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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 October 1, 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 November 5, 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 4,092,813
---- - - ---------
6,613,460
=========
SAUCONY, INC. AND SUBSIDIARIES
INDEX
Page
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements - Unaudited.....................................3
Condensed Consolidated Balance Sheets as of October 1, 2004
and January 2, 2004.........................................................3
Condensed Consolidated Statements of Income for the
thirteen and thirty-nine weeks ended October 1, 2004 and October 3, 2003....4
Condensed Consolidated Statements of Cash Flows for the
thirty-nine weeks ended October 1, 2004 and October 3, 2003.................5
Notes to Condensed Consolidated Financial Statements --
October 1, 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..............................................25
Part II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use .....................25
Item 6. Exhibits.............................................................25
Signature.....................................................................26
Exhibit Index..............................................................27-28
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS - UNAUDITED
SAUCONY, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands, except share and per share amounts)
ASSETS
October 1, January 2,
2004 2004
---- ----
(Unaudited)
Current assets:
Cash and cash equivalents.....................................$ 11,389 $ 41,781
Short-term investments........................................ 13,814 5,788
Accounts receivable........................................... 26,268 19,167
Inventories................................................... 23,391 22,421
Deferred income taxes......................................... 1,975 2,340
Prepaid expenses and other current assets..................... 1,371 1,329
--------- ---------
Total current assets........................................ 78,208 92,826
--------- ---------
Property, plant and equipment, net............................... 9,100 6,201
--------- ---------
Other assets:
Goodwill, net................................................. 912 912
Deferred charges, net......................................... 150 124
Other......................................................... 109 130
--------- ---------
Total other assets.......................................... 1,171 1,166
--------- ---------
Total assets.....................................................$ 88,479 $ 100,193
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capitalized lease obligations..............$ 63 $ --
Accounts payable.............................................. 6,690 9,259
Accrued expenses and other current liabilities................ 11,651 9,544
--------- ---------
Total current liabilities................................... 18,404 18,803
--------- ---------
Long-term obligations:
Capitalized lease obligations, net of current portion......... 156 --
Deferred income taxes......................................... 2,208 2,016
--------- ---------
Total long-term obligations................................. 2,364 2,016
--------- ---------
Minority interest in consolidated subsidiary..................... 443 320
--------- ---------
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 October 1, 2004, 2,520,647 and
January 2, 2004, 2,711,127).............................. 840 904
Class B, $.333 par value per share, authorized 20,000,000
shares (issued October 1, 2004, 4,016,447 and
January 2, 2004, 4,210,560)................................ 1,339 1,403
Additional paid in capital.................................... 16,866 19,010
Retained earnings............................................. 47,360 63,655
Accumulated other comprehensive income........................ 863 505
Common stock held in treasury, at cost
(October 1, 2004, Class A, none, Class B, none, and
January 2, 2004, Class A, 190,480, Class B, 582,326)...... -- (6,423)
--------- ---------
Total stockholders' equity.................................. 67,268 79,054
--------- ---------
Total liabilities and stockholders' equity.......................$ 88,479 $ 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 Thirty-Nine Weeks ended October 1, 2004 and October 3, 2003
(Unaudited)
(in thousands, except per share amounts)
Thirteen Thirteen Thirty-Nine Thirty-Nine
Weeks Weeks Weeks Weeks
Ended Ended Ended Ended
October 1, October 3, October 1, October 3,
2004 2003 2004 2003
---- ---- ---- ----
Net sales..................................................$ 42,266 $ 31,978 $ 133,214 $ 105,518
Other revenue ............................................. 95 94 377 257
---------- ---------- ---------- ----------
Total revenue ............................................. 42,361 32,072 133,591 105,775
---------- ---------- ---------- ----------
Costs and expenses
Cost of sales........................................... 24,797 18,983 78,617 63,899
Selling expenses........................................ 5,223 4,396 17,592 14,266
General and administrative expenses........................ 6,527 5,172 19,117 16,127
---------- --------- --------- ---------
Total costs and expenses.............................. 36,547 28,551 115,326 94,292
---------- --------- --------- ---------
Operating income........................................... 5,814 3,521 18,265 11,483
Non-operating income (expense)
Interest income......................................... 66 49 192 176
Interest expense........................................ -- -- (5) (5)
Foreign currency........................................ 26 (41) (335) 17
Other................................................... (1) 38 16 55
---------- ---------- ---------- ----------
Income before income taxes and minority interest........... 5,905 3,567 18,133 11,726
Provision for income taxes................................. 2,401 1,359 7,289 4,577
Minority interest in income of consolidated subsidiaries... 46 29 110 135
---------- ---------- ---------- ----------
Net income.................................................$ 3,458 $ 2,179 $ 10,734 $ 7,014
========== ========== ========== ==========
Per share amounts:
Earnings per share:
Basic:
Class A common stock................................$ 0.50 $ 0.34 $ 1.57 $ 1.09
========= ========== ========== ==========
Class B common stock................................$ 0.55 $ 0.37 $ 1.72 $ 1.20
========= ========== ========== ==========
Diluted:
Class A common stock................................$ 0.45 $ 0.32 $ 1.43 $ 1.05
========= ========== ========== ==========
Class B common stock................................$ 0.49 $ 0.35 $ 1.58 $ 1.15
========= ========== ========== ==========
Weighted average common shares and equivalents outstanding:
Basic:
Class A common stock................................ 2,521 2,521 2,521 2,522
Class B common stock................................ 4,011 3,603 3,935 3,570
--------- ---------- ---------- ----------
6,532 6,124 6,456 6,092
========= ========== ========== ==========
Diluted:
Class A common stock................................ 2,521 2,521 2,521 2,522
Class B common stock................................ 4,709 3,899 4,524 3,808
--------- ---------- ---------- ----------
7,230 6,420 7,045 6,330
========= ========== ========== ==========
Cash dividends per share of common stock:
Class A common stock................................$ 0.050 $ 0.040 $ 4.150 $ 0.080
Class B common stock................................$ 0.055 $ 0.044 $ 4.165 $ 0.088
The accompanying notes are an integral part of these consolidated financial statements.
