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 April 1, 2005
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)
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 [ X ] No [ ]
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 May 3, 2005
----- -----------------
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 4,176,593
---------
6,697,240
=========
SAUCONY, INC. AND SUBSIDIARIES
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements - Unaudited......................................3
Condensed Consolidated Balance Sheets as of April 1, 2005
and December 31, 2004.................................................3
Condensed Consolidated Statements of Income for the
thirteen weeks ended April 1, 2005 and April 2, 2004..................4
Condensed Consolidated Statements of Cash Flows for the
thirteen weeks ended April 1, 2005 and April 2, 2004..................5
Notes to Condensed Consolidated Financial Statements --
April 1, 2005......................................................6-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.....................................13-22
Item 3. Quantitative and Qualitative Disclosures about Market Risk........23-24
Item 4. Controls and Procedures..............................................25
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds......... 26
Item 6. Exhibits.............................................................26
Signature.....................................................................27
Exhibit Index.................................................................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
April 1, December 31,
2005 2004
---- ----
Current assets:
Cash and cash equivalents............................................$ 28,437 $ 12,042
Short-term investments............................................... 300 20,694
Accounts receivable, net............................................. 27,517 22,485
Inventories.......................................................... 22,600 25,645
Deferred income taxes................................................ 2,554 2,455
Prepaid expenses and other current assets............................ 1,466 1,316
--------- ---------
Total current assets............................................... 82,874 84,637
--------- ---------
Property, plant and equipment, net...................................... 9,341 9,570
--------- ---------
Other assets:
Goodwill, net........................................................ 912 912
Deferred charges, net................................................ 80 91
Other................................................................ 1,029 1,047
--------- ---------
Total other assets................................................. 2,021 2,050
--------- ---------
Total assets............................................................$ 94,236 $ 96,257
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capitalized lease obligations.....................$ 64 $ 63
Accounts payable..................................................... 7,246 10,484
Accrued expenses and other current liabilities....................... 9,164 11,249
Environmental accrual................................................ 2,220 2,275
--------- ---------
Total current liabilities.......................................... 18,694 24,071
--------- ---------
Long-term obligations:
Capitalized lease obligations, net of current portion................ 123 138
Other long-term obligations.......................................... 963 932
Deferred income taxes................................................ 1,931 1,964
--------- ---------
Total long-term obligations........................................ 3,017 3,034
--------- ---------
Minority interest in consolidated subsidiary............................ 505 461
--------- ---------
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 and outstanding April 1, 2005, 2,520,647 and
December 31, 2004, 2,711,129).................................... 840 840
Class B, $.333 par value per share, authorized 20,000,000 shares
(issued and outstanding April 1, 2005, 4,176,593 and
December 31, 2004, 4,094,445).................................... 1,392 1,365
Additional paid in capital........................................... 18,829 18,049
Retained earnings.................................................... 49,528 46,693
Accumulated other comprehensive income............................... 1,431 1,744
--------- ---------
Total stockholders' equity....................................... 72,020 68,691
--------- ---------
Total liabilities and stockholders' equity..............................$ 94,236 $ 96,257
========= =========
The accompanying notes are an integral part of these consolidated financial statements.
SAUCONY, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
For the Thirteen Weeks Ended April 1, 2005 and April 2, 2004
(Unaudited)
(In thousands, except per share amounts)
Thirteen Weeks Thirteen Weeks
Ended Ended
April 1, April 2,
2005 2004
---- ----
Net sales..............................................................$ 41,851 $ 46,969
Other revenue ......................................................... 96 179
---------- ----------
Total revenue ......................................................... 41,947 47,148
---------- ----------
Costs and expenses
Cost of sales....................................................... 24,257 27,912
Selling expenses.................................................... 5,752 6,058
General and administrative expenses................................. 6,894 6,078
---------- ----------
Total costs and expenses.......................................... 36,903 40,048
---------- ----------
Operating income....................................................... 5,044 7,100
Non-operating income (expense)
Interest income..................................................... 157 69
Interest expense.................................................... (3) --
Foreign currency gains (losses) .................................... 100 (144)
Other............................................................... 25 3
---------- ----------
Income before income taxes and minority interest....................... 5,323 7,028
Provision for income taxes............................................. 2,083 2,759
Minority interest in income of consolidated subsidiaries............... 50 38
---------- ----------
Net income.............................................................$ 3,190 $ 4,231
========== ==========
Per share amounts:
Earnings per share:
Basic:
Class A common stock............................................$ 0.45 $ 0.63
========= ==========
Class B common stock............................................$ 0.50 $ 0.69
========= ==========
Diluted:
Class A common stock............................................$ 0.41 $ 0.58
========= ==========
Class B common stock............................................$ 0.46 $ 0.64
========= ==========
Weighted average common shares and equivalents outstanding:
Basic:
Class A common stock............................................ 2,521 2,521
Class B common stock............................................ 4,137 3,801
---------- ----------
Total......................................................... 6,658 6,322
========== ==========
Diluted:
Class A common stock............................................ 2,521 2,521
Class B common stock............................................ 4,698 4,323
---------- ----------
Total......................................................... 7,219 6,844
========== ==========
Cash dividends per share of common stock:
Class A common stock............................................$ 0.050 $ 4.050
========== ==========
Class B common stock............................................$ 0.055 $ 4.055
========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
SAUCONY, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
For the Thirteen Weeks Ended April 1, 2005 and April 2, 2004
(Unaudited)
(In thousands)
Thirteen Weeks Thirteen Weeks
Ended Ended
April 1, April 2,
2005 2004
---- ----
Cash flows from operating activities:
Net income.................................................................$ 3,190 $ 4,231
Adjustments to reconcile net income to net cash
used by operating activities:
Depreciation and amortization.............................................. 455 361
Provision for bad debts and discounts...................................... 1,992 2,032
Deferred income tax (credit) expense ...................................... (134) 659
Tax benefit on stock option exercises...................................... 6 1,036
Other...................................................................... 12 8
Changes in operating assets and liabilities, net of effect
foreign currency adjustments:
(Increase) decrease in assets:
Accounts receivable.................................................... (7,096) (15,645)
Inventories............................................................ 2,864 113
Prepaid expenses and other current assets....................................... (126) (38)
Decrease in liabilities:
Accounts payable....................................................... (3,221) (2,012)
Accrued expenses....................................................... (2,061) (1,349)
-------- --------
Total adjustments............................................................ (7,309) (14,835)
-------- --------
Net cash used by operating activities........................................... (4,119) (10,604)
-------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment................................... (235) (437)
Sales of short-term investments.............................................. 20,428 5,769
Proceeds from sale of property, plant and equipment.......................... 8 --
Change in deposits and other................................................. (10) (63)
-------- --------
Net cash provided by investing activities.................................... 20,191 5,269
-------- --------
Cash flows from financing activities:
Repayment of capital lease obligations....................................... (14) --
Dividends paid on common stock............................................... (351) (26,251)
Issuances of common stock, stock option exercises............................ 802 2,231
Issuances of common stock, stock purchase warrant exercises.................. -- 352
-------- --------
Net cash provided (used) by financing activities................................ 437 (23,668)
Effect of exchange rate changes on cash and cash equivalents.................... (114) (89)
-------- --------
Net increase (decrease) in cash and cash equivalents............................ 16,395 (29,092)
Cash and equivalents at beginning of period..................................... 12,042 41,781
-------- ---------
Cash and equivalents at end of period...........................................$ 28,437 $ 12,689
======== =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes, net of refunds...............................................$ 1,144 $ 975
======== =========
Interest...................................................................$ 3 $ --
======== =========
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
APRIL 1, 2005
(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 December 31,
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 December 31, 2004. Operating results for the
thirteen weeks ended April 1, 2005 are not necessarily indicative of the results
for the entire year.
