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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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 August 30, 2002
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to .
Commission File Number: 1-4404
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THE STRIDE RITE CORPORATION
(Exact name of registrant as specified in its charter)
Massachusetts 04-1399290
--------------------------------
(State or other jurisdiction) (I.R.S. Employer Identified No.)
191 Spring Street, Lexington, Massachusetts 02421
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617)824-6000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
- -------------------------------- -----------------------
Common stock, $.25 par value New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required 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 report), and (2) has been subject to such filing
requirements for the past 90 days.
Yes (X) No ( )
-
As of October 9, 2002, 40,101,793 shares of the Registrant's common stock, $.25
par value, and the accompanying Preferred Stock Purchase Rights were
outstanding.
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
THE STRIDE RITE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
August 30, August 31,
2002 November 30, 2001
(Unaudited) 2001 (Unaudited)
-------------- -------------- --------------
Assets
Current Assets:
Cash and cash equivalents $ 73,979 $ 81,159 $ 17,443
Accounts and notes
receivable, net 70,436 44,739 83,909
Inventories 77,531 112,481 107,607
Deferred income taxes 23,759 24,245 25,808
Other assets 3,874 5,344 3,169
-------- -------- --------
Total current assets 249,579 267,968 237,936
Property and equipment, net 70,539 72,244 73,686
Other assets 13,632 9,608 21,365
-------- -------- --------
Total assets $333,750 $349,820 $332,987
======== ======== ========
The accompanying notes are an integral part of the
condensed consolidated financial statements.
2
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Dollars in Thousands)
August 30, August 31,
2002 November 30, 2001
(Unaudited) 2001 (Unaudited)
-------------- -------------- -------------
Liabilities and Stockholders' Equity
Current Liabilities:
Short-term debt - $ 26,000 -
Accounts payable $ 13,957 23,000 $ 18,815
Income taxes payable 16,412 11,682 19,592
Accrued expenses and other
liabilities 25,892 22,041 18,666
----------- ---------- --------
Total current liabilities 56,261 82,723 57,073
Deferred income taxes 5,162 4,858 5,236
Stockholders' Equity:
Preferred stock,
$1 par value
Shares authorized -
1,000,000
Shares issued - None - - -
Common stock, $.25 par
value
Shares authorized -
135,000,000
Shares issued -
56,946,544 14,237 14,237 14,237
Capital in excess of par
value 17,674 19,209 19,002
Retained earnings 402,383 382,460 390,576
Less cost of 16,390,253
shares of common stock
held in treasury
(15,087,646 on November
30,2001 and 15,002,590
on August 31, 2001) (161,967) (153,667) (153,137)
----------- ---------- --------
Total stockholders' equity 272,327 262,239 270,678
----------- ---------- -------
Total liabilities and
stockholders' equity $333,750 $349,820 $332,987
=========== ========== ========
The accompanying notes are an integral part of the
condensed consolidated financial statements.
3
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
For the periods ended August 30, 2002 and August 31, 2001
(In Thousands Except Per Share Data)
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
August 30, August 31, August 30, August 31,
2002 2001 2002 2001
-------------- ------------- -------------- -------------
Net sales $136,989 $135,368 $434,203 $440,121
Cost of sales 86,203 87,164 273,212 278,193
Selling and
administrative
expenses 41,667 39,038 122,757 125,317
--------- --------- --------- ---------
Operating income 9,119 9,166 38,234 36,611
Other income
(expense):
Interest income 294 494 1,020 2,462
Interest expense (71) (353) (607) (1,428)
Other, net (62) (86) (315) (639)
---------- --------- --------- ---------
161 55 98 395
--------- --------- --------- ---------
Income before
income taxes 9,280 9,221 38,332 37,006
Provision for
income taxes 2,239 2,068 12,179 11,986
--------- --------- --------- ---------
Net income $ 7,041 $ 7,153 $ 26,153 $ 25,020
========= ========= ========= =========
Net income per
common share:
Diluted $ .17 $ .17 $ .62 $ .59
========= ========= ========= =========
Basic $ .17 $ .17 $ .63 $ .60
========= ========= ========= =========
Dividends per
common share $ .05 $ .05 $ .15 $ .15
========= ========= ========= =========
Average common
shares used in
per share
computations:
Diluted 41,657 42,372 42,137 42,126
========= ========= ========= =========
Basic 41,308 41,817 41,746 41,718
========= ========= ========= =========
The accompanying notes are an integral part of the
Condensed consolidated financial statements.