SAUCONY, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
For the Thirty-Nine Weeks Ended October 1, 2004 and October 3, 2003
(Unaudited)
(In thousands)
Thirty-Nine Thirty-Nine
Weeks Weeks
Ended Ended
October 1, October 3,
2004 2003
---- ----
Cash flows from operating activities:
Net income.................................................................$ 10,734 $ 7,014
-------- ---------
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization.............................................. 1,092 1,000
Provision for bad debts and discounts...................................... 5,188 4,106
Deferred income tax expense ............................................... 542 830
Litigation settlement benefit.............................................. -- (566)
Tax benefit on stock option exercises...................................... 1,159 97
Compensation from stock warrants........................................... -- 164
Other...................................................................... 32 150
Changes in operating assets and liabilities, net of effect
foreign currency adjustments:
(Increase) decrease in assets:
Accounts receivable.................................................... (12,137) (7,425)
Inventories............................................................ (962) 10,162
Prepaid expenses and other current assets.............................. (43) 434
(Decrease) increase in liabilities:
Accounts payable....................................................... (2,575) (3,436)
Accrued expenses....................................................... 2,061 (1,678)
-------- ---------
Total adjustments............................................................ (5,643) 3,838
-------- ---------
Net cash provided by operating activities....................................... 5,091 10,852
-------- ---------
Cash flows from investing activities:
Share purchase - Saucony Canada, Inc......................................... -- (547)
Purchases of property, plant and equipment................................... (3,672) (1,042)
Sales of short-term investments.............................................. 5,767 --
Purchases of short-term investments......................................... (13,777) --
Change in deposits and other................................................. (57) (4)
-------- --------
Net cash used by investing activities........................................ (11,739) (1,593)
-------- --------
Cash flows from financing activities:
Repayment of capitalized lease obligations................................... (41) --
Dividends paid on common stock............................................... (26,942) (259)
Common stock repurchased..................................................... -- (126)
Issuances of common stock, stock option exercises............................ 2,641 546
Issuances of common stock, stock purchase warrant exercises.................. 352 --
-------- ---------
Net cash (used) provided by financing activities................................ (23,990) 161
Effect of exchange rate changes on cash and cash equivalents.................... 246 (222)
-------- ---------
Net (decrease) increase in cash and cash equivalents............................ (30,392) 9,198
Cash and equivalents at beginning of period..................................... 41,781 34,483
-------- ---------
Cash and equivalents at end of period...........................................$ 11,389 $ 43,681
======== =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes, net of refunds...............................................$ 4,359 $ 4,318
======== =========
Interest...................................................................$ 5 $ 4
======== =========
Non-cash investing and financing activities:
Property purchased under capital leases......................................$ 260 $ --
======== =========
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
October 1, 2004
(Unaudited)
(In thousands, except share and 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 thirty-nine weeks ended October 1, 2004 are not necessarily
indicative of the results for the entire year.
NOTE 2 - INVENTORIES
Inventories at October 1, 2004 and January 2, 2004 consisted of the following:
October 1, January 2,
2004 2004
--------- ---------
Finished goods........................$ 23,268 $ 22,322
Raw material and supplies............. 126 34
Work in progress...................... -- 65
--------- ---------
Total.................................$ 23,391 $ 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 Thirty-Nine Weeks
Ended Ended
-------------------------- --------------------------
October 1, October 3, October 1, October 3,
2004 2003 2004 2003
---- ---- ---- ----
Net income available to Class A
and Class B common stockholders................ $ 3,458 $ 2,179 $ 10,734 $ 7,014
--------- --------- --------- ---------
Allocation of undistributed net income:
Basic:
Class A common stock........................... $ 1,258 $ 847 $ 3,951 $ 2,743
Class B common stock........................... 2,200 1,332 6,783 4,271
--------- --------- --------- ---------
$ 3,458 $ 2,179 $ 10,734 $ 7,014
========= ========= ========= =========
Diluted:
Class A common stock........................... $ 1,132 $ 807 $ 3,609 $ 2,636
Class B common stock........................... 2,326 1,372 7,125 4,378
--------- --------- --------- ---------
$ 3,458 $ 2,179 $ 10,734 $ 7,014
========= ========= ========= =========
Weighted average common shares
and equivalents outstanding:
Basic:
Class A common stock........................... 2,521 2,521 2,521 2,522
Class B common stock........................... 4,011 3,603 3,935 3,570
--------- --------- --------- ---------
6,532 6,124 6,456 6,092
========= ========= ========= =========
Diluted:
Class A common stock........................... 2,521 2,521 2,521 2,522
Class B common stock........................... 4,709 3,899 4,524 3,808
--------- --------- --------- ---------
7,230 6,420 7,045 6,330
========= ========= ========= =========
Earnings per share:
Basic:
Class A common stock........................... $ 0.50 $ 0.34 $ 1.57 $ 1.09
========= ========= ======== =========
Class B common stock........................... $ 0.55 $ 0.37 $ 1.72 $ 1.20
========= ========= ======== =========
Diluted:
Class A common stock........................... $ 0.45 $ 0.32 $ 1.43 $ 1.05
========= ========= ======== =========
Class B common stock........................... $ 0.49 $ 0.35 $ 1.58 $ 1.15
========= ========= ======== =========
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 thirty-nine
weeks ended October 1, 2004, compared to the thirteen and thirty-nine weeks
ended October 3, 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 395,000 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 93,000 shares of common stock outstanding at October 3, 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 252,000 shares of common stock outstanding at October 3, 2003 were
not included in the computations of diluted earnings per share, for the
thirty-nine week period then-ended, since the options were anti-dilutive. All of
the options to purchase shares of common stock outstanding at October 1, 2004
were included in the computations of diluted earnings per share for the thirteen
and thirty-nine 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 thirteen weeks and thirty-nine weeks ended
October 1, 2004 and the thirteen weeks and thirty-nine weeks ended October 3,
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 $52 and $21 for the thirteen weeks ended October 1, 2004 and October
3, 2003, respectively, and $1,159 and $97 in the thirty-nine weeks ended October
1, 2004 and October 3, 2003, respectively, that have been credited to additional
paid-in capital.