NOTE 2 - INVENTORIES
Inventories at April 1, 2005 and December 31, 2004 consisted of the following:
April 1, December 31,
2005 2004
---- ----
Finished goods...............................$ 22,393 $ 25,503
Raw material and supplies.................... 192 142
Work in progress............................. 15 --
--------- ---------
Total........................................$ 22,600 $ 25,645
========= =========
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 are
presented:
Thirteen Weeks
Ended
-----------------------------
April 1, April 2,
2005 2004
---- ----
Net income available to Class A
and Class B common stockholders................$ 3,190 $ 4,231
------- -------
Allocation of net income:
Basic:
Class A common stock...........................$ 1,137 $ 1,591
Class B common stock........................... 2,053 2,640
------- -------
Total..........................................$ 3,190 $ 4,231
======= =======
Diluted:
Class A common stock........................... 1,046 $ 1,466
Class B common stock........................... 2,144 2,765
------- -------
Total..........................................$ 3,190 $ 4,231
======= =======
Weighted average common shares
and equivalents outstanding:
Basic:
Class A common stock........................... 2,521 2,521
Class B common stock........................... 4,137 3,801
------- -------
Total.......................................... 6,658 6,322
======= =======
Diluted:
Class A common stock........................... 2,521 2,521
Class B common stock........................... 4,698 4,323
------- -------
Total......................................... 7,219 6,844
======= =======
Earnings per share:
Basic:
Class A common stock...........................$ 0.45 $ 0.63
======= =======
Class B common stock...........................$ 0.50 $ 0.69
======= =======
Diluted:
Class A common stock...........................$ 0.41 $ 0.58
======= =======
Class B common stock...........................$ 0.46 $ 0.64
======= =======
The increase in the weighted average common shares and equivalents outstanding
was due to the increase in Class B common shares outstanding from the issuance
of approximately 185,000 Class B common shares due to the exercise of stock
options.
All of the options to purchase shares of common stock outstanding at April 1,
2005 and April 2, 2004 were included in the computations of diluted earnings per
share.
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 ended April 2, 2004 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 option grants. There were no stock options granted
during the thirteen weeks ended April 1, 2005.
In connection with the exercise of options, the Company has realized income tax
benefits of $6 and $1,036 for the thirteen weeks ended April 1, 2005 and April
2, 2004, respectively, that have been credited to additional paid-in capital.
Had the Company determined the stock-based compensation expense for the
Company's stock options based upon the fair value at the grant date for stock
option awards for the thirteen weeks ended April 1, 2005 and April 2, 2004,
consistent with the fair value method provisions of SFAS 123, the Company's net
income and net income per share would have been reduced to the pro forma amounts
indicated below:
Thirteen Weeks Ended Thirteen Weeks Ended
April 1, 2005 April 2, 2004
Basic Diluted Basic Diluted
----- ------- ----- -------
Net income:
As reported........................................$ 3,190 $ 3,190 $ 4,231 $ 4,231
Less: Total stock-based compensation
expense determined under the fair value
based method for all awards, net of
related tax benefit................................ (268) (268) (338) (338)
-------- -------- -------- --------
Pro forma net income ................................$ 2,922 $ 2,922 $ 3,893 $ 3,893
======== ======== ======== ========
Pro forma net income allocated:
Class A common stock.............................$ 1,040 $ 1,043 $ 1,464 $ 1,349
Class B common stock............................. 1,882 1,879 2,429 2,544
-------- -------- -------- --------
Total.....................................$ 2,922 $ 2,922 $ 3,893 $ 3,893
======== ======== ======== ========
Thirteen Weeks Ended Thirteen Weeks Ended
April 1, 2005 April 2, 2004
Basic Diluted Basic Diluted
----- ------- ----- -------
Pro forma earnings per share:
Class A common stock
As reported........................................$ 0.45 $ 0.41 $ 0.63 $ 0.58
Less: Total stock-based compensation
expense determined under the fair
value based method for all awards,
net of related tax benefit......................... (0.04) (0.04) (0.05) (0.04)
-------- -------- -------- --------
Pro forma net income per share.......................$ 0.41 $ 0.37 $ 0.58 $ 0.54
======== ======== ======== ========
Thirteen Weeks Ended Thirteen Weeks Ended
April 1, 2005 April 2, 2004
--------------------- ---------------------
Basic Diluted Basic Diluted
----- ------- ----- -------
Pro forma earnings per share:
Class B common stock
As reported........................................$ 0.50 $ 0.46 $ 0.69 $ 0.64
Less: Total stock-based compensation
expense determined under the fair
value based method for all awards,
net of related tax benefit......................... (0.04) (0.04) (0.05) (0.05)
-------- ------- ------- --------
Pro forma net income per share.......................$ 0.46 $ 0.42 $ 0.64 $ 0.59
======== ======= ======= ========
The fair value of options at date of grant was estimated using the Black-Scholes
option-pricing model with the following weighted average assumptions:
Thirteen Weeks
Ended
April 2, 2004
-------------
Expected life (years)....................... 5.0
Risk-free interest rate..................... 3.0%
Expected volatility......................... 57.5%
Expected dividend yield..................... 1.2%
There were no stock options granted during the thirteen weeks ended April 1,
2005.
