --------- ---------
Total.....................................$ 2,696 $ 2,696 $ 1,990 $ 1,990
======== ========= ========= =========
Thirteen Weeks Ended Thirteen Weeks Ended
July 2, 2004 July 4, 2003
---------------------- ----------------------
Basic Diluted Basic Diluted
-------- --------- --------- ---------
Pro forma earnings per share:
Class A common stock
As reported........................................$ 0.44 $ 0.41 $ 0.35 $ 0.33
Add:Stock-based compensation expense
included in reported net income, net
of related tax benefit............................. -- -- -- --
Less: Total stock-based compensation
expense determined under the fair
value based method for all awards,
net of related tax benefit......................... (0.05) (0.05) (0.04) (0.03)
-------- -------- --------- ---------
Pro forma net income per share.......................$ 0.39 $ 0.36 $ 0.31 $ 0.30
======== ======== ========= =========
Thirteen Weeks Ended Thirteen Weeks Ended
July 2, 2004 July 4, 2003
---------------------- ---------------------
Basic Diluted Basic Diluted
-------- --------- --------- ---------
Pro forma earnings per share:
Class B common stock
As reported........................................$ 0.49 $ 0.45 $ 0.38 $ 0.37
Add:Stock-based compensation expense
included in reported net income,
net of related tax.............................. -- -- -- --
Less: Total stock-based compensation
expense determined under the fair
value based method for all awards,
net of related tax benefit......................... (0.06) (0.05) (0.04) (0.04)
-------- -------- --------- ----------
Pro forma net income per share.......................$ 0.43 $ 0.40 $ 0.34 $ 0.33
======== ======== ========= ==========
Twenty-Six Weeks Ended Twenty-Six Weeks Ended
July 2, 2004 July 4, 2003
----------------------- ----------------------
Basic Diluted Basic Diluted
--------- --------- --------- ---------
Net income:
As reported........................................$ 7,276 $ 7,276 $ 4,835 $ 4,835
Add:Stock-based compensation expense
included in reported net income, net
of related tax benefit............................. -- -- 11 11
Less:Total stock-based compensation
expense determined under the fair value
based method for all awards, net of
related tax benefit................................ (687) (687) (395) (395)
-------- --------- --------- ---------
Pro forma net income ................................$ 6,589 $ 6,589 $ 4,451 $ 4,451
======== ========= ========= =========
Pro forma net income allocated:
Class A common stock.............................$ 2,440 $ 2,247 $ 1,746 $ 1,690
Class B common stock............................. 4,149 4,342 2,705 2,761
-------- --------- --------- ---------
Total.....................................$ 6,589 $ 6,589 $ 4,451 $ 4,451
======== ========= ========= =========
Twenty-Six Weeks Ended Twenty-Six Weeks Ended
July 2, 2004 July 4, 2003
----------------------- ----------------------
Basic Diluted Basic Diluted
----- ------- ----- -------
Pro forma earnings per share:
Class A common stock
As reported........................................$ 1.07 $ 0.98 $ 0.75 $ 0.73
Add:Stock-based compensation expense
included in reported net income, net
of related tax benefit............................. -- -- -- --
Less: Total stock-based compensation
expense determined under the fair
value based method for all awards,
net of related tax benefit......................... (0.10) (0.09) (0.06) (0.06)
-------- -------- --------- ---------
Pro forma net income per share.......................$ 0.97 $ 0.89 $ 0.69 $ 0.67
======== ======== ========= =========
Twenty-Six Weeks Ended Twenty-Six Weeks Ended
July 2, 2004 July 4, 2003
---------------------- ----------------------
Basic Diluted Basic Diluted
----- ------- ----- -------
Pro forma earnings per share:
Class B common stock
As reported........................................$ 1.18 $ 1.08 $ 0.83 $ 0.80
Add:Stock-based compensation expense
included in reported net income,
net of related tax.............................. -- -- -- --
Less: Total stock-based compensation
expense determined under the fair
value based method for all awards,
net of related tax benefit......................... (0.11) (0.10) (0.07) (0.06)
-------- -------- --------- ----------
Pro forma net income per share.......................$ 1.07 $ 0.98 $ 0.76 $ 0.74
======== ======== ========= ==========
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 2, 2004 July 4, 2003
------------ ------------
Expected life (years).................. 5.0 5.0
Risk-free interest rate................ 3.0% 2.8%
Expected volatility.................... 55.1% 66.6%
Expected dividend yield................ 1.2% 1.4%
NOTE 5 - STATEMENT OF COMPREHENSIVE INCOME
Thirteen Thirteen Twenty-Six Twenty-Six
Weeks Weeks Weeks Weeks
Ended Ended Ended Ended
July 2, 2004 July 4, 2003 July 2, 2004 July 4, 2003
------------ ------------ ------------ ------------
Net income................................................$ 3,045 $ 2,232 $ 7,276 $ 4,835
Other comprehensive income:
Foreign currency translation adjustments,
net of tax........................................... 120 578 (56) 832
------- -------- -------- -------
Comprehensive income......................................$ 3,165 $ 2,810 $ 7,220 $ 5,667
======= ======== ======== =======
NOTE 6 - GOODWILL AND DEFERRED CHARGES
Goodwill and intangible assets as of July 2, 2004 and January 2, 2004 are as
follows:
July 2, 2004 January 2, 2004
------------------------------------ -------------------------------------
Accumulated Accumulated
Cost Amortization Net Cost Amortization Net
---- ------------ --- ---- ------------ ---
Goodwill...................$ 1,463 $ (551) $ 912 $ 1,463 $ (551) $ 912
======== ========= ======= ======== ========= =======
Deferred charges:
Software licenses........ 1,135 (1,026) 109 1,060 (992) 68
Capitalized debt
financing costs........ 87 (87) -- 87 (76) 11
Other.................... 444 (415) 29 444 (399) 45
-------- --------- ------- -------- --------- -------
Total......................$ 1,666 $ (1,528) $ 138 $ 1,591 $ (1,467) $ 124
======== ========= ======= ======== ========= =======
Amortization of intangible assets was $28 and $56, respectively, in the thirteen
weeks ended July 2, 2004 and July 4, 2003. For the twenty-six weeks ended July
2, 2004 and July 4, 2003, amortization expense was $60 and $103, respectively.