Had the Company determined the stock-based compensation expense for the
Company's stock options based upon the fair value at the grant date for stock
option awards for the thirteen weeks and thirty-nine weeks ended October 1, 2004
and October 3, 2003, consistent with the fair value method provisions of SFAS
123, the Company's net income and net income per share would have been reduced
to the pro forma amounts indicated below:
Thirteen Weeks Ended Thirteen Weeks Ended
October 1, 2004 October 3, 2003
-------------------- --------------------
Basic Diluted Basic Diluted
----- ------- ----- -------
Net income:
As reported........................................$ 3,458 $ 3,458 $ 2,179 $ 2,179
Add:Stock-based compensation expense
included in reported net income, net
of related tax benefit............................. -- -- 5 5
Less:Total stock-based compensation
expense determined under the fair value
based method for all awards, net of
related tax benefit................................ (444) (444) (191) (191)
-------- --------- --------- ---------
Pro forma net income ................................$ 3,014 $ 3,014 $ 1,993 $ 1,993
======== ========= ========= =========
Pro forma net income allocated:
Class A common stock.............................$ 1,096 $ 987 $ 775 $ 738
Class B common stock............................. 1,918 2,027 1,218 1,255
-------- --------- --------- ---------
Total.....................................$ 3,014 $ 3,014 $ 1,993 $ 1,993
======== ========= ========= =========
Thirteen Weeks Ended Thirteen Weeks Ended
October 1, 2004 October 3, 2003
---------------------- ----------------------
Basic Diluted Basic Diluted
----- ------- ----- -------
Pro forma earnings per share:
Class A common stock
As reported........................................$ 0.50 $ 0.45 $ 0.34 $ 0.32
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......................... (0.06) (0.06) (0.03) (0.03)
-------- -------- --------- ---------
Pro forma net income per share.......................$ 0.44 $ 0.39 $ 0.31 $ 0.29
======== ======== ========= =========
Thirteen Weeks Ended Thirteen Weeks Ended
October 1, 2004 October 3, 2003
---------------------- ----------------------
Basic Diluted Basic Diluted
----- ------- ----- -------
Pro forma earnings per share:
Class B common stock
As reported........................................$ 0.55 $ 0.49 $ 0.37 $ 0.35
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......................... (0.07) (0.06) (0.03) (0.03)
-------- -------- --------- ---------
Pro forma net income per share.......................$ 0.48 $ 0.43 $ 0.34 $ 0.32
======== ======== ========= =========
Thirty-Nine Weeks Ended Thirty-Nine Weeks Ended
October 1, 2004 October 3, 2003
------------------------ -----------------------
Basic Diluted Basic Diluted
----- ------- ----- -------
Net income:
As reported........................................$ 10,734 $ 10,734 $ 7,014 $ 7,014
Add:Stock-based compensation expense
included in reported net income, net
of related tax benefit............................. -- -- 16 16
Less:Total stock-based compensation
expense determined under the fair value
based method for all awards, net of
related tax benefit................................ (1,131) (1,131) (586) (586)
-------- --------- --------- ---------
Pro forma net income ................................$ 9,603 $ 9,603 $ 6,444 $ 6,444
======== ========= ========= =========
Pro forma net income allocated:
Class A common stock.............................$ 3,534 $ 3,229 $ 2,520 $ 2,422
Class B common stock............................. 6,069 6,374 3,924 4,022
-------- --------- --------- ---------
Total.....................................$ 9,603 $ 9,603 $ 6,444 $ 6,444
======== ========= ========= =========
Thirty-Nine Weeks Ended Thirty-Nine Weeks Ended
October 1, 2004 October 3, 2003
------------------------ ------------------------
Basic Diluted Basic Diluted
----- ------- ----- -------
Pro forma earnings per share:
Class A common stock
As reported........................................$ 1.57 $ 1.43 $ 1.09 $ 1.05
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......................... (0.17) (0.15) (0.09) (0.09)
-------- -------- --------- ---------
Pro forma net income per share.......................$ 1.40 $ 1.28 $ 1.00 $ 0.96
======== ======== ========= =========
Thirty-Nine Weeks Ended Thirty-Nine Weeks Ended
October 1, 2004 October 3, 2003
----------------------- -----------------------
Basic Diluted Basic Diluted
----- ------- ----- -------
Pro forma earnings per share:
Class B common stock
As reported........................................$ 1.72 $ 1.58 $ 1.20 $ 1.15
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......................... (0.18) (0.17) (0.10) (0.09)
-------- -------- --------- ----------
Pro forma net income per share.......................$ 1.54 $ 1.41 $ 1.10 $ 1.06
======== ======== ========= ==========
The fair value of options at date of grant was estimated using the Black-Scholes
option-pricing model with the following weighted average assumptions:
Thirty-Nine Weeks Thirty-Nine Weeks
Ended Ended
October 1, 2004 October 3, 2003
--------------- ---------------
Expected life (years)....................... 5.0 5.0
Risk-free interest rate..................... 2.7% 2.9%
Expected volatility......................... 48.6% 62.8%
Expected dividend yield..................... 0.9% 1.3%
NOTE 5 - STATEMENT OF COMPREHENSIVE INCOME
Thirteen Thirteen Thirty-Nine Thirty-Nine
Weeks Weeks Weeks Weeks
Ended Ended Ended Ended
October 1, October 3, October 1, October 3,
2004 2003 2004 2003
---- ---- ---- ----
Net income................................................$ 3,458 $ 2,179 $ 10,734 $ 7,014
Other comprehensive income:
Foreign currency translation adjustments,
net of tax........................................... 414 27 358 859
------- -------- -------- -------
Comprehensive income......................................$ 3,872 $ 2,206 $ 11,092 $ 7,873
======= ======== ======== =======
NOTE 6 - DEFERRED CHARGES
Deferred charges as of October 1, 2004 and January 2, 2004 were as follows:
October 1, 2004 January 2, 2004
Accumulated Accumulated
Cost Amortization Net Cost Amortization Net
---- ------------ --- ---- ------------ ---
Deferred charges:
Software licenses........ 1,171 (1,042) 129 1,060 (992) 68
Capitalized debt
financing costs........ 87 (87) -- 87 (76) 11
Other.................... 444 (423) 21 444 (399) 45
-------- --------- ------- -------- --------- -------
Total......................$ 1,702 $ (1,552) $ 150 $ 1,591 $ (1,467) $ 124
======== ========= ======= ======== ========= =======
Amortization of deferred charges was $24 and $14, respectively, in the thirteen
weeks ended October 1, 2004 and October 3, 2003. For the thirty-nine weeks ended
October 1, 2004 and October 3, 2003, amortization expense was $84 and $117,
respectively.