NOTE 5 - STATEMENT OF COMPREHENSIVE INCOME
Thirteen Weeks Thirteen Weeks
Ended Ended
April 1, 2005 April 2, 2004
------------- -------------
Net income........................................................$ 3,190 $ 4,231
Other comprehensive income:
Foreign currency translation adjustments........................ (313) (176)
-------- --------
Comprehensive income..............................................$ 2,877 $ 4,055
======== ========
NOTE 6 - DEFERRED CHARGES
Deferred charges as of April 1, 2005 and December 31, 2004 are as follows:
April 1, 2005 December 31, 2004
Accumulated Accumulated
Cost Amortization Net Cost Amortization Net
---- ------------ --- ---- ------------ ---
Software licenses...................$ 1,115 $ (1,040) $ 75 $ 1,135 $ (1,057) $ 78
Other............................... 444 (439) 5 444 (431) 13
--------- --------- ----- -------- --------- ------
Total...............................$ 1,559 $ (1,479) $ 80 $ 1,579 $ (1,488) $ 91
========= ========= ===== ======== ========= ======
Amortization of intangible assets was $21 and $32, respectively, in the thirteen
weeks ended April 1, 2005 and April 2, 2004.
NOTE 7 - ENVIRONMENTAL ACCRUAL
In the thirteen weeks ended December 31, 2004, the Company recorded a charge of
$2,275 to address environmental conditions at a Company owned distribution
facility. The assessment of the liability and the associated costs was an
estimate based upon available information after consultation with environmental
engineers, consultants and attorneys assisting the Company in addressing these
environmental issues. Actual costs to address the environmental conditions may
change based on further investigations, based on the conclusions of regulatory
authorities about information gathered in those investigations and due to the
inherent uncertainties involved in estimating conditions in the environment and
the costs of addressing such conditions. The following table presents the
changes in the liability for the thirteen weeks ended April 1, 2005:
Balance at December 31, 2004..............................$ 2,275
Additions charged to costs and expenses................... --
Deductions from reserve................................... (55)
----------
Balance at April 1, 2005..................................$ 2,220
==========
NOTE 8 - 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 weeks ended April 1, 2005 and April
2, 2004, 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 December 31, 2004.
Thirteen Weeks Thirteen Weeks
Ended Ended
April 1, 2005 April 2, 2004
------------- -------------
Revenues:
Saucony....................................................$ 35,583 $ 41,240
Other Products............................................. 6,364 5,908
-------- --------
Total revenue.........................................$ 41,947 $ 47,148
======== ========
Income before income taxes and minority interest:
Saucony....................................................$ 4,637 $ 6,372
Other Products............................................. 686 656
-------- --------
Total.................................................$ 5,323 $ 7,028
======== ========
NOTE 9 - RECENT ACCOUNTING PRONOUNCEMENTS
In March 2005, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 47, "Accounting for Conditional Asset Retirement
Obligations", an interpretation of FASB Statement No. 143. FIN 47 clarifies that
the term "conditional asset retirement obligation" as used in FASB Statement No.
143, "Accounting for Asset Retirement Obligations", refers to a legal obligation
to perform an asset retirement activity in which the timing and (or) the method
of settlement are conditional on a future event that may or may not be within
the control of the entity. The interpretation also clarifies when an entity
should have sufficient information to reasonably estimate the fair value of an
asset retirement obligation. The provisions of FIN 47 are effective for fiscal
years ending after December 15, 2005 (December 31, 2005 for calendar-year
enterprises). FIN 47 requires that the amount recognized as an asset retirement
cost shall be measured as of the date the asset retirement obligation was
incurred. An entity shall recognize the cumulative effect of initially adopting
FIN 47 as a change in accounting principle. Further, an entity shall compute on
a pro forma basis and disclose in the footnotes to the financial statements for
the beginning of the earliest year presented and at the end of all years
presented the amount of the liability for asset retirement obligations as if FIN
47 had been applied during all periods affected. Retrospective application of
interim financial information is permitted but not required. The Company is
evaluating the provisions of this interpretation to determine the impact on its
financial position, results of operations and cash flows.
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment" ("SFAS
123R"). This statement is a revision of SFAS No. 123, "Accounting for
Stock-Based Compensation," and supersedes APB Opinion No. 25, "Accounting for
Stock Issued to Employees." SFAS 123R requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
financial statements based on their fair values. The provisions of this
statement are effective for interim or annual periods beginning after June 15,
2005. On April 22, 2005, the Securities and Exchange Commission amended Rule
4-01(a) of Regulation S-X regarding the compliance date for SFAS 123R, amending
the date for compliance with SFAS 123R so that each registrant that is not a
small business issuer, as defined by Regulation S-B, item 10, 17 CFR 228.10, is
permitted to implement SFAS 123R at the beginning of its next fiscal year,
instead of the next reporting period that begins after June 15, 2005.
Accordingly, such companies need not comply with SFAS 123R until its interim
financial statements for the first quarter of fiscal 2006 are filed with the
Securities and Exchange Commission. The Commission's rule does not change the
accounting required by SFAS 123R, it only changes the dates for compliance with
the standard. The Company is currently evaluating the provisions of this
revision to determine the impact on its consolidated financial statements. The
adoption of this statement is expected to have a negative effect on the
Company's consolidated net income.
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 December 31, 2004 under "Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations - Certain Other
Factors That May Affect Future Results" filed by us with the Securities and
Exchange Commission on March 16, 2005, 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, cooperative advertising, volume
incentive rebates, inventories, property, plant and equipment, impairment of
long-lived assets, income taxes, stock-based compensation, hedge accounting for
derivatives and environmental costs. For a more detailed explanation of our
critical accounting policies, refer to our Annual Report on Form 10-K for the
year ended December 31, 2004, as filed with the Securities and Exchange
Commission on March 16, 2005.
Dollar amounts throughout this Item 2 are in thousands, except per share
amounts.