NOTE 7 - OPERATING SEGMENT DATA
The Company's operating segments are organized based on the nature of products
and consist of the Saucony segment and Other Products segment. The determination
of the reportable segments for the thirteen and twenty-six weeks ended July 2,
2004 and July 4, 2003, as well as the basis of measurement of segment profit or
loss, is consistent with the segment reporting disclosed in the Company's Annual
Report on Form 10-K for the fiscal year ended January 2, 2004.
Thirteen Thirteen Twenty-Six Twenty-Six
Weeks Weeks Weeks Weeks
Ended Ended Ended Ended
July 2, 2004 July 4, 2003 July 2, 2004 July 4, 2003
------------ ------------ ------------ ------------
Revenues:
Saucony...........................................$ 38,438 $ 29,874 $ 79,677 $ 62,425
Other Products.................................... 5,644 4,666 11,553 11,278
--------- --------- --------- --------
Total revenue..................................$ 44,082 $ 34,540 $ 91,230 $ 73,703
========= ========= ========= ========
Income (loss) before income taxes and minority interest:
Saucony...........................................$ 5,193 $ 3,794 $ 11,565 $ 7,776
Other Products.................................... 7 (52) 663 383
--------- --------- --------- --------
Total ...............................................$ 5,200 $ 3,742 $ 12,228 $ 8,159
========= ========= ========= ========
NOTE 8 - STOCKHOLDERS' EQUITY
Effective July 1, 2004, companies incorporated in Massachusetts became subject
to the Massachusetts Business Corporation Act, Chapter 156D. Chapter 156D
provides that shares that are reacquired by a company become authorized but
unissued shares under Section 6.31. As a result, Chapter 156D eliminates the
concept of "treasury shares" and provides that shares reacquired by a company
become "authorized but unissued" shares. Accordingly, at July 2, 2004, we have
redesignated the Company's existing treasury shares, at an aggregate cost of
$6,565, as authorized but unissued and allocated this amount to the common
stock's par value and additional paid in capital.
NOTE 9 - SUPPLEMENTAL CASH FLOW DISCLOSURE
In February 2004, two officers who are also directors and principal holders of
the Company's Class A common stock, each delivered 3,609 shares of Class B
common stock in payment of their respective option exercises to purchase 9,999
shares each of the Company's Class B common stock.
NOTE 10 - SUBSEQUENT EVENT
On August 2, 2004, Saucony announced that it has retained the services of
Chestnut Securities, Inc., Boston, Massachusetts, to assist it in its analysis
and consideration of various strategic alternatives that may be available to it,
including a possible sale of Saucony. Saucony has not determined whether to
pursue any particular strategic alternative. There can be no assurance that, if
any transaction is commenced, it will be completed or as to the value that any
such transaction might have for Saucony's stockholders.
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 used in this report, the words "will",
"believes", "anticipates", "intends", "estimates", "expects", "projects" and
similar expressions are intended 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 2, 2004 under "Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations - Certain Factors That
May Affect Future Results" filed by us with the Securities and Exchange
Commission on April 1, 2004, 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.
Critical Accounting Policies and Estimates
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 and hedge accounting for derivatives. For a more detailed
explanation of our critical accounting policies, refer to our Annual Report on
Form 10-K for the year ended January 2, 2004, as filed with the Securities and
Exchange Commission on April 1, 2004.
Dollar amounts throughout this Item 2 are in thousands, except per share
amounts.
Highlights
Thirteen Weeks and Twenty-Six Weeks Ended
July 2, 2004 Compared to Thirteen Weeks and
Twenty-Six Weeks Ended July 4, 2003
--------------------------------------------
Increase (Decrease)
-------------------
Thirteen Weeks Twenty-Six Weeks
-------------- ----------------
Net sales.............................................$ 9,507 27.6% $ 17,408 23.7%
Gross profit......................................... 4,643 34.6% 8,504 29.7%
Selling, general and administrative expenses......... 2,918 29.5% 4,134 19.9%
Increase (Decrease)
-------------------
Thirteen Weeks Twenty-Six Weeks
-------------- ----------------
Operating income......................................... $1,760 $4,489
Income before income taxes and minority interest......... 1,458 4,069
Net income............................................... 813 2,441
Percent of Net Sales
--------------------
Thirteen Weeks Twenty-Six Weeks
Ended Ended
------------------ -------------------
July 2, July 4, July 2, July 4,
2004 2003 2004 2003
---- ---- ---- ----
Gross profit......................................... 41.1% 39.0% 40.8% 38.9%
Selling, general and administrative expenses......... 29.2 28.7 27.4 28.3
Operating income..................................... 12.2 10.4 13.7 10.8
Income before income taxes and minority interest..... 11.8 10.9 13.4 11.1
Net income........................................... 6.9 6.5 8.0 6.6
The following table sets forth the approximate contribution to net sales (in
dollars and as a percentage of consolidated net sales) attributable to our
Saucony segment and our Other Products segment for the thirteen and twenty-six
weeks ended July 2, 2004 and July 4, 2003:
Thirteen Weeks Ended
--------------------
July 2, 2004 July 4, 2003
------------ ------------
Saucony..........................$ 38,361 87.2% $ 29,828 86.5%
Other Products................... 5,618 12.8% 4,644 13.5%
--------- ----- --------- -----
Total............................$ 43,979 100.0% $ 34,472 100.0%
========= ===== ========= =====
Twenty-Six Weeks Ended
----------------------
July 2, 2004 July 4, 2003
------------ ------------
Saucony..........................$ 79,460 87.4% $ 62,313 84.7%
Other Products................... 11,488 12.6% 11,227 15.3%
--------- ----- --------- -----
Total............................$ 90,948 100.0% $ 73,540 100.0%
========= ===== ========= =====
Thirteen Weeks Ended July 2, 2004 Compared to Thirteen Weeks Ended July 4, 2003
- -------------------------------------------------------------------------------
Consolidated Net Sales
Net sales increased $9,507, or 28%, to $43,979 in the thirteen weeks ended July
2, 2004 from $34,472 in the thirteen weeks ended July 4, 2003.