NOTE 7 - OPERATING SEGMENT DATA
The Company's operating segments are organized based on the nature of products
and consist of the Saucony segment and Other Products segment. The determination
of the reportable segments for the thirteen and thirty-nine weeks ended October
1, 2004 and October 3, 2003, as well as the basis of measurement of segment
profit or loss, is consistent with the segment reporting disclosed in the
Company's Annual Report on Form 10-K for the fiscal year ended January 2, 2004.
Thirteen Thirteen Thirty-Nine Thirty-Nine
Weeks Weeks Weeks Weeks
Ended Ended Ended Ended
October 1, October 3, October 1, October 3,
2004 2003 2004 2003
---- ---- ---- ----
Revenues:
Saucony...........................................$ 34,228 $ 24,964 $ 113,905 $ 87,389
Other Products.................................... 8,133 7,108 19,686 18,386
--------- --------- --------- --------
Total revenue..................................$ 42,361 $ 32,072 $ 133,591 $105,775
========= ========= ========= ========
Income before income taxes and minority interest:
Saucony...........................................$ 4,450 $ 2,296 $ 16,015 $ 10,071
Other Products.................................... 1,455 1,271 2,118 1,655
--------- --------- --------- --------
Total ...............................................$ 5,905 $ 3,567 $ 18,133 $ 11,726
========= ========= ========= ========
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. 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 October 1, 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 - CREDIT FACILITY
In August 2004, the Company amended the existing credit agreement with our
lender, extending the term of the Company's primary facility, to expire on
August 31, 2005. At October 1, 2004, there were no borrowings outstanding under
the Company's credit facilities.
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 fiscal 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 share and per
share amounts.
Highlights
Thirteen Weeks and Thirty-Nine Weeks Ended
October 1, 2004 Compared to Thirteen Weeks and
Thirty-Nine Weeks Ended October 3, 2003
---------------------------------------
Increase
--------
Thirteen Weeks Thirty-Nine Weeks
-------------- -----------------
Net sales.............................................$ 10,288 32.2% $ 27,696 26.2%
Gross profit......................................... 4,474 34.4% 12,978 31.2%
Selling, general and administrative expenses......... 2,182 22.8% 6,316 20.8%
Increase
--------
Thirteen Weeks Thirty-Nine Weeks
-------------- -----------------
Operating income......................................... $2,293 $6,782
Income before income taxes and minority interest......... 2,338 6,407
Net income............................................... 1,279 3,720
Percent of Net Sales
--------------------
Thirteen Weeks Thirty-Nine Weeks
Ended Ended
------------------------ ------------------------
October 1, October 3, October 1, October 3,
2004 2003 2004 2003
---- ---- ---- ----
Gross profit........................................ 41.3% 40.6% 41.0% 39.4%
Selling, general and administrative expenses........ 27.8 29.9 27.6 28.8
Operating income.................................... 13.8 11.0 13.7 10.9
Income before income taxes and minority interest.... 14.0 11.2 13.6 11.1
Net income.......................................... 8.2 6.8 8.1 6.6
The following table sets forth the approximate contribution to net sales (in
dollars and as a percentage of consolidated net sales) attributable to our
Saucony segment and our Other Products segment for the thirteen and thirty-nine
weeks ended October 1, 2004 and October 3, 2003:
Thirteen Weeks Ended
------------------------------------------------
October 1, 2004 October 3, 2003
--------------- ---------------
Saucony......................$ 34,154 80.8% $ 24,900 77.9%
Other Products............... 8,112 19.2% 7,078 22.1%
--------- ----- --------- -----
Total........................$ 42,266 100.0% $ 31,978 100.0%
========= ===== ========= =====
Thirty-Nine Weeks Ended
------------------------------------------------
October 1, 2004 October 3, 2003
--------------- ---------------
Saucony......................$ 113,614 85.3% $ 87,213 82.7%
Other Products............... 19,600 14.7% 18,305 17.3%
--------- ----- --------- -----
Total........................$ 133,214 100.0% $ 105,518 100.0%
========= ===== ========= =====
Thirteen Weeks Ended October 1, 2004 Compared to Thirteen Weeks Ended October 3,
2003
Consolidated Net Sales
Net sales increased $10,288, or 32%, to $42,266 in the thirteen weeks ended
October 1, 2004 from $31,978 in the thirteen weeks ended October 3, 2003.
On a geographic basis, domestic net sales increased $8,673, or 38%, to $31,240
in the thirteen weeks ended October 1, 2004 from $22,567 in the thirteen weeks
ended October 3, 2003. International net sales increased $1,615, or 17%, to
$11,026 in the thirteen weeks ended October 1, 2004 from $9,411 in the thirteen
weeks ended October 3, 2003. Favorable changes in foreign exchange rates
accounted for $670 of the international sales increase in the thirteen weeks
ended October 1, 2004, compared to the thirteen weeks ended October 3, 2003.
Saucony Brand Segment
Worldwide net sales of Saucony branded footwear and Saucony branded apparel
increased $9,254, or 37%, to $34,154 in the thirteen weeks ended October 1, 2004
from $24,900 in the thirteen weeks ended October 3, 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 and a
$250 provision for potential customer related credits. The volume of footwear
sold in the thirteen weeks ended October 1, 2004 increased 45% to 1,098 pair
from 757 pair in the thirteen weeks ended October 3, 2003.