4
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the nine months ended August 30, 2002 and August 31, 2001
(Dollars in Thousands)
August 30, August 31,
2002 2001
-------------- --------------
Cash provided from (used for):
Operations:
Net income $ 26,153 $ 25,020
Adjustments to reconcile to net cash provided
from (used for) operations:
Depreciation and amortization 11,849 10,777
Deferred income taxes, net 790 (1,007)
Compensation expense related to executive
stock plans 120 170
Gain related to long-term investments - (451)
Loss on disposal of property and
equipment 631 83
Changes in:
Accounts and notes receivable (25,697) (29,534)
Inventories 34,950 (1,690)
Other current assets 1,642 3,196
Accounts payable, income taxes, accrued
expenses and other current liabilities (341) (15,693)
---------- ---------
Net cash provided from(used for)operations 50,097 (9,129)
--------- ---------
Investments:
Additions to property and equipment (10,576) (8,118)
Distribution from long-term investments - 451
Sales(purchases)of marketable securities, net 250 (61)
Increase in other assets (4,645) (407)
---------- ---------
Net cash used for investments (14,971) (8,135)
---------- ---------
Financing:
Short-term debt repayments (26,000) (24,000)
Proceeds from sale of stock under stock plans 1,974 1,979
Cash dividends paid (6,296) (6,248)
Repurchase of common stock (11,984) -
---------- --------
Net cash used for financing (42,306) (28,269)
---------- ---------
Net decrease in cash and cash equivalents (7,180) (45,533)
Cash and cash equivalents at beginning of the
period 81,159 62,976
---------- --------
Cash and cash equivalents at end of the period $ 73,979 $ 17,443
========== ========
The accompanying notes are an integral part of the
condensed consolidated financial statements.
5
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1
The financial information included in this Form 10-Q of The Stride Rite
Corporation (the "Company") for the periods ended August 30, 2002 and August,
31, 2001 is unaudited and subject to year-end adjustments. However, such
information includes all adjustments (including all normal recurring
adjustments) which, in the opinion of management, are considered necessary for a
fair presentation of the consolidated results for those periods. The results of
operations for the periods ended August 30, 2002 and August 31, 2001 are not
necessarily indicative of the results of operations that may be expected for the
complete fiscal year. The year-end condensed balance sheet data was derived from
audited financial statements, but does not include all disclosures required by
generally accepted accounting principles. The Company filed audited consolidated
financial statements for the year ended November 30, 2001 on Form 10-K which
included all information and footnotes necessary for such presentation.
The Company's preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
respective periods. The most significant estimates included in these financial
statements include valuation allowances and reserves for accounts receivable,
inventory and income taxes. Actual results could differ from those estimates.
6
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2
Basic earnings per common share excludes dilution and is computed by
dividing net income available to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted earnings per common
share reflects the potential dilution that could occur if options to issue
common stock were exercised.
The following is a reconciliation of the number of shares used in the basic
and diluted earnings per share computations (shares in thousands):
Three Months Ended Nine Months Ended
------------------ -----------------
Aug. 30, Aug. 31, Aug. 30 Aug. 31,
2002 2001 2002 2001
---- ---- ---- ----
Net income applicable to common
shares $ 7,041 $ 7,153 $ 26,153 $ 25,020
Calculation of shares:
Weighted average number of common
shares outstanding(basic) 41,308 41,817 41,746 41,718
Common shares attributable to
assumed exercise of dilutive
stock options and stock
purchase rights using the
treasury stock method 349 555 391 408
-------- -------- -------- --------
Average common shares and common
equivalents outstanding during
the period (diluted) 41,657 42,372 42,137 42,126
======== ======== ======== ========
Net income per common share (basic) $ .17 $ .17 $ .63 $ .60
======== ======== ======== ========
Net income per common share(diluted) $ .17 $ .17 $ .62 $ .59
======== ======== ======== ========
The following options were not included in the computation of diluted net
income per common share because the options' exercise price was greater than the
average market price of the common shares:
Third Quarter First Nine Months
---------------------------------------------
2002 2001 2002 2001
--------------------------------- -----------
Options to purchase shares of
common stock (in thousands) 1,390 996 1,435 1,745
7
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTE 3
In the fourth quarter of fiscal 2001, the Company recorded pre-tax
nonrecurring charges of $3,059,000 related to a restructuring of its
administrative staff, the exit of its leased department store business and
retail system asset impairment costs. The Company expects to fully utilize this
accrual before the end of the 2002 fiscal year's fourth quarter. The following
table summarizes activity during the first nine months of fiscal 2002:
Third Nine
(In thousands) Quarter Months
- -------------- ------------- --------------
Balance at beginning of period $773 $2,262
Amounts charged against accrual for severance (82) (1,330)
Amounts charged against accrual for employee
benefit costs - (12)
Amounts charged against accrual for other costs (503) (732)
------------- --------------
Balance at August 30, 2002 $188 $188
============= ==============
8
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This form 10-Q contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995 and Section 21E of the
Securities Exchange Act of 1934. We caution investors that any forward-looking
statements presented in this report and presented elsewhere by management from
time to time are based on management's beliefs and assumptions made by, and
information currently available to, management. When used, the words
"anticipate", "believe", expect", "intend", "may", "might", "plan", "estimate",
"project", "should", "will be", "will result" and similar expressions which do
not relate solely to historical matters are intended to identify forward-looking
statements. Such statements are subject to risks, uncertainties and assumptions
and are not guarantees of future performance, which may be affected by known and
unknown risks, trends, uncertainties and factors that are beyond our control.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those anticipated, estimated or projected. We expressly disclaim any
responsibility to update forward-looking statements. Accordingly, past results
and trends should not be used by investors to anticipate future results or
trends.