Highlights
Dollar and Percentage
(Decrease) Increase
Thirteen Weeks Ended
April 1, 2005 vs. April 2, 2004
-------------------------------
Net sales...................................... $(5,118) (10.9%)
Gross profit................................... (1,463) (7.7%)
Selling, general and
administrative expenses...................... 510 4.2%
Dollar Change
Thirteen Weeks Ended
April 1, 2005 vs. April 2, 2004
-------------------------------
Operating income................................... $(2,056)
Income before income taxes and
minority interest................................ (1,705)
Net income......................................... (1,041)
Percent of Net Sales
Thirteen Weeks Ended
April 1, 2005 April 2, 2004
------------- -------------
Gross profit...................................... 42.0% 40.6%
Selling, general and
administrative expenses......................... 30.2 25.8
Operating income.................................. 12.1 15.1
Income before income taxes........................ 12.7 15.0
Net income........................................ 7.6 9.0
The following table sets forth the approximate contribution to net sales (in
dollars and as a percentage of consolidated net sales) attributable to our
Saucony segment and our Other Products segment for the thirteen weeks ended
April 1, 2005 and April 2, 2004:
Thirteen Weeks Ended
April 1, 2005 April 2, 2004
------------- -------------
Saucony..................$ 35,525 84.9% $ 41,099 87.5%
Other Products........... 6,326 15.1% 5,870 12.5%
-------- ------ -------- ------
Total....................$ 41,851 100.0% $ 46,969 100.0%
======== ===== ======== =====
Thirteen Weeks Ended April 1, 2005 Compared to Thirteen Weeks Ended April 2,
2004
Consolidated Net Sales
Net sales decreased $5,118, or 11%, to $41,851 in the thirteen weeks ended April
1, 2005 from $46,969 in the thirteen weeks ended April 2, 2004.
On a geographic basis, domestic net sales decreased $4,933, or 14%, to $31,035
in the thirteen weeks ended April 1, 2005 from $35,968 in the thirteen weeks
ended April 2, 2004. International net sales decreased $185, or 2%, to $10,816
in the thirteen weeks ended April 1, 2005 from $11,001 in the thirteen weeks
ended April 2, 2004. The decrease in our international net sales for the
thirteen weeks ended April 1, 2005 was partially offset by $531 in sales
attributable to favorable changes in foreign exchange rates, as compared to the
thirteen weeks ended April 2, 2004.
Saucony Brand Segment
Worldwide net sales of Saucony branded footwear and Saucony branded apparel
decreased $5,574, or 14%, to $35,525 in the thirteen weeks ended April 1, 2005
from $41,099 in the thirteen weeks ended April 2, 2004, due to a $5,492 decrease
in sales of Saucony footwear and an $81 decrease in sales of Saucony apparel.
Partially offsetting these decreases were favorable changes in foreign exchange
rates resulting from a weaker U.S. dollar against European and Canadian
currencies which increased Saucony international sales by $509 in the thirteen
weeks ended April 1, 2005, as compared to the thirteen weeks ended April 2,
2004. The decrease in sales of Saucony footwear was due primarily to a 13%
decrease in footwear unit volumes and, to a lesser extent, a 1% decrease in
average wholesale per pair footwear selling prices. The volume of footwear sold
in the thirteen weeks ended April 1, 2005 decreased 13%, to 1,171 pair from
1,347 pair in the thirteen weeks ended April 2, 2004, primarily due to decreased
domestic mid-priced cross-over footwear and domestic Originals footwear unit
volumes and decreased international technical footwear unit volumes, partially
offset by increased domestic and international special makeup footwear unit
volumes and, to a lesser extent, increased domestic technical footwear and
closeout footwear unit volumes. Average domestic and international wholesale per
pair footwear selling prices in the thirteen weeks ended April 1, 2005 decreased
1%, compared to the thirteen weeks ended April 2, 2004. The decrease in sales of
Saucony apparel was due primarily to decreased apparel sales at our Canadian and
Dutch subsidiaries, partially offset by increased domestic apparel sales.
Domestic net sales decreased $5,487, or 18%, to $25,056 in the thirteen weeks
ended April 1, 2005 from $30,543 in the thirteen weeks ended April 2, 2004, due
primarily to $3,362 of decreased sales of mid-priced cross-over footwear, $2,895
of decreased sales of Originals footwear and $1,504 of decreased sales of
technical footwear, offset partially by $1,820 of increased sales of special
makeup footwear, $305 of increased sales of Saucony apparel and $149 of
increased sales of closeout footwear. The volume of domestic footwear sold in
the thirteen weeks ended April 1, 2005 decreased 17% to 911 pair from 1,098 pair
in the thirteen weeks ended April 2, 2004, including a 50% decrease in Originals
footwear unit volumes to 146 pair and a 43% decrease in mid-priced cross-over
footwear unit volumes to 191 pair, partially offset by an 42% increase in
special makeup footwear unit volumes to 260 pair, a 37% increase in closeout
footwear unit volumes to 60 pair and a 5% increase in technical footwear unit
volumes to 254 pair. The cross-over and Originals footwear unit volume decrease
in the thirteen weeks ended April 1, 2005 at the athletic mall, fashion mall,
sporting goods and value channels, compared to the thirteen weeks ended April 2,
2004, was due to a change in consumer preference to fashion-inspired athletic
footwear which we did not offer and the ability of our competitors to offer more
value in cosmetics and function in their lower-priced footwear products, as
compared to our products. The average domestic wholesale per pair footwear
selling price in the thirteen weeks ended April 1, 2005 decreased 2%, as
compared to the thirteen weeks ended April 2, 2004. The lower average wholesale
selling price per pair was due to a change in the product mix of our technical
footwear to lower price products and increased special makeup footwear unit
volumes. Our special makeup footwear sells at prices below our first quality
technical footwear.
We expect further significant declines in sales of cross-over and Originals
footwear into the athletic mall, fashion mall, sporting goods and value channels
through the third quarter of fiscal 2005 due to the lead time required to
introduce new products into the market.
Sales of closeout footwear accounted for approximately 5%, or $1,127, of
domestic Saucony net sales in the thirteen weeks ended April 1, 2005 compared to
3%, or $978, in the thirteen weeks ended April 2, 2004. The increase in closeout
footwear sales in the thirteen weeks ended April 1, 2005 was primarily due to
increased closeout unit volume sold to reduce inventory supply of cross-over
footwear.
Originals footwear accounted for approximately 16% of domestic footwear unit
volume in the thirteen weeks ended April 1, 2005, compared to 27% in the
thirteen weeks ended April 2, 2004. The unit volume decrease in Originals
footwear in the thirteen weeks ended April 1, 2005 was primarily due to
decreased unit volume of Jazz Originals and Shadow Originals, for both adults
and children, sold into the athletic mall, sporting goods and value channels.
Our domestic order cancellation rate for the thirteen weeks ended April 1, 2005
was comparable with the order cancellation rate for the thirteen weeks ended
April 2, 2004.