Domestic net sales increased $7,590, or 48%, to $23,419 in the thirteen weeks
ended October 1, 2004 from $15,829 in the thirteen weeks ended October 3, 2003,
due primarily to a 48% 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 October 1, 2004
increased 63% to 831 pair from 510 pair in the thirteen weeks ended October 3,
2003. The footwear unit volume increase in the thirteen weeks ended October 1,
2004 was due primarily to a 125% 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 102% increase in
Originals footwear unit volume, due primarily to increased unit volume sold into
the athletic mall, sporting goods and value channels, and a 16% increase in
technical footwear unit volume, due primarily to increased unit volume sold into
the athletic mall and mail order channels. Our cross-over footwear category
consists primarily of mid-priced running shoes incorporating one of our
proprietary Grid technologies, previously included in our technical footwear
category. Our technical footwear accounted for 44% of domestic footwear unit
volume in the thirteen weeks ended October 1, 2004, compared to 58% of domestic
footwear volume in the thirteen weeks ended October 3, 2003. Our cross-over
footwear accounted for 30% of domestic footwear unit volume in the thirteen
weeks ended October 1, 2004, compared to 22% of domestic footwear volume in the
thirteen weeks ended October 3, 2003. Our Originals footwear accounted for 22%
of domestic footwear unit volume in the thirteen weeks ended October 1, 2004,
compared to 18% in the thirteen weeks ended October 3, 2003.
The average wholesale per pair selling prices for domestic footwear decreased in
the thirteen weeks ended October 1, 2004, compared to the thirteen weeks ended
October 3, 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.
International net sales increased $1,664, or 18%, to $10,735 in the thirteen
weeks ended October 1, 2004 from $9,071 in the thirteen weeks ended October 3,
2003, due primarily to increased footwear unit volume and, to a lesser extent,
favorable changes in foreign exchange rates and higher wholesale per pair
average selling prices, compared to the thirteen weeks ended October 3, 2003.
International footwear unit volume increased 8% in the thirteen weeks ended
October 1, 2004, compared to the thirteen weeks ended October 3, 2003.
The volume of international footwear sold in the thirteen weeks ended October 1,
2004 increased 8% to 267 pair from 247 pair in the thirteen weeks ended October
3, 2003. Footwear unit volume at our Dutch subsidiary increased 22% and footwear
unit volume at our Canadian subsidiary increased 32% in the thirteen weeks ended
October 1, 2004, compared to the thirteen weeks ended October 3, 2003, due
primarily to increased technical footwear unit volume. Footwear unit volume at
our British subsidiary decreased 5% in the thirteen weeks ended October 1, 2004,
compared to the thirteen weeks ended October 3, 2003, due primarily to decreased
technical footwear unit volume. International distributor footwear unit volume
decreased 17% in the thirteen weeks ended October 1, 2004, compared to the
thirteen weeks ended October 3, 2003, due primarily to decreased technical
footwear unit volume sold throughout our international distributor base, except
in Japan. Technical footwear unit volume sold in the Japanese footwear market
increased in the thirteen weeks ended October 1, 2004, compared to the thirteen
weeks ended October 3, 2003, due to sales of new technical products.
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 October 1, 2004, compared to
the thirteen weeks ended October 3, 2003. Cross-over footwear typically sells at
higher wholesale per pair selling prices than Originals footwear.
Other Products Segment
Worldwide sales of Other Products increased $1,034, or 15%, to $8,112 in the
thirteen weeks ended October 1, 2004 from $7,078 in the thirteen weeks ended
October 3, 2003, due primarily to a 16% increase in domestic sales of our Hind
brand apparel and, to a lesser extent, a 16% increase in sales at our factory
outlet stores.
Domestic net sales of Other Products increased $1,083, or 16%, to $7,821 in the
thirteen weeks ended October 1, 2004 from $6,738 in the thirteen weeks ended
October 3, 2003, due primarily to increased sales of Hind brand apparel, and to
a lesser extent, increased sales at our factory outlet stores. Sales at our
factory outlet stores increased 16% in the thirteen weeks ended October 1, 2004,
compared to the thirteen weeks ended October 3, 2003, due primarily to sales
derived from two additional factory outlet stores opened after October 3, 2003
and, to a lesser extent, increased sales at our domestic factory outlet stores
open on or before October 3, 2003. Hind apparel sales increased 16% due
primarily to an 11% increase in the average wholesale per item selling price of
our Hind apparel and a 4% increase in Hind apparel unit volume. The increase in
the Hind apparel unit volume was due primarily to our introduction of new
fitness and outerwear products in the thirteen weeks ended October 1, 2004. The
increase in average wholesale per item selling price of our Hind apparel
similarly was due primarily to these new product introductions which carry
higher wholesale per item selling prices, compared to products available in the
thirteen weeks ended October 3, 2003. Decreased sales of closeout apparel, which
accounted for approximately 11% of domestic Hind apparel net sales in the
thirteen weeks ended October 1, 2004, compared to 15% of domestic Hind apparel
net sales in the thirteen weeks ended October 3, 2003, also contributed to the
increase in average wholesale per item Hind selling price. During the thirteen
weeks ended October 1, 2004, our closeout sales volume decreased, compared to
the thirteen weeks ended October 3, 2003, due to the decreased production and
sale during the 2004 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 $49, or 14%, to $291 in the
thirteen weeks ended October 1, 2004 from $340 in the thirteen weeks ended
October 3, 2003, due primarily to discontinuing Hind apparel and 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 thirteen weeks ended October 1, 2004 increased
to 41.3% compared to 40.6% in the thirteen weeks ended October 3, 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 October 1, 2004, compared to the thirteen weeks ended
October 3, 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 and increased inventory reserve provisions for certain
slow-moving Saucony domestic footwear styles.
Selling, general and administrative expenses as a percentage of net sales
decreased to 27.8% in the thirteen weeks ended October 1, 2004, compared to
29.9% in the thirteen weeks ended October 3, 2003. In absolute dollars, selling,
general and administrative expenses increased 23%, due primarily to increased
legal and other professional fees, administrative and selling payroll, operating
expenses associated with the expansion of our factory outlet division, account
specific advertising and promotion, variable selling expenses and promotions.
Included in general and administrative expenses in the thirteen weeks ended
October 1, 2004 were $415 of professional fees associated with our assessment of
internal controls as required under Section 404 of the Sarbanes-Oxley Act and
$300 of legal fees related to our review of strategic alternatives and related
matters. Foreign exchange rate changes increased selling and administrative
expenses by $137 in the thirteen weeks ended October 1, 2004, compared to the
thirteen weeks ended October 3, 2003.