On a geographic basis, domestic net sales increased $8,320, or 31%, to $35,459
in the thirteen weeks ended July 2, 2004 from $27,139 in the thirteen weeks
ended July 4, 2003. International net sales increased $1,187, or 16%, to $8,520
in the thirteen weeks ended July 2, 2004 from $7,333 in the thirteen weeks ended
July 4, 2003. Favorable changes in foreign exchange rates accounted for $338 of
the international sales increase in the thirteen weeks ended July 2, 2004,
compared to the thirteen weeks ended July 4, 2003.
Saucony Brand Segment
Worldwide net sales of Saucony branded footwear and Saucony branded apparel
increased $8,533, or 29%, to $38,361 in the thirteen weeks ended July 2, 2004
from $29,828 in the thirteen weeks ended July 4, 2003, due primarily to an
increase in domestic footwear unit volume and, to a lesser extent, increased
technical footwear unit volumes at our international subsidiaries and favorable
currency exchange resulting from a weaker U.S. dollar against European and
Canadian currencies, partially offset by lower domestic selling prices. The
volume of footwear sold in the thirteen weeks ended July 2, 2004 increased 30%
to 1,319 pair from 1,014 pair in the thirteen weeks ended July 4, 2003.
Domestic net sales increased $7,462, or 33%, to $30,146 in the thirteen weeks
ended July 2, 2004 from $22,684 in the thirteen weeks ended July 4, 2003, due
primarily to a 36% increase in footwear unit volumes, partially offset by lower
wholesale per pair average selling prices.
The volume of domestic footwear sold in the thirteen weeks ended July 2, 2004,
increased to 1,096 pair from 805 pair in the thirteen weeks ended July 4, 2003.
The footwear unit volume increase in the thirteen weeks ended July 2, 2004 was
due primarily to a 90% footwear unit volume increase in our mid-priced
cross-over footwear, due primarily to increased cross-over unit volume sold into
the athletic mall, sporting goods and value channels, a 27% increase in
technical footwear unit volumes and a 63% increase in Originals footwear unit
volumes. Our cross-over footwear category consists primarily of mid-priced
running shoes incorporating our proprietary Grid technology, previously included
in our technical footwear category. These increases were partially offset by a
9% decrease in special make up footwear unit volumes. Our Originals footwear
accounted for 26% of domestic footwear unit volume in the thirteen weeks ended
July 2, 2004, compared to 21% in the thirteen weeks ended July 4, 2003. The unit
volume increase in Originals footwear was primarily due to increased unit volume
of our Jazz and Shadow Originals sold into the athletic mall, sporting goods and
value channels and, to a lesser extent, the sales of new products in the
thirteen weeks ended July 2, 2004.
The average wholesale per pair selling prices for domestic footwear decreased in
the thirteen weeks ended July 2, 2004, compared to the thirteen weeks ended July
4, 2003, due to a change in the product mix to increased cross-over and Original
footwear unit volumes, both of which sell at wholesale per pair selling prices
below our first quality technical footwear, a change in the special make up
footwear product mix to lower priced products and increased rebates provided to
certain domestic customers.
International net sales increased $1,071, or 15%, to $8,215 in the thirteen
weeks ended July 2, 2004 from $7,144 in the thirteen weeks ended July 4, 2003,
due primarily to increased footwear unit volume and, to a lesser extent, higher
wholesale per pair average selling prices and favorable changes in foreign
exchange rates, compared to the thirteen weeks ended July 4, 2003. Footwear unit
volumes increased 6% in the thirteen weeks ended July 2, 2004, compared to the
thirteen weeks ended July 4, 2003.
The volume of international footwear sold in the thirteen weeks ended July 2,
2004 increased 6% to 223 pair from 210 pair in the thirteen weeks ended July 4,
2003. Footwear unit volumes at our Dutch and Canadian subsidiaries increased 18%
and 7%, respectively, in the thirteen weeks ended July 2, 2004, compared to the
thirteen weeks ended July 4, 2003, due primarily to increased technical footwear
unit volumes. Footwear unit volumes at our British subsidiary were flat.
International distributor footwear unit volumes increased 4% in the thirteen
weeks ended July 2, 2004, compared to the thirteen weeks ended July 4, 2003, due
primarily to increased technical footwear unit volumes sold throughout our
international distributor base, partially offset by a decrease in Originals
footwear unit volumes sold in the Japanese footwear market. Cross-over footwear
typically sells at higher wholesale per pair selling prices than Originals
footwear.
The international footwear average wholesale per pair selling price increased
primarily due to increased international distributor average wholesale per pair
selling prices, due to a change in the product mix to higher priced technical
footwear, increased cross-over footwear unit volumes and lower Originals
footwear unit volumes in the thirteen weeks ended July 2, 2004, compared to the
thirteen weeks ended July 4, 2003.
Other Products Segment
Worldwide sales of Other Products increased $974, or 21%, to $5,618 in the
thirteen weeks ended July 2, 2004 from $4,644 in the thirteen weeks ended July
4, 2003, due primarily to a 29% increase in sales at our factory outlet stores
and, to a lesser extent, a 14% increase in domestic sales of our Hind brand
apparel.