International net sales decreased $87, or 1%, to $10,469 in the thirteen weeks
ended April 1, 2005 from $10,556 in the thirteen weeks ended April 2, 2004, due
to a $400 decrease in Saucony apparel sales at our Canadian and Dutch
subsidiaries due to delays in product deliveries and a $241 decrease in footwear
sales at our subsidiaries due primarily to lower average wholesale per pair
footwear selling prices as a result of increased footwear unit volume of special
makeup footwear, which products carry lower average wholesale per pair selling
prices than our technical footwear, partially offset by $510 attributable to
favorable currency exchange, primarily resulting from a weaker U.S. dollar
against European and Canadian currencies, and, to a lesser extent, a $44
increase in footwear sales at our international distributor business due to
higher average wholesale per pair footwear selling prices. The volume of
international footwear sold in the thirteen weeks ended April 1, 2005 increased
5%, to 261 pair, from 249 pair in the thirteen weeks ended April 2, 2004. The
international footwear average wholesale per pair selling price decreased due to
a change in the product mix to increased unit volume of special makeup footwear
sold at our British subsidiary.
Other Products Segment
Worldwide sales increased $456, or 8%, to $6,326 in the thirteen weeks ended
April 1, 2005 from $5,870 in the thirteen weeks ended April 2, 2004. This
increase was due primarily to $701 of increased domestic sales of our Hind brand
apparel and, to a lesser extent, $81 of increased sales at our Canadian factory
outlet stores and $21 attributable to favorable currency exchange. The favorable
currency exchange was primarily due to a weaker U.S. dollar against European and
Canadian currencies. These increases were partially offset by $200 of decreased
international sales of our Hind brand apparel, $111 of decreased sales of our
Spot-bilt brand footwear and $35 of decreased sales at our factory outlet
division.
Domestic net sales of Other Products increased $554, or 10%, to $5,979 in the
thirteen weeks ended April 1, 2005 from $5,425 in the thirteen weeks ended April
2, 2004. This increase was due primarily to a 21% increase in Hind brand apparel
sales, to $3,981 in the thirteen weeks ended April 1, 2005, compared to $3,280
in thirteen weeks ended April 2, 2004. These increases were partially offset by
a $111 decrease in sales of our Spot-bilt brand footwear and a $35 decrease in
sales at our factory outlet division in the thirteen weeks ended April 1, 2005,
compared to the thirteen weeks ended April 2, 2004.
The Hind apparel sales increase was due primarily to a 12% increase in the
average wholesale unit selling price of our Hind apparel brand and, to a lesser
extent, an 8% increase in apparel unit volumes. Unit volumes of our Hind apparel
increased to 268 units in the thirteen weeks ended April 1, 2005, compared to
248 units in the thirteen weeks ended April 2, 2004. The increase in the average
wholesale per unit selling price for our Hind apparel brand was due primarily to
a change in the product mix of our special makeup apparel sold in the thirteen
weeks ended April 1, 2005 and increased unit volume in our undergarment and
fitness product categories, which carry higher selling prices than our running
category. The increased Hind apparel unit volume was due primarily to increased
undergarment, fitness and special makeup apparel unit volumes sold in the
thirteen weeks ended April 1, 2005, compared to the thirteen weeks ended April
2, 2004. Sales of special makeup apparel accounted for approximately 19% of Hind
apparel domestic net sales in the thirteen weeks ended April 1, 2005, compared
to 15% of Hind domestic net sales in thirteen weeks ended April 2, 2004.
Domestic sales at our factory outlet stores decreased 2% to $1,808 in the
thirteen weeks ended April 1, 2005, compared to $1,843 in the thirteen weeks
ended April 2, 2004 due primarily to the prolonged winter weather in the
Northeast, partially offset by sales increases at our stores located in the
Southeast. Sales at our factory outlet stores open for more than one year
decreased 5%, or $101, in the thirteen weeks ended April 1, 2005, compared to
the thirteen weeks ended April 2, 2004.
Spot-bilt brand sales decreased 37% in the thirteen weeks ended April 1, 2005 to
$191, compared to $302 in the thirteen weeks ended April 2, 2004, due primarily
to a 63% decrease in footwear unit volumes, partially offset by a 71% increase
in wholesale per pair selling prices. The decreased footwear unit volumes and
increased wholesale per pair selling prices in the thirteen weeks ended April 1,
2005, compared to the thirteen weeks ended April 1, 2004, were due to closing
out certain walking/duty styles in the thirteen weeks ended April 2, 2004 which
increased sales volume and lowered average wholesale per pair selling prices
during that period.
International net sales of Other Products decreased $98, or 22%, to $347 in the
thirteen weeks ended April 1,2005, compared to $445 in thirteen weeks ended
April 2, 2004, due primarily to $200 of decreased Hind apparel sales at our
Canadian and British subsidiaries, partially offset by $81 of increased sales at
our Canadian factory outlet stores and, to a lesser extent, $21 attributable to
favorable currency exchange primarily resulting from a weaker U.S. dollar
against European and Canadian currencies.
Costs and Expenses
Our gross margin percentage increased 1.4% to 42.0% in the thirteen weeks ended
April 1, 2005 from 40.6% in thirteen weeks ended April 2, 2004 due primarily to
a reduction in our product costs, favorable currency exchange and a decrease in
inventory provisions taken in the thirteen weeks ended April 1, 2005. Our
product costs decreased primarily due to a $417 decrease in Saucony domestic
footwear product costs reflecting negotiated price reductions and lower mold
costs, a $268 decrease in international footwear product costs due to favorable
currency exchange reflecting the impact of a weaker U.S. dollar against European
and Canadian currencies, a $260 decrease in inventory provisions, primarily due
to decreased Saucony domestic footwear inventory provision and a $49 decrease in
Hind product costs reflecting a change in our product sourcing to finished
goods. Offsetting these decreases in cost of sales was a $393 increase in sales
allowances, due primarily to increased domestic Saucony footwear sales allowance
provisions provided for anticipated customer returns. Another factor offsetting
the increase in gross margin in the thirteen weeks ended April 1, 2005 was
increased unit volume of Saucony domestic closeout and special makeup footwear,
both of which carry lower margins than our first quality technical footwear.