Non-Operating Income (Expense)
Non-operating income increased in the thirteen weeks ended October 1, 2004 to
$91, compared to $46 in the thirteen weeks ended October 3, 2003. The increase
was due primarily to foreign currency gains of $26 in the thirteen weeks ended
October 1, 2004, compared to foreign currency losses of $41 in the thirteen
weeks ended October 3, 2003. Interest income increased to $66 in the thirteen
weeks ended October 1, 2004 from $49 in the thirteen weeks ended October 3,
2003, due to higher interest rates in the thirteen weeks ended October 1, 2004.
Income Before Income Taxes and Minority Interest
Thirteen Weeks Ended
-----------------------------------
October 1, October 3,
2004 2003
---- ----
Segment
Saucony.......................$ 4,450 $ 2,296
Other Products................ 1,455 1,271
--------- --------
Total.........................$ 5,905 $ 3,567
========= ========
Income before tax and minority interest increased $2,338 in the thirteen weeks
ended October 1, 2004 to $5,905, compared to $3,567 in the thirteen weeks ended
October 3, 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 October 1, 2004, compared to
the thirteen weeks ended October 3, 2003, was due primarily to improved
profitability at our factory outlet stores due to higher sales and a shift in
product mix to higher margin products, and improved profitability at our Hind
apparel brand due to higher sales and lower operating expenses.
Income Taxes
The provision for income taxes increased to $2,401 in the thirteen weeks ended
October 1, 2004 from $1,359 in the thirteen weeks ended October 3, 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 2.6% to 40.7% in the thirteen weeks
ended October 1, 2004 from 38.1% in the thirteen weeks ended October 3, 2003,
due to a shift in the composition of domestic and foreign pre-tax earnings and
additional provisions for tax reserves. We credited to additional paid-in
capital income tax benefits of options exercised of $52 during the thirteen
weeks ended October 1, 2004 and of $21 during the thirteen weeks ended October
3, 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 increased to $46 in the thirteen weeks ended October 1, 2004,
compared to $29 in the thirteen weeks ended October 3, 2003, due to the increase
in the subsidiary's earnings after deducting for income tax.
Net Income
Net income for the thirteen weeks ended October 1, 2004 increased to $3,458, or
$0.45 per Class A share and $0.49 per Class B share on a diluted basis, compared
to $2,179, or $0.32 per Class A share and $0.35 per Class B share on a diluted
basis, in the thirteen weeks ended October 3, 2003. Weighted average common
shares and common stock equivalents used to calculate diluted earnings per share
in the thirteen weeks ended October 1, 2004 consisted of 2,521,000 Class A and
4,709,000 Class B shares, compared to 2,521,000 Class A and 3,899,000 Class B
shares in the thirteen weeks ended October 3, 2003.
The increase in the weighted average common shares and equivalents in the
thirteen weeks ended October 1, 2004, compared to the thirteen weeks ended
October 3, 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 395,000 Class B common
shares due to the exercise of stock options and stock purchase warrants, of
which approximately 9,000 Class B common shares were issued in the thirteen
weeks ended October 1, 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.
Thirty-Nine Weeks Ended October 1, 2004 Compared to Thirty-Nine Weeks Ended
October 3, 2003
Consolidated Net Sales
Net sales increased $27,696, or 26%, to $133,214 in the thirty-nine weeks ended
October 1, 2004 from $105,518 in the thirty-nine weeks ended October 3, 2003.
On a geographic basis, domestic net sales increased $23,385, or 30%, to $102,667
in the thirty-nine weeks ended October 1, 2004 from $79,282 in the thirty-nine
weeks ended October 3, 2003. International net sales increased $4,311, or 16%,
to $30,547 in the thirty-nine weeks ended October 1, 2004 from $26,236 in the
thirty-nine weeks ended October 3, 2003. Favorable changes in foreign exchange
rates accounted for $2,316 of the international sales increase in the
thirty-nine weeks ended October 1, 2004, compared to the thirty-nine weeks ended
October 3, 2003.
Saucony Brand Segment
Worldwide net sales of Saucony branded footwear and Saucony branded apparel
increased $26,401, or 30%, to $113,614 in the thirty-nine weeks ended October 1,
2004 from $87,213 in the thirty-nine weeks ended October 3, 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 and a $250 provision for potential customer related
credits. The volume of footwear sold in the thirty-nine weeks ended October 1,
2004 increased 33% to 3,763 pair from 2,824 pair in the thirty-nine weeks ended
October 3, 2003.
Domestic net sales increased $21,939, or 35%, to $84,108 in the thirty-nine
weeks ended October 1, 2004 from $62,169 in the thirty-nine weeks ended October
3, 2003, due primarily to a 43% increase in footwear unit volumes, partially
offset by lower wholesale per pair average selling prices.
The volume of domestic footwear sold in the thirty-nine weeks ended October 1,
2004, increased to 3,025 pair from 2,114 pair in the thirty-nine weeks ended
October 3, 2003. The footwear unit volume increase in the thirty-nine weeks
ended October 1, 2004 was due primarily to a 101% 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 68% increase in Originals footwear unit volume, due primarily to
increased unit volume sold into the athletic mall and sporting goods channels,
and a 20% increase in technical footwear unit volume, due primarily to increased
unit volume sold across all of our domestic distribution channels. Our
cross-over footwear category consists primarily of mid-priced running shoes
incorporating one of our proprietary Grid technologies, previously included in
our technical footwear category. Our technical footwear accounted for 41% of
domestic footwear unit volume in the thirty-nine weeks ended October 1, 2004,
compared to 53% of domestic footwear volume in the thirty-nine weeks ended
October 3, 2003. Our cross-over footwear accounted for 31% of domestic footwear
unit volume in the thirty-nine weeks ended October 1, 2004, compared to 22% of
domestic footwear volume in the thirty-nine weeks ended October 3, 2003. Our
Originals footwear accounted for 25% of domestic footwear unit volume in the
thirty-nine weeks ended October 1, 2004, compared to 21% of domestic footwear
unit volume in the thirty-nine weeks ended October 3, 2003.