Risks and uncertainties that may affect future performance are detailed
from time to time in reports filed by the Company with the SEC, including Forms
10-Q and 10-K, and include, among others, the following: international, national
and local general economic and market conditions; the size and growth of the
overall footwear and general retail market; intense competition among designers,
marketers, distributors and sellers of footwear; demographic changes; changes in
consumer fashion trends that may shift to footwear styling not currently
included in our product lines; popularity of particular designs and categories
of products; seasonal and geographic demand for the Company's products;
difficulties in anticipating or forecasting changes in consumer preferences;
delays in the opening of new stores; difficulties in implementing, operating and
maintaining the Company's complex information systems and controls, including,
without limitation, the systems related to the Company's retail stores, systems
related to demand and supply planning, and inventory control; interruptions in
data and communications systems; fluctuations and difficulty in forecasting
operating results; the ability of the Company to sustain, manage or forecast its
growth and inventories; the size, timing and mix of purchases of the Company's
products; the underperformance or delay of new products; the possible failure to
retain the Tommy Hilfiger footwear license; the ability to secure and protect
trademarks, patents and other intellectual property; performance and reliability
of products; customer service; adverse publicity; the loss of significant
suppliers or customers, such as department stores and specialty retailers, the
consolidation or restructuring of such customers, including large department
stores, which may result in unexpected store closings; dependence on China
manufacturing; the ability to secure raw materials; delays and increased costs
of freight and transportation to meet delivery deadlines, including, without
limitation, potential delays in delivery of the Company's products as a result
of the backlog from the closure of U.S. West Coast ports; changes in business
strategy or development plans; general risks associated with doing business
outside the United States, including, without limitation, import duties,
tariffs, quotas and political and economic instability; changes in
9
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
government regulations; liability and other claims asserted against the
Company; the ability to attract and retain qualified personnel; and other
factors referenced or incorporated by reference in this report and other
reports.
The risks included here are not exhaustive. Other sections of this report
may include additional factors which could adversely affect the Company's
business and financial performance. Moreover, the Company operates in a very
competitive and rapidly changing environment. New risk factors emerge from time
to time and it is not possible for management to predict all such risk factors,
nor can it assess the impact of all such risk factors on the Company's business
or the extent to which any factor, or combination of factors, may cause actual
results to differ materially from those contained in any forward-looking
statements. Given these risks and uncertainties, investors should not place
undue reliance on forward-looking statements as a prediction of actual results.
We discussed a number of significant trends and specific factors affecting
the footwear industry in general and our business in particular in "Management's
Discussion and Analysis of Financial Condition and Results of Operations", Item
7 of our Annual Report on Form 10-K for the fiscal year 2001 under the heading
"Overview". Those trends and factors continue to be very relevant to the
Company's performance and financial condition.
In addition, the Company continues to closely monitor the contract
negotiations between the Pacific Maritime Association (the "PMA") and the
International Longshore and Warehouse Union (the "ILWU"). The PMA represents
West Coast port employers and shippers, who handle a substantial amount of the
Company's import shipments from overseas suppliers. The previous contract
between the PMA and ILWU expired on July 1, 2002, subsequent to which work
stoppages and short-term compromises have occurred intermittently. On October 8,
President George W. Bush invoked the Taft-Hartley Act, which has required that
the PMA leave the ports open and that members of the ILWU return to work. A
long-term solution has therefore not been reached. Further uncertainty in the
relationship between the PMA and the ILWU could cause a disruption in the U.S.
transportation network, which could adversely affect the Company's operations.
10
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
- ---------------------
The following table summarizes the Company's performance for the third
quarter and first nine months of fiscal 2002 as compared to the results for the
same periods in fiscal 2001:
Increase (Decrease) Percent vs. 2001 Results:
- ---------------------------------------------
Third Quarter Nine Months
------------- -----------
Net sales 1.2% (1.3)%
Gross profit 5.4% (0.6)%
Selling and administrative expenses 6.7% (2.0)%
Operating income (0.5)% 4.4%
Income before income taxes 0.6% 3.6%
Net income (1.6)% 4.5%
Operating Ratios as a Percent to Net Sales:
Third Quarter Nine Months
----------------- -------------------
2002 2001 2002 2001
------- --------- --------- ---------
Gross profit 37.1% 35.6% 37.1% 36.8%
Selling and administrative expenses 30.4% 28.8% 28.3% 28.5%
Operating income 6.7% 6.8% 8.8% 8.3%
Income before income taxes 6.8% 6.8% 8.8% 8.4%
Net income 5.1% 5.3% 6.0% 5.7%
Net Sales
- ---------
Net sales in the third quarter of fiscal 2002 increased $1.6 million or
1.2% above the net sales level for the same period of fiscal 2001. In the third
quarter of 2002, wholesale revenues decreased 0.4%, while overall retail sales
increased 8.0% from the same period in the prior fiscal year. During the first
nine months of fiscal 2002, consolidated net sales decreased by $5.9 million,
1.3% below the net sales for the comparable period of 2001. Revenues related to
the Company's wholesale brands decreased 3.6% during the first nine months of
fiscal 2002, while overall retail sales increased 9.5%. Unit shipments of
current line merchandise for the wholesale brands