Selling, general and administrative expenses as a percentage of net sales
increased to 30% in the thirteen weeks ended April 1, 2005, compared to 26% in
the thirteen weeks ended April 2, 2004. The increase in the selling, general and
administrative expenses as a percentage of net sales resulted from a decrease in
net sales and increased advertising, selling and administrative expenses in the
thirteen weeks ended April 1, 2005. Selling, general and administrative expenses
increased to $12,646, or 4%, in the thirteen weeks ended April 1, 2005 from
$12,136 in the thirteen weeks ended April 2, 2004, due primarily to a $308
increase in administrative and selling payroll and related fringe benefits
resulting from increased staffing, a $223 increase in professional fees, a $180
increase in travel related expenses and a $103 increase in depreciation and
generally higher levels of administrative expenses, partially offset by a $306
decrease in advertising, primarily in print media, a $263 decrease in incentive
compensation, and a $101 decrease in variable selling expenses. The effects of
foreign exchange rate changes increased selling and administrative expenses by
$101 in the thirteen weeks ended April 1, 2005, compared to the thirteen weeks
ended April 2, 2004. Included in professional fees in thirteen weeks ended April
1, 2005 were $105 of professional fees associated with our assessment of
internal controls as required under Section 404 of the Sarbanes-Oxley Act of
2002 and $120 of legal and professional fees related to our review of strategic
alternatives and related matters. Professional fees of $158 associated with our
assessment of internal controls under Section 404 of the Sarbanes-Oxley Act of
2002 were included in professional fees in the thirteen weeks ended April 2,
2004.
Non-Operating Income (Expense)
Non-operating income increased to $279 in the thirteen weeks ended April 1,
2005, compared to an expense of $72 in the thirteen weeks ended April 2, 2004.
The increase was due a $244 increase in foreign currency income and an $88
increase in interest income in the thirteen weeks ended April 1, 2005, compared
to the thirteen weeks ended April 2, 2004. Foreign currency income increased to
$100 in the thirteen weeks ended April 1, 2005, compared to foreign currency
losses of $144 in the thirteen weeks ended April 2, 2004, due primarily to the
impact of currency fluctuations on forward foreign currency contracts. Interest
income increased to $157 in the thirteen weeks ended April 1, 2005, compared to
$69 in the thirteen weeks ended April 2, 2004, due to higher interest rates on
invested cash balances and short-term investments.
Income Before Tax and Minority Interest
Thirteen Weeks Ended
April 1, April 2,
2005 2004
---- ----
Segment
Saucony..........................$ 4,637 $ 6,372
Other Products................... 686 656
------- -------
Total............................$ 5,323 $ 7,028
======= =======
Income before tax and minority interest decreased $1,705 in the thirteen weeks
ended April 1, 2005 to $5,323, compared to $7,028 in the thirteen weeks ended
April 2, 2004, due primarily to decreased pre-tax income realized by our
domestic Saucony business due to lower sales and increased operating expenses.
The improvement in our Other Products segment income before tax and minority
interest in the thirteen weeks ended April 1, 2005, compared to the thirteen
weeks ended April 2, 2004, was due primarily to improved profitability at our
Hind apparel brand due to higher sales and improved gross margins.
Income Taxes
The provision for income taxes decreased to $2,083 in the thirteen weeks ended
April 1, 2005 from $2,759 in the thirteen weeks ended April 2, 2004, due
primarily to lower pre-tax income realized by our domestic Saucony business. The
effective tax rate decreased 0.2% to 39.1% in the thirteen weeks ended April 1,
2005 from 39.3% in the thirteen weeks ended April 2, 2004, 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 $6 during the
thirteen weeks ended April 1, 2005 and of $1,036 during the thirteen weeks ended
April 2, 2004. The income tax benefits of options exercised did not impact our
provision for income taxes or the effective tax rate in either period. The
decrease in the income tax benefit of options credited to additional paid-in
capital in thirteen weeks ended April 1, 2005 was due to the increase in stock
option exercises prior to the record date of our special cash dividend paid on
our common stock in the first quarter of fiscal 2004.
During the thirteen weeks ended April 1, 2005, we provided $56, for probable tax
contingencies.
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 $50 in the thirteen weeks ended April 1, 2005,
compared to $38 in the thirteen weeks ended April 2, 2004, due to increased net
sales and improved gross margins achieved at Saucony Canada, Inc. in the
thirteen weeks ended April 1, 2005.
Net Income
Net income for the thirteen weeks ended April 1, 2005 decreased to $3,190, or
$0.41 per Class A share and $0.46 per Class B share on a diluted basis, compared
to $4,231, or $0.58 per Class A share and $0.64 per Class B share on a diluted
basis, in the thirteen weeks ended April 2, 2004. Weighted average common shares
and common stock equivalents used to calculate diluted earnings per share in the
thirteen weeks ended April 1, 2005 consisted of 2,521,000 Class A and 4,698,000
Class B shares, compared to 2,521,000 Class A and 3,801,000 Class B shares in
the thirteen weeks ended April 2, 2004.
Liquidity and Capital Resources
As of April 1, 2005, our cash and cash equivalents totaled $28,437, an increase
of $16,395 from December 31, 2004. The increase was due primarily to the sales
in short term investments of $20,428 and the receipt of $802 of cash as a result
of option exercises. The increase in cash was offset in part by the use of
$4,119 to fund operations, payment of regular quarterly cash dividends of $351,
cash outlays for capital assets of $235 and $14 expended in payment of capital
lease obligations.
Our accounts receivable at April 1, 2005 increased $5,104, net of the provision
for bad debts and discounts, as compared to at December 31, 2004, due primarily
to increased net sales of our Saucony and Other Products in the thirteen weeks
ended April 1, 2005, compared to the thirteen weeks ended December 31, 2004. Our
days' sales outstanding for our accounts receivable decreased to 60 days in
thirteen weeks ended April 1, 2005 from 62 days in the thirteen weeks ended
April 2, 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. Our days' sales outstanding decreased in the thirteen weeks ended April
1, 2005 due to a change in the Saucony domestic sales mix to products and
programs which offer shorter payment terms. The provision for bad debts and
doubtful accounts decreased to $1,992 in the thirteen weeks ended April 1, 2005
from $2,032 in the thirteen weeks ended April 2, 2004 due to decrease in sales
discounts, both domestically and at our international subsidiaries in the
thirteen weeks ended April 1, 2005.