The average wholesale per pair selling price for domestic footwear decreased in
the thirty-nine weeks ended October 1, 2004, compared to the thirty-nine weeks
ended October 3, 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 $4,462, or 18%, to $29,506 in the thirty-nine
weeks ended October 1, 2004 from $25,044 in the thirty-nine weeks ended October
3, 2003, due primarily to favorable currency exchange resulting from a weaker
U.S. dollar against European and Canadian currencies and, to a lesser extent,
increased technical footwear volume, 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 thirty-nine weeks ended October 1, 2004, compared
to the thirty-nine weeks ended October 3, 2003. Cross-over footwear typically
sells at higher wholesale per pair selling prices than Originals footwear.
The volume of international footwear sold in the thirty-nine weeks ended October
1, 2004 increased to 738 pair from 710 pair in the thirty-nine weeks ended
October 3, 2003. Footwear unit volumes at our foreign subsidiaries increased 14%
in the thirty-nine weeks ended October 1, 2004, compared to the thirty-nine
weeks ended October 3, 2003, due primarily to increased technical footwear unit
volumes sold at our Canadian and European subsidiaries. International
distributor footwear unit volumes decreased 15% in the thirty-nine weeks ended
October 1, 2004, compared to the thirty-nine weeks ended October 3, 2003, due
primarily to a 77% decrease in Originals footwear unit volumes sold in the
Japanese footwear market and decreased technical footwear unit volume sold to
our distributors in Australia and in Europe, partially offset by increased
technical footwear unit volume sold in the Japanese market due to the sale of
new technical products.
Other Products Segment
Worldwide sales of Other Products increased $1,295, or 7%, to $19,600 in the
thirty-nine weeks ended October 1, 2004 from $18,305 in the thirty-nine weeks
ended October 3, 2003, due primarily to a 27% increase in sales at our factory
outlet stores, partially offset by a 3% decrease in domestic sales of our Hind
brand apparel.
Domestic net sales of Other Products increased $1,446, or 8%, to $18,559 in the
thirty-nine weeks ended October 1, 2004 from $17,113 in the thirty-nine weeks
ended October 3, 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 27% in the thirty-nine weeks ended October
1, 2004, compared to the thirty-nine weeks ended October 3, 2003, due primarily
to sales derived from two additional factory outlet stores opened since October
3, 2003 and, to a lesser extent, a 9% sales increase at our domestic factory
outlet stores open for more than one year. Hind apparel sales decreased 3% due
primarily to a 12% decrease in Hind apparel unit volume, partially offset by a
11% 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 thirty-nine weeks ended October 1, 2004,
compared to the thirty-nine weeks ended October 3, 2003. Sales of closeout
apparel accounted for approximately 11% of domestic Hind apparel net sales in
the thirty-nine weeks ended October 1, 2004, compared to 22% of domestic Hind
apparel net sales in the thirty-nine weeks ended October 3, 2003. During the
thirty-nine weeks ended October 1, 2004, our closeout sales volume decreased,
compared to the thirty-nine weeks ended October 3, 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 $151, or 13%, to $1,041 in
the thirty-nine weeks ended October 1, 2004 from $1,192 in the thirty-nine weeks
ended October 3, 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 thirty-nine weeks ended October 1, 2004
increased to 41.0%, compared to 39.4% in the thirty-nine weeks ended October 3,
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 due to a shift in product mix to higher margin products. The improved
margins on our Hind brand apparel during the thirty-nine weeks ended October 1,
2004, compared to the thirty-nine weeks ended October 3, 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 thirty-nine weeks
ended October 1, 2004, compared to the thirty-nine weeks ended October 3, 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
and increased inventory reserve provisions for certain slow-moving Saucony
domestic footwear styles.
Selling, general and administrative expenses as a percentage of net sales
decreased to 27.6% in the thirty-nine weeks ended October 1, 2004, compared to
28.8% in the thirty-nine weeks ended October 3, 2003. In absolute dollars,
selling, general and administrative expenses increased 21%, due primarily to
increased administrative and selling payroll, legal and professional fees,
operating expenses associated with the expansion of our factory outlet division,
print media advertising, variable selling expenses and account specific
advertising and promotion. Included in general and administrative expenses in
the nine months ended October 1, 2004 were $775 of professional fees associated
with our assessment of internal controls as required under Section 404 of the
Sarbanes-Oxley Act and $300 of legal fees related to our review of strategic
alternatives and related matters. General and administrative expenses in the
thirty-nine weeks ended October 3, 2003 included a favorable litigation
settlement which reduced bad debt expense by $566. Foreign exchange rate changes
increased selling and administrative expenses by $453 in the thirty-nine weeks
ended October 1, 2004, compared to the thirty-nine weeks ended October 3, 2003.
Non-Operating Income (Expense)
Non-operating income (expense) decreased in the thirty-nine weeks ended October
1, 2004 to an expense of $132, compared to income of $243 in the thirty-nine
weeks ended October 3, 2003. The decrease was due primarily to foreign currency
losses of $335 in the thirty-nine weeks ended October 1, 2004, compared to
foreign currency gains of $17 in the thirty-nine weeks ended October 3, 2003,
due primarily to losses on forward foreign exchange contracts, and, to a lesser
extent, recognizing $146 of accumulated other comprehensive losses from the
closing and relocation of our Saucony International administrative office.
Income Before Income Taxes and Minority Interest
Thirty-Nine Weeks Ended
------------------------------------
October 1, October 3,
2004 2003
---- ----
Segment
Saucony..........................$ 16,015 $ 10,071
Other Products................... 2,118 1,655
--------- --------
Total............................$ 18,133 $ 11,726
========= ========
Income before tax and minority interest increased $6,407 in the thirty-nine
weeks ended October 1, 2004 to $18,133, compared to $11,726 in the thirty-nine
weeks ended October 3, 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 thirty-nine weeks ended October 1, 2004,
compared to the thirty-nine weeks ended October 3, 2003, was due primarily to
improved profitability at our factory outlet stores due to a shift in product
mix to higher margin products, 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 $7,289 in the thirty-nine weeks
ended October 1, 2004 from $4,577 in the thirty-nine weeks ended October 3,
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 1.2% to 40.2% in the thirty-nine weeks ended October 1, 2004 from
39.0% in the thirty-nine weeks ended October 3, 2003, due to a shift in the
composition of domestic and foreign pre-tax earnings and increased provisions
for tax reserves. We credited to additional paid-in capital income tax benefits
of options exercised of $1,159 during the thirty-nine weeks ended October 1,
2004 and of $97 during the thirty-nine weeks ended October 3, 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 $110 in the thirty-nine weeks ended October 1,
2004, compared to $135 in the thirty-nine weeks ended October 3, 2003, due to
the increase in our ownership percentage in Saucony Canada, Inc. to 95% from 85%
in July 2003 and an increase in the subsidiary's earnings after deducting for
income tax.