Domestic net sales of Other Products increased $858, or 19%, to $5,313 in the
thirteen weeks ended July 2, 2004 from $4,455 in the thirteen weeks ended July
4, 2003, due primarily to increased sales at our factory outlet stores and, to a
lesser extent, increased sales of Hind brand apparel. Sales at our factory
outlet stores increased 29% in the thirteen weeks ended July 2, 2004, compared
to the thirteen weeks ended July 4, 2003, due primarily to sales derived from
additional factory outlet stores opened after April 4, 2003 and the addition of
two factory outlet stores which were opened in March 2004 and, to a lesser
extent, increased sales at our factory outlet stores open for more than one
year. Hind apparel sales increased 14% due primarily to an 18% increase in the
average wholesale per item selling price of our Hind apparel, partially offset
by a 3% decrease in Hind apparel unit volume. The increase in average wholesale
per item selling price of our Hind apparel was due primarily to new product
introductions in the thirteen weeks ended July 2, 2004, carrying higher
wholesale per item sell prices and lower sales of closeout apparel in the
thirteen weeks ended July 2, 2004, compared to the thirteen weeks ended July 4,
2003. Sales of closeout apparel accounted for approximately 16% of domestic Hind
apparel net sales in the thirteen weeks ended July 2, 2004, compared to 32% of
domestic Hind apparel net sales in the thirteen weeks ended July 4, 2003. During
the thirteen weeks ended July 2, 2004, our closeout sales volume decreased,
compared to the thirteen weeks ended July 4, 2003, due to the production and
sale during the 2003 period of surplus special makeup closeout apparel from
remaining raw materials in connection with a change in our product sourcing.
International net sales of Other Products increased $116, or 61%, to $305 in the
thirteen weeks ended July 2, 2004 from $189 in the thirteen weeks ended July 4,
2003, due primarily to sales at our factory outlet stores in Canada, which
opened in the first quarter of 2004, and increased Hind apparel unit volume sold
to international distributors.
Costs and Expenses
The Company's gross margin in the thirteen weeks ended July 2, 2004 increased to
41.1% compared to 39.0% in the thirteen weeks ended July 4, 2003, due primarily
to favorable currency exchange due to the impact of a weaker U.S. dollar against
European and Canadian currencies, higher levels of domestic at once shipments,
which shipments carry lower discounts, and improved margins at our factory
outlet division. Partially offsetting these margin increases in the thirteen
weeks ended July 2, 2004, compared to the thirteen weeks ended July 4, 2003 were
increased footwear unit volume of our mid-priced cross-over footwear sold into
the athletic mall, sporting goods and value channel at lower gross margins that
include rebates provided to certain Saucony domestic customers.
Selling, general and administrative expenses as a percentage of net sales
increased to 29.2% in the thirteen weeks ended July 2, 2004, compared to 28.7%
in the thirteen weeks ended July 4, 2003. In absolute dollars, selling, general
and administrative expenses increased 29%, due primarily to increased
administrative and selling payroll, print media advertising, operating expenses
associated with the factory outlet division expansion, variable selling
expenses, professional fees and account specific advertising and promotion.
General and administrative expenses in the second quarter of 2003 included a
favorable litigation settlement which reduced bad debt expense by $566. Foreign
exchange rate changes increased selling and administrative expenses by $279 in
the thirteen weeks ended July 2, 2004, compared to the thirteen weeks ended July
4, 2003.
Non-Operating Income (Expense)
Non-operating income (expense) decreased in the thirteen weeks ended July 2,
2004 to an expense of $151, compared to income of $151 in the thirteen weeks
ended July 4, 2003. The decrease was due primarily to an increase in foreign
currency losses to $217 in the thirteen weeks ended July 2, 2004, compared to
foreign currency gains of $73 in the thirteen weeks ended July 4, 2003, due
primarily to recognizing $146 of accumulated other comprehensive losses from the
closing and relocation of our Saucony International administrative office and,
to a lesser extent, losses on forward foreign exchange contracts. Interest
income increased to $57 in the thirteen weeks ended July 2, 2004 from $53 in the
thirteen weeks ended July 4, 2003, due to higher interest rates in the thirteen
weeks ended July 2, 2004.
Income Before Income Taxes and Minority Interest
Thirteen Weeks Ended
July 2, July 4,
2004 2003
---- ----
Segment
Saucony...........................$ 5,193 $ 3,794
Other Products.................... 7 (52)
--------- --------
Total.............................$ 5,200 $ 3,742
========= ========
Income before tax and minority interest increased $1,458 in the thirteen weeks
ended July 2, 2004 to $5,200, compared to $3,742 in the thirteen weeks ended
July 4, 2003, due primarily to increased pre-tax income realized by both our
domestic and international Saucony businesses, due to higher sales and improved
gross margins. The improvement in our Other Products segment income before tax
and minority interest in the thirteen weeks ended July 2, 2004, compared to the
thirteen weeks ended July 4, 2003, was due primarily to improved profitability
at our factory outlet stores due to higher sales and improved gross margins.
Income Taxes
The provision for income taxes increased to $2,129 in the thirteen weeks ended
July 2, 2004 from $1,468 in the thirteen weeks ended July 4, 2003, due primarily
to higher pre-tax income realized by our domestic and international Saucony
businesses and higher pre-tax income realized by our factory outlet stores. The
effective tax rate increased 1.6% to 40.9% in the thirteen weeks ended July 2,
2004 from 39.3% in the thirteen weeks ended July 4, 2003, due to a shift in the
composition of domestic and foreign pre-tax earnings. We credited to additional
paid-in capital income tax benefits of options exercised of $71 during the
thirteen weeks ended July 2, 2004 and of $72 during the thirteen weeks ended
July 4, 2003. The income tax benefits of options exercised did not impact our
provision for income taxes or the effective tax rate in either period.
Minority Interest in Net Income of Consolidated Subsidiary
Minority interest expense represents a minority shareholder's allocable share of
our Canadian subsidiary's earnings after deducting for income tax. Minority
interest expense decreased to $26 in the thirteen weeks ended July 2, 2004,
compared to $42 in the thirteen weeks ended July 4, 2003, due to the increase in
our ownership percentage in Saucony Canada, Inc. to 95% from 85% in July 2003.