Inventories decreased $2,864, at April 1, 2005, as compared to December 31,
2004, due primarily to seasonal reductions in inventories resulting from
shipping our Spring 2005 programs. Our inventory turns ratio decreased to 4.0
turns in the thirteen weeks ended April 1, 2005 from 5.0 turns in the thirteen
weeks ended April 2, 2004, due primarily to increased levels of domestic Saucony
cross-over and special makeup footwear and Hind apparel inventories which were
on hand at December 31, 2004. The number of days' sales in inventory increased
to 85 days in the thirteen weeks ended April 1, 2005 from 73 days in the
thirteen weeks ended April 2, 2004, due primarily to increased levels of
domestic Saucony cross-over footwear, which we expect to ship at discounted
margins in fiscal 2005. The inventory turns ratio represents our net sales for a
period divided by our inventory at the end of 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 inventories by the average daily cost of sales.
Other factors affecting our operating cash flows in the thirteen weeks ended
April 1, 2005, included a $2,061 decrease in accrued expenses due primarily to
reduced employee compensation accruals, reflecting the payment of the fiscal
2004 incentive compensation, the timing of our payrolls and a decrease in
incentive compensation accrued in the thirteen weeks ended April 1, 2005,
partially offset by increased income tax accruals. Accounts payable decreased
$3,221 in the thirteen weeks ended April 1, 2005 due to payments made for
inventory received in the fourth quarter of fiscal 2004.
On February 17, 2005, our Board of Directors declared regular quarterly cash
dividends of $0.050 per share on our Class A Common Stock and $0.055 per share
on our Class B Common Stock. The dividends were paid on April 14, 2005 to
stockholders of record at the close of business on March 17, 2005. The aggregate
dividend payout amounted to approximately $355. As of April 1, 2005, we recorded
$355 in current liabilities, under accrued expenses, representing the dividend
liability for the April 14, 2005 dividends.
During the thirteen weeks ended April 1, 2005, we did not make any repurchases
of our common stock. As of April 1, 2005, we remained authorized to repurchase
up to 168,376 shares under the May 1998 stock repurchase program.
We maintain a revolving credit agreement under the terms of which a bank
committed up to a maximum of $15,000 to us for cash borrowings and letters of
credit. On August 31, 2004, we amended the revolving credit agreement. Pursuant
to the amendment, the term of the credit agreement was extended to and expires
on August 31, 2005. Upon its expiration, we intend either to extend this
facility or enter into a new, similar facility. However, we will evaluate our
liquidity needs again around the time the facility is scheduled to terminate,
and we may elect not to extend or replace the facility or to delay any extension
or replacement of the facility. In addition, we may not be able to extend or
replace the facility on similar terms or on terms acceptable to us.
Our liquidity is contingent upon a number of factors, principally our future
operating results. We believe that our current cash and cash equivalents, credit
facilities and internally generated funds will be adequate to meet our working
capital requirements and other operating expenses and, to fund our capital
investment needs, dividend payments and debt service payments for at least the
next 12 months. During the thirteen weeks ended April 1, 2005, we used $4,119 in
cash to fund operations, due primarily to an increase in accounts receivable. In
the thirteen weeks ended April 2, 2004, we used $10,604 in cash to fund
operations also due primarily to an increase in accounts receivable. We had no
borrowings outstanding under our credit facilities, at April 1, 2005 and April
2, 2004.
Off-Balance Sheet Arrangements
We had letters of credit outstanding of $269 at April 1, 2005. All of the
letters of credit were issued for the purchase of inventory. We had forward
foreign exchange contracts of $4,305 at April 1, 2005, all of which are due to
settle within the next 12 months.
Amounts
Committed
April 1, 2005
-------------
Letters of credit...............................$ 269
Forward foreign exchange contracts.............. 4,305
-------
Total...........................................$ 4,574
=======
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.
Recent Accounting Pronouncements
In March 2005, the FASB ("FASB") issued FASB Interpretation No. 47, "Accounting
for Conditional Asset Retirement Obligations", an interpretation of FASB
Statement No. 143. FIN 47 clarifies that the term "conditional asset retirement
obligation" as used in FASB Statement No. 143, "Accounting for Asset Retirement
Obligations", refers to a legal obligation to perform an asset retirement
activity in which the timing and (or) the method of settlement are conditional
on a future event that may or may not be within the control of the entity. The
interpretation also clarifies when an entity should have sufficient information
to reasonably estimate the fair value of an asset retirement obligation. The
provisions of FIN 47 are effective for fiscal years ending after December 15,
2005 (December 31, 2005 for calendar-year enterprises). FIN 47 requires that the
amount recognized as an asset retirement cost shall be measured as of the date
the asset retirement obligation was incurred. An entity shall recognize the
cumulative effect of initially adopting FIN 47 as a change in accounting
principle. Further, an entity shall compute on a pro forma basis and disclose in
the footnotes to the financial statements for the beginning of the earliest year
presented and at the end of all years presented the amount of the liability for
asset retirement obligations as if FIN 47 had been applied during all periods
affected. Retrospective application of interim financial information is
permitted but not required. We are evaluating the provisions of this
interpretation to determine the impact on our financial position, results of
operations and cash flows.
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment" ("SFAS
123R"). This statement is a revision of SFAS No. 123, "Accounting for
Stock-Based Compensation," and supersedes APB Opinion No. 25, "Accounting for
Stock Issued to Employees." SFAS 123R requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
financial statements based on their fair values. The provisions of this
statement are effective for interim or annual periods beginning after June 15,
2005. On April 22, 2005, the Securities and Exchange Commission amended Rule
4-01(a) of Regulation S-X regarding the compliance date for SFAS No. 123R,
"Share Based Payment," amending the date for compliance with SFAS 123R so that
each registrant that is not a small business issuer, as defined by Regulation
S-B, item 10, 17 CFR 228.10, is permitted to implement SFAS 123R at the
beginning of its next fiscal year, instead of the next reporting period that
begins after June 15, 2005. Accordingly, such companies need not comply with
SFAS 123R until its interim financial statements for the first quarter of fiscal
2006 are filed with the Securities and Exchange Commission. The Commission's
rule does not change the accounting required by SFAS 123R, it only changes the
dates for compliance with the standard. We are currently evaluating the
provisions of this revision to determine the impact on our consolidated
financial statements. We expect that the adoption of this statement will have a
material negative effect on our consolidated net income.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
We are exposed to market risk from changes in interest rates and foreign
exchange rates, which could affect our future results of operations and
financial position. Our objective in managing our exposure to interest rates and
foreign currency rate changes is to limit the impact of these changes on cash
flows and earnings and to lower our overall borrowing costs. In order to achieve
these objectives we identify the risks and manage them by adjusting fixed and
variable rate debt positions and selectively hedging foreign currency risks.