Net Income
Net income for the thirty-nine weeks ended October 1, 2004 increased to $10,734,
or $1.43 per Class A share and $1.58 per Class B share on a diluted basis,
compared to $7,014, or $1.05 per Class A share and $1.15 per Class B share on a
diluted basis, in the thirty-nine weeks ended October 3, 2003. Weighted average
common shares and common stock equivalents used to calculate diluted earnings
per share in the thirty-nine weeks ended October 1, 2004 consisted of 2,521,000
Class A and 4,524,000 Class B shares, compared to 2,522,000 Class A and
3,808,000 Class B shares in the thirty-nine weeks ended October 3, 2003.
The increase in the weighted average common shares and equivalents in the
thirty-nine weeks ended October 1, 2004, compared to the thirty-nine weeks ended
October 3, 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 395,000 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 October 1, 2004, our cash and cash equivalents totaled $11,389, a decrease
of $30,392 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 $952, cash outlays for capital assets of $3,672, due primarily to
the expansion of our corporate offices, and an increase of short term
investments of $7,991. This decrease in cash was offset in part by the receipt
of $2,993 from the issuance of shares of our common stock as a result of option
and common stock purchase warrant exercises and cash provided by operations of
$5,091.
Our accounts receivable, net of the provision for bad debts and discounts, at
October 1, 2004 increased $6,949, compared to at January 2, 2004, due primarily
to increased sales of our Saucony footwear products in the thirty-nine weeks
ended October 1, 2004. Also, our days' sales outstanding for accounts receivable
increased to 54 days in the thirty-nine weeks ended October 1, 2004 from 51 days
in the thirty-nine weeks ended October 3, 2003, due to the timing of our
shipments in the thirty-nine weeks ended October 1, 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 $5,188 in the thirty-nine weeks ended October 1, 2004
from $4,106 in the thirty-nine weeks ended October 3, 2003 due primarily to
increased sales discounts on higher sales volumes in the thirteen weeks ended
October 1, 2004 and, to a lesser extent, an increase in the provision for bad
debts. Inventories increased $962 in the thirty-nine weeks ended October 1,
2004, compared to at January 2, 2004. Our inventory turns increased to 4.6 turns
in the thirty-nine weeks ended October 1, 2004 from 3.8 turns in the thirty-nine
weeks ended October 3, 2003. The number of days' sales in inventory increased to
81 days in the thirty-nine weeks ended October 1, 2004 from 76 days in the
thirty-nine weeks ended October 3, 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
cross-over footwear inventory which we expect to ship at discounted margin
levels over the course of the next several months.
Principal factors, other than net income, accounts receivable, provision for bad
debts and discounts and inventory, affecting our operating cash flows in the
thirty-nine weeks ended October 1, 2004 included a $2,575 decrease in accounts
payable and a $2,061 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 both in the short and long term. During the thirty-nine weeks
ended October 1, 2004, our operating activities provided $5,091 in cash to fund
operations, due primarily to an increase in net income, net of an increase in
accounts receivable. In the thirty-nine weeks ended October 3, 2003, we
generated $10,852 in cash from operations due primarily to decreased
inventories. In August 2004, we amended the existing credit agreement with our
lender, extending the term of our primary credit facility, to expire on August
31, 2005. At October 1, 2004 and October 3, 2003, we had no borrowings
outstanding under our credit facilities.
Off-Balance Sheet Arrangements
We had letters of credit outstanding of $197 at October 1, 2004. All of the
letters of credit were issued for the purchase of inventory. We had forward
foreign exchange contracts of $5,045 at October 1, 2004, all of which are due to
settle within the next 12 months.
Amounts
Committed
October 1, 2004
---------------
Letters of credit...............................$ 197
Forward foreign exchange contracts.............. 5,045
---------
Total...........................................$ 5,242
=========
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 and our sales to foreign distributors 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 October 1, 2004, we experienced $26 in
foreign currency gains, due primarily to recognizing gains on forward foreign
exchange contracts, compared to foreign currency losses of $41 in the thirteen
weeks ended October 3, 2003. During the thirty-nine weeks ended October 1, 2004,
we experienced $335 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
$17 in the thirty-nine weeks ended October 3, 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 October 1,
2004. Based on this evaluation, our chief executive officer and chief
financial officer have concluded that as of October 1, 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 October 1, 2004 that has materially
affected, or is reasonably likely to materially affect, our internal
controls over financial reporting.
PART II. OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY IN SECURITIES AND USE OF PROCEEDS
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 October 1, 2004, and as of October 1, 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 6. 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.
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: November 15, 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
- ---- ----------------
3.1 By-Laws, as amended, of the Registrant.
10.1 Amendment to Amended and Restated Credit Agreement, dated as of August 30,
2002, By and between Saucony, Inc. and HSBC Bank USA, National Association,
dated August 31, 2004.
10.2 Retention Agreement dated as of September 9, 2004, by and between the
Registrant and Brian Enge.
10.3 Retention Agreement dated as of September 9, 2004, by and between the
Registrant and Michael Jeppesen.
10.4 Retention Agreement dated as of September 9, 2004, by and between the
Registrant and Samuel Ward.
10.5 Retention Agreement dated as of September 9, 2004, by and between the
Registrant and Michael Umana.
10.6 Retention Agreement dated as of September 9, 2004, by and between the
Registrant and Roger Deschenes.
10.7 Letter agreement dated as of September 9, 2004, by and between the
Registrant and Michael Umana.
10.8 Severance Benefit Plan
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.