Net Income
Net income for the thirteen weeks ended July 2, 2004 increased to $3,045, or
$0.41 per Class A share and $0.45 per Class B share on a diluted basis, compared
to $2,232, or $0.33 per Class A share and $0.37 per Class B share on a diluted
basis, in the thirteen weeks ended July 4, 2003. Weighted average common shares
and common stock equivalents used to calculate diluted earnings per share in the
thirteen weeks ended July 2, 2004 consisted of 2,521,000 Class A and 4,527,000
Class B shares, compared to 2,521,000 Class A and 3,778,000 Class B shares in
the thirteen weeks ended July 4, 2003.
The increase in the weighted average common shares and equivalents in the
thirteen weeks ended July 2, 2004, compared to the thirteen weeks ended July 4,
2003, was due to increased Class B common shares outstanding and the impact of
our special dividend declared on February 17, 2004 which increased the dilutive
effect of outstanding options. The increase in Class B common shares outstanding
was due to the issuance of approximately 386,000 Class B common shares due to
the exercise of stock options and stock purchase warrants, of which 356,000
Class B common shares were issued in the thirteen weeks ended April 2, 2004.
Options outstanding at March 1, 2004, the ex-dividend date for the special
dividend, were increased due to customary dilutive adjustments in the number of
outstanding options to purchase Class B common stock, and the exercise price of
such options, in proportion to changes in the market price of our Class B common
stock on that date.
Twenty-six weeks Ended July 2, 2004 Compared to Twenty-six weeks Ended July 4,
2003
- ----
Consolidated Net Sales
Net sales increased $17,408, or 24%, to $90,948 in the twenty-six weeks ended
July 2, 2004 from $73,540 in the twenty-six weeks ended July 4, 2003.
On a geographic basis, domestic net sales increased $14,712, or 26%, to $71,427
in the twenty-six weeks ended July 2, 2004 from $56,715 in the twenty-six weeks
ended July 4, 2003. International net sales increased $2,696, or 16%, to $19,521
in the twenty-six weeks ended July 2, 2004 from $16,825 in the twenty-six weeks
ended July 4, 2003. Favorable changes in foreign exchange rates accounted for
$1,606 of the international sales increase in the twenty-six weeks ended July 2,
2004, compared to the twenty-six weeks ended July 4, 2003.
Saucony Brand Segment
Worldwide net sales of Saucony branded footwear and Saucony branded apparel
increased $17,417, or 28%, to $79,460 in the twenty-six weeks ended July 2, 2004
from $62,313 in the twenty-six weeks ended July 4, 2003, due primarily to an
increase in domestic footwear unit volume and, to a lesser extent, favorable
currency exchange resulting from a weaker U.S. dollar against European and
Canadian currencies and increased technical footwear unit volume at our
international subsidiaries, partially offset by lower domestic wholesale per
pair average selling prices. The volume of footwear sold in the twenty-six weeks
ended July 2, 2004 increased 28% to 2,665 pair from 2,076 pair in the twenty-six
weeks ended July 4, 2003.
Domestic net sales increased $14,349, or 31%, to $60,689 in the twenty-six weeks
ended July 2, 2004 from $46,340 in the twenty-six weeks ended July 4, 2003, due
primarily to a 37% increase in footwear unit volumes, partially offset by lower
wholesale per pair average selling prices.
The volume of domestic footwear sold in the twenty-six weeks ended July 2, 2004,
increased to 2,194 pair from 1,604 pair in the twenty-six weeks ended July 4,
2003. The footwear unit volume increase in the twenty-six weeks ended July 2,
2004 was due primarily to a 94% footwear unit volume increase in our mid-priced
cross-over footwear, due primarily to increased cross-over unit volume sold into
the athletic mall, sporting goods and value distribution channels, a 22%
increase in technical footwear unit volumes and a 59% increase in Originals
footwear unit volumes. Our cross-over footwear category consists primarily of
mid-priced running shoes incorporating our proprietary Grid technology,
previously included in our technical footwear category. These increases were
partially offset by a 10% decrease in special make up footwear unit volumes. Our
Originals footwear accounted for 26% of domestic footwear unit volume in the
twenty-six weeks ended July 2, 2004, compared to 22% of domestic footwear unit
volume in the twenty-six weeks ended July 4, 2003. The unit volume increase in
Originals footwear was primarily due to increased unit volume of our Jazz and
Shadow Originals sold into the athletic mall channel and, to a lesser extent,
the introduction of new products in the twenty-six weeks ended July 2, 2004.
The average wholesale per pair selling price for domestic footwear decreased in
the twenty-six weeks ended July 2, 2004, compared to the twenty-six weeks ended
July 4, 2003, due to a change in the product mix to increased cross-over and
Original footwear unit volumes, both of which sell at wholesale per pair selling
prices below our first quality technical footwear, a change in the special make
up footwear product mix to lower priced product, increased rebates provided to
certain domestic customers and a higher level of discounts.
International net sales increased $2,798, or 18%, to $18,771 in the twenty-six
weeks ended July 2, 2004 from $15,973 in the twenty-six weeks ended July 4,
2003, due primarily to favorable currency exchange resulting from a weaker U.S.
dollar against European and Canadian currencies and, to a lesser extent, higher
average wholesale per pair selling prices and increased sales of Saucony brand
apparel.
The international footwear average wholesale per pair selling price increased
primarily due to increased international distributor average wholesale per pair
selling prices, due to a change in the product mix to higher priced technical
footwear, increased cross-over footwear unit volumes and lower Originals
footwear unit volumes in the twenty-six weeks ended July 2, 2004, compared to
the twenty-six weeks ended July 4, 2003. Cross-over footwear typically sells at
higher wholesale per pair selling prices than Originals footwear.