Borrowings under our credit facilities are based on floating rates, which would
increase interest expense in an environment of rising interest rates. 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. Our functional currency is the U.S. dollar. We have
international operations resulting in receipts and payments that differ from our
functional currency. We attempt to reduce foreign currency exchange risks by
using financial instruments, including derivatives pursuant to our hedging
policy. We enter into forward exchange contracts to hedge firm and anticipated
purchase and sale commitments denominated in currencies other than our
subsidiaries' local currencies. We do not enter into forward exchange contracts
for speculation or trading purposes. 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. Our forward exchange
contracts principally hedge U.S. denominated transactions with our Canadian,
Dutch and British subsidiaries. Generally these contracts have maturities that
do not exceed one year. Our forward exchange contracts function as effective
hedges of our underlying exposure; however, we are required to record changes in
the fair value of these foreign currency contracts against earnings in the
period of the change in other income and expense. We include all gains and
losses related to foreign exchange contracts in cash flows from operating
activities in our consolidated statement of cash flows. During the thirteen
weeks ended April 1, 2005, we experienced $226 in foreign currency gains on
forward foreign exchange contracts, compared to foreign currency losses of $144
on forward foreign currency exchange contracts in the thirteen weeks ended April
2, 2004. While we have a policy of selectively hedging foreign currency risks,
this program may not fully insulate us against short-term fluctuations in
financial results.
Foreign Exchange Risk
We conduct operations in various international countries, which exposes us to
changes in foreign exchange rates. The financial results of our foreign
subsidiaries may be materially impacted by exposure to fluctuating exchange
rates. Reported sales and costs and expenses at our foreign subsidiaries, when
translated into U.S. dollars for financial reporting purposes, can fluctuate due
to exchange rate movement. While exchange rate fluctuations can have a material
impact on reported revenues and earnings, this impact is principally the result
of the translation effect and does not materially impact our short-term cash
flows.
Currency Risk
In the ordinary course of business, we enter into forward foreign exchange
contracts to hedge firm and anticipated intercompany purchase and sale
commitments denominated in currencies other than our subsidiaries' local
currencies. Our foreign subsidiaries footwear inventory purchases are
denominated in U.S. dollars, which exposes us to changes in foreign exchange
rates. The purpose of our currency hedging is to protect our local currency cash
flows related to these commitments from fluctuations in foreign currency
movements. Transactions covered by hedge contracts include intercompany
payables. The principal currencies we hedge are the Canadian dollar, British
Pound Sterling and Euro. The contracts have no cash requirements until maturity
and we record them at fair value on our consolidated balance sheet. Credit risk
is minimal as the foreign exchange contracts are with major banking
institutions. The fair value of our forward exchange contracts is sensitive to
changes in currency exchange rates. The fair value of forward exchange contracts
is the estimated amount that we would pay or receive upon termination of the
contract, taking into account the change in the currency exchange rates. As of
April 1, 2005, the fair value of our forward exchange contracts was $4,300, and
as of April 2, 2004, the fair value of our forward exchange contracts was
$4,541. We have calculated the effect of a 10% depreciation in the year-end
currency exchange rates related to the forward exchange contracts as of April 1,
2005 and April 2, 2004. This depreciation would result in an increase in the
unrealized losses on forward exchange contracts of approximately $392 at April
1, 2005 and $429 at April 2, 2004, which would materially affect our results of
operations and financial position. Unrealized losses on our forward exchange
contracts resulting from changes in currency exchange rates will be partially
offset by gains on the exposures being hedged. The calculations of the
hypothetical 10% depreciation in the year-end exchange rates assume that each
rate changed in the same direction at the same time relative to the U.S. dollar.
The calculations reflect only those differences resulting from mechanically
replacing an exchange rate for another and do not factor in any potential
effects that changes in currency rates may have on the translation of the
statement of income, sales volume and prices and on local currency costs. 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.
Interest Risk
At April 1, 2005 and April 2, 2004, we had $187 and $279, respectively, in
capitalized lease obligations outstanding. At April 1, 2005, we had available
unsecured committed lines of credit as sources for financing our working capital
needs. Borrowings under these credit agreements bear interest at variable rates,
which would subject us to credit based interest rate risks. We have also
calculated the effect of a 10% depreciation in period end interest rates and
have determined the effects to our results of operations and financial position
to be immaterial. We are also subject to interest rate risks on our current
cash, cash equivalents and short-term investments. We minimize credit risk
associated with our short-term investments by using investment grade, highly
liquid securities. We have classified all of our short-term investments as
available for sale securities. Our short-term investments consist primarily of
obligations of United States governmental agencies and state and municipal bonds
with original maturities of 91 days to one year. Cash and cash equivalents
include all short-term deposits with an original maturity of three months or
less.
We do not expect to make any significant changes in our management of foreign
currency or interest rate exposures or in the strategies we employ to manage
these exposures in the foreseeable future.
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 of April 1, 2005. The term "disclosure controls
and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act, means controls and other procedures of a company that are
designed to ensure that information required to be disclosed by a company
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. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that
information required to be disclosed by a company in the reports that it
files or submits under the Exchange Act is accumulated and communicated to
the company's management, including its principal executive and principal
financial officers, as appropriate to allow timely decisions regarding
required disclosure. Management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving their objectives and management
necessarily applies its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. Based on the evaluation
of our disclosure controls and procedures as of April 1, 2005, our chief
executive officer and chief financial officer concluded that, as of such
date, our disclosure controls and procedures were effective at the
reasonable assurance level.
(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 April 1, 2005 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 SECURITIES AND USES OF PROCEEDS
Issuer Purchases of Equity Securities
(c) Total Number of (d) Maximum Number
(a) Total (b) Average Shares Purchased as of Shares that May
Number of Shares Price Paid Part of Publicly Be Purchased
Period Purchased (1) per Share Announced Plan Under the Plan
------ ----------------- --------- -------------------- -------------------
January 1-28, 2005............ -- -- -- 168,376
January 29, 2005 to
February 28, 2005.......... -- -- -- 168,376
February 29, 2005 to
April 1, 2005.............. -- -- -- 168,376
Total......................... -- -- -- 168,376
(1) 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. This plan was publicly announced on June 4, 1998.
(2) Unless terminated earlier by a resolution of our Board of Directors, the
plan will expire when we have repurchased all shares authorized for
repurchase under the plan.
ITEM 6. EXHIBITS
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.
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: May 11, 2005 /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 Sarbanes-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
Sarbanes-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 December 31, 2004
filed with the Securities and Exchange Commission on March 16, 2005.