The volume of international footwear sold in the twenty-six weeks ended July 2,
2004 decreased to 471 pair from 472 pair in the twenty-six weeks ended July 4,
2003. Footwear unit volumes at our foreign subsidiaries increased 7% in the
twenty-six weeks ended July 2, 2004, compared to the twenty-six weeks ended July
4, 2003, due primarily to increased technical footwear unit volumes sold at our
Canadian and European subsidiaries. International distributor footwear unit
volumes decreased 14% in the twenty-six weeks ended July 2, 2004, compared to
the twenty-six weeks ended July 4, 2003, due primarily to a 71% decrease in
Originals footwear unit volumes sold in the Japanese footwear market, partially
offset by a 21% increase in footwear unit volumes sold, due primarily to
increased technical footwear unit volume sold to our distributors in Australia
and in Europe.
Other Products Segment
Worldwide sales of Other Products increased $261, or 2%, to $11,488 in the
twenty-six weeks ended July 2, 2004 from $11,227 in the twenty-six weeks ended
July 4, 2003, due primarily to a 35% increase in sales at our factory outlet
stores, partially offset by a 13% decrease in domestic sales of our Hind brand
apparel.
Domestic net sales of Other Products increased $363, or 4%, to $10,738 in the
twenty-six weeks ended July 2, 2004 from $10,375 in the twenty-six weeks ended
July 4, 2003, due primarily to increased sales at our factory outlet stores,
partially offset by decreased sales of our Hind brand apparel. Sales at our
factory outlet division increased 35% in the twenty-six weeks ended July 2,
2004, compared to the twenty-six weeks ended July 4, 2003, due primarily to
sales derived from additional factory outlet stores opened since April 4, 2003
and, to a lesser extent, a 12% sales increase at our factory outlet stores open
for more than one year. Hind apparel sales decreased 13% due primarily to a 20%
decrease in Hind apparel unit volume, partially offset by a 9% increase in the
average wholesale per item selling price of our Hind brand apparel. Both the
decrease in Hind apparel unit volume and the increase in the average wholesale
per item selling price of our Hind apparel were due to lower closeout unit
volumes sold in the twenty-six weeks ended July 2, 2004, compared to the
twenty-six weeks ended July 4, 2003. Sales of closeout apparel accounted for
approximately 11% of domestic Hind apparel net sales in the twenty-six weeks
ended July 2, 2004, compared to 26% of domestic Hind apparel net sales in the
twenty-six weeks ended July 4, 2003. During the twenty-six weeks ended July 2,
2004, our closeout sales volume decreased, compared to the twenty-six weeks
ended July 4, 2003, due to the production and sale during the 2003 period of
surplus special makeup closeout apparel from remaining raw materials in
connection with a change in our product sourcing.
International net sales of Other Products decreased $102, or 12%, to $750 in the
twenty-six weeks ended July 2, 2004 from $852 in the twenty-six weeks ended July
4, 2003, due primarily to discontinuing Hind apparel distribution at our Dutch
subsidiary and decreased Hind apparel sales in Canada and the United Kingdom.
Partially offsetting these decreases were sales at our recently opened factory
outlet stores in Canada.
Costs and Expenses
The Company's gross margin in the twenty-six weeks ended July 2, 2004 increased
to 40.8%, compared to 38.9% in the twenty-six weeks ended July 4, 2003, due
primarily to favorable currency exchange due to the impact of a weaker U.S.
dollar against European and Canadian currencies, improved margins on Hind brand
apparel, higher levels of domestic at once footwear shipments, which shipments
carry lower discounts, and improved margins at our factory outlet division. The
improved margins on our Hind brand apparel during the twenty-six weeks ended
July 2, 2004, compared to the twenty-six weeks ended July 4, 2003, were due
primarily to changes in product sourcing, which lowered our product cost and
increased our first quality gross margins, lower closeout sales and lower
inventory provisions. Offsetting these margin increases in the twenty-six weeks
ended July 2, 2004, compared to the twenty-six weeks ended July 4, 2003, were
increased footwear unit volume of our mid-priced cross-over footwear sold into
the athletic mall, sporting goods and value channels at lower gross margins that
included increased rebates provided to certain Saucony domestic customers.
Selling, general and administrative expenses as a percentage of net sales
decreased to 27.4% in the twenty-six weeks ended July 2, 2004, compared to 28.3%
in the twenty-six weeks ended July 4, 2003. In absolute dollars, selling,
general and administrative expenses increased 20%, due primarily to increased
administrative and selling payroll, print media advertising, operating expenses
associated with a factory outlet division expansion, professional fees, variable
selling expenses and account specific advertising and promotion. General and
administrative expenses in the twenty-six weeks ended July 4, 2003 included a
favorable litigation settlement which reduced bad debt expense by $566. Foreign
exchange rate changes increased selling and administrative expenses by $493 in
the twenty-six weeks ended July 2, 2004, compared to the twenty-six weeks ended
July 4, 2003.
Non-Operating Income (Expense)
Non-operating income (expense) decreased in the twenty-six weeks ended July 2,
2004 to an expense of $223, compared to income of $197 in the twenty-six weeks
ended July 4, 2003. The decrease was due primarily to an increase in foreign
currency losses to $361 in the twenty-six weeks ended July 2, 2004, compared to
foreign currency gains of $58 in the twenty-six weeks ended July 4, 2003, due
primarily to losses on forward foreign exchange contracts and, to a lesser
extent, recognizing $146 of accumulated other comprehensive losses from the
closing and relocation of our Saucony International administrative office.
Income Before Income Taxes and Minority Interest
Twenty-Six weeks Ended
July 2, July 4,
2004 2003
---- ----
Segment
Saucony.........................$ 11,565 $ 7,776
Other Products.................. 663 383
--------- --------
Total...........................$ 12,228 $ 8,159
========= ========
Income before tax and minority interest increased $4,069 in the twenty-six weeks
ended July 2, 2004 to $12,228, compared to $8,159 in the twenty-six weeks ended
July 4, 2003, due primarily to increased pre-tax income realized by both our
domestic and international Saucony businesses, due to higher sales and improved
gross margins. The improvement in our Other Products segment income before tax
and minority interest in the twenty-six weeks ended July 2, 2004, compared to
the twenty-six weeks ended July 4, 2003, was due primarily to improved
profitability at our factory outlet stores due to higher sales and improved
gross margins and improved profitability at our Hind apparel brand due to
improved gross margins and lower operating expenses.
Income Taxes
The provision for income taxes increased to $4,888 in the twenty-six weeks ended
July 2, 2004 from $3,218 in the twenty-six weeks ended July 4, 2003, due
primarily to higher pre-tax income realized by our domestic and international
Saucony businesses and, to a lesser extent, higher pre-tax income realized by
our factory outlet stores and Hind apparel brand. The effective tax rate
increased 0.6% to 40.0% in the twenty-six weeks ended July 2, 2004 from 39.4% in
the twenty-six weeks ended July 4, 2003, due to a shift in the composition of
domestic and foreign pre-tax earnings. We credited to additional paid-in capital
income tax benefits of options exercised of $1,107 during the twenty-six weeks
ended July 2, 2004 and of $76 during the twenty-six weeks ended July 4, 2003.
The income tax benefits of options exercised did not impact our provision for
income taxes or the effective tax rate in either period.
Minority Interest in Net Income of Consolidated Subsidiary
Minority interest expense represents a minority shareholder's allocable share of
our Canadian subsidiary's earnings after deducting for income tax. Minority
interest expense decreased to $64 in the twenty-six weeks ended July 2, 2004,
compared to $106 in the twenty-six weeks ended July 4, 2003, due to the increase
in our ownership percentage in Saucony Canada, Inc. to 95% from 85% in July
2003.
Net Income
Net income for the twenty-six weeks ended July 2, 2004 increased to $7,276, or
$0.98 per Class A share and $1.08 per Class B share on a diluted basis, compared
to $4,835, or $0.73 per Class A share and $0.80 per Class B share on a diluted
basis, in the twenty-six weeks ended July 4, 2003. Weighted average common
shares and common stock equivalents used to calculate diluted earnings per share
in the twenty-six weeks ended July 2, 2004 consisted of 2,521,000 Class A and
4,430,000 Class B shares, compared to 2,522,000 Class A and 3,756,000 Class B
shares in the twenty-six weeks ended July 4, 2003.
The increase in the weighted average common shares and equivalents in the
twenty-six weeks ended July 2, 2004, compared to the twenty-six weeks ended July
4, 2003, was due to increased Class B common shares outstanding and the impact
of our special dividend declared on February 17, 2004, which increased the
dilutive effect of outstanding options. The increase in Class B common shares
outstanding was due to the issuance of approximately 386,000 Class B common
shares due to the exercise of stock options and stock purchase warrants. Options
outstanding at March 1, 2004, the ex-dividend date for the special dividend,
were increased due to customary dilutive adjustments in the number of
outstanding options to purchase Class B common stock, and the exercise price of
such options, in proportion to changes in the market price of our Class B common
stock on that date.
Liquidity and Capital Resources
As of July 4, 2003, our cash and cash equivalents totaled $14,266, a decrease of
$27,515 from January 2, 2004. The decrease was due primarily to the payment of a
special cash dividend of $25,990 in March 2004 and regular quarterly cash
dividends of $605, the use of cash from operations of $2,548 and cash outlays
for capital assets of $2,101, due to an expansion of our corporate offices. This
decrease in cash was offset in part by the receipt of $2,902 from the issuance
of shares of our common stock as a result of option and common stock purchase
warrant exercises and a reduction in short-term investments of $908.
Our accounts receivable, net of the provision for bad debts and discounts, at
July 4, 2004 increased $11,531, compared to at January 2, 2004, due primarily to
increased sales of our Saucony footwear products we experienced in the
twenty-six weeks ended July 2, 2004. Our days' sales outstanding for accounts
receivable increased to 62 days in the twenty-six weeks ended July 2, 2004 from
61 days in the twenty-six weeks ended July 4, 2003, due to the timing of our
shipments in the twenty-six weeks ended July 2, 2004, much of which shipped in
June 2004. Days' 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.
The provision for bad debts and discounts, which does not include our second
quarter 2003 litigation settlement, increased to $3,580 in the twenty-six weeks
ended July 2, 2004 from $2,731 in the twenty-six weeks ended July 4, 2003 due
primarily to increased sales discounts on higher sales volumes in the thirteen
weeks ended July 2, 2004 and, to a lesser extent, an increase in the provision
for bad debts. Inventories increased $5,251 in the twenty-six weeks ended July
2, 2004, compared to at January 2, 2004. Our inventory turns increased to 4.3
turns in the twenty-six weeks ended July 2, 2004 from 3.8 turns in the
twenty-six weeks ended July 4, 2003. The number of days' sales in inventory
increased to 93 days in the twenty-six weeks ended July 2, 2004 from 79 days in
the twenty-six weeks ended July 4, 2003. The inventory turns ratio represents
our cost of sales for a period divided by the average of our beginning and
ending inventory during the period. Days' 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. The increases in our inventory and in our days'
sales in inventory were due primarily to higher levels of domestic Saucony
technical and cross-over footwear inventory which we expect to ship at customary
margin levels in the second half of fiscal 2004.
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 2, 2004 included a $2,722 increase in accounts
payable, due primarily to increased inventory received in the second quarter of
fiscal 2004, and a $1,602 increase in accrued expenses, due primarily to
increased income tax accruals on higher pre-tax income, increased freight and
inventory importation accruals and increased accruals due to higher levels of
operating expenses.
Our liquidity is contingent upon a number of factors, principally our future
operating results. Management believes that our current cash and cash
equivalents and internally generated funds are adequate to meet our working
capital requirements and to fund our capital investment needs and any debt
service payments. During the twenty-six weeks ended July 2, 2004, we used $2,548
in cash to fund operations, due primarily to an increase in accounts receivable
and increased inventories. In the twenty-six weeks ended July 4, 2003, we
generated $3,213 in cash from operations due primarily to a decrease in
inventories. The term of our primary credit facility will expire on August 30,
2004. We are in discussions with the lender under our primary credit facility to
extend the term of that facility, however, that term may not be extended, or if
extended, it may not be extended on the same terms. At July 2, 2004 and July 4,
2003, we had no borrowings outstanding under our credit facilities.
Off-Balance Sheet Arrangements
We had letters of credit outstanding of $474 at July 2, 2004. All of the letters
of credit were issued for the purchase of inventory. We had forward foreign
exchange contracts of $7,580 at July 2, 2004, all of which are due to settle
within the next 12 months.
Amounts
Committed
July 2, 2004
------------
Letters of credit...............................$ 474
Forward foreign exchange contracts.............. 7,580
---------
Total...........................................$ 8,054
=========
We use letters of credit to facilitate a limited number of supplier arrangements
for our Hind apparel inventory. We do not believe our use of letters of credit
materially affects our liquidity. If we did not use letters of credit we would
make alternative arrangements with these Hind apparel inventory suppliers. Our
primary market risk is the risk of exposure to unfavorable movements in exchange
rates between the U.S. dollar and the Canadian dollar, the British Pound
Sterling and the Euro. We use forward exchange contracts to hedge firm and
anticipated purchase and sale commitments denominated in currencies other than
our subsidiaries' local currencies. The purpose of our currency hedging
activities is to protect our local subsidiaries' cash flows related to these
commitments from fluctuations in currency exchange rates, the loss of which
would expose us to increased market risk and fluctuations in our liquidity.
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 certain 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 certain transaction currency risks. During the thirteen weeks ended
July 2, 2004, we experienced $217 in foreign currency losses, due primarily to
recognizing $146 of accumulated other comprehensive losses and, to a lesser
extent, losses on forward foreign exchange contracts, compared to foreign
currency gains of $73 in the thirteen weeks ended July 4, 2003. During the
twenty-six weeks ended July 2, 2004, we experienced $361 in foreign currency
losses, due primarily to losses on forward foreign exchange contracts and, to a
lesser extent, recognizing $146 of accumulated other comprehensive losses,
compared to foreign currency gains of $58 in the twenty-six weeks ended July 4,
2003. Unfavorable movements in exchange rates between the U.S. dollar and the
Canadian dollar, the British Pound Sterling or the Euro against our hedged
positions, since these forward foreign currency contracts were executed, would
expose us to hedge losses for the balance of fiscal 2004. However, these losses
will be partially offset by gains on the exposures being hedged and the
offsetting positive translation impact.
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
certain foreign currency denominated payables. We have entered into certain
forward foreign exchange contracts to minimize the transaction currency risk.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure 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 Securities Exchange Act of 1934) as of July 2, 2004. Based on this
evaluation, our chief executive officer and chief financial officer have
concluded that as of July 2, 2004, our disclosure controls and procedures
were (1) designed to ensure that material information relating to Saucony,
including its 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 Saucony in the reports that it
files or submits under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the SEC's rules and
forms.
(b) Changes in internal controls.
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 2, 2004 that has materially affected, or is
reasonably likely to materially affect, our internal controls over
financial reporting.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
In May 1998, our Board of Directors approved a stock repurchase plan authorizing
the repurchase of up to an aggregate of 750,000 shares of our outstanding common
stock, either Class A or Class B or a combination thereof. Unless terminated
earlier by a resolution of our Board of Directors, the plan will expire when we
have repurchased all shares authorized for repurchase thereunder. We announced
this plan publicly on June 4, 1998. We did not make any repurchases under this
plan during the quarter ended July 2, 2004, and as of July 2, 2004 a maximum of
168,376 shares of our outstanding common stock, either Class A or Class B or a
combination thereof, may be purchased under the plan.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At our 2004 Annual Meeting of Stockholders held on May 19, 2004, 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 ratification of the appointment by the Audit Committee of our Board of
Directors of the registered public accounting firm of Deloitte & Touche LLP
as our independent auditors for the 2004 fiscal year.
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 2,433,105 5,590
Charles A. Gottesman 2,433,105 5,590
Robert J. LeFort, Jr. 2,351,085 87,610
Jonathan O. Lee 2,433,105 5,590
John J. Neuhauser 2,433,105 5,590
Votes Votes
For Against Abstain
--- ------- -------
2. Ratification of appointment
of Deloitte & Touche LLP 2,428,545 9,585 565
ITEM 5. OTHER INFORMATION
On August 2, 2004, Saucony announced that it has retained the services of
Chestnut Securities, Inc., Boston, Massachusetts, to assist it in its analysis
and consideration of various strategic alternatives that may be available to it,
including the possible sale of Saucony. Saucony has not determined whether to
pursue any particular strategic alternative. There can be no assurance that, if
any transaction is commenced, it will be completed or as to the value that any
such transaction might have for Saucony's stockholders.
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 28, 2004, we filed a Current Report on Form 8-K dated the same
date. The report furnished under Item 12 (Results of Operations and
Financial Condition) a copy of our press release announcing our financial
results for the fiscal quarter ended April 2, 2004.
On May 19, 2004, we filed a Current Report on Form 8-K dated the same date.
The report disclosed under Item 5 (Other Events) our declaration of our
regular quarterly cash dividend.
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 13, 2004 By: /s/ Michael Umana
-----------------------------
Michael Umana
Executive Vice President, Finance
Chief Operating and Financial Officer
(Duly authorized officer and
principal financial officer)
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
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 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 2, 2004 filed
with the Securities and Exchange Commission on April 1, 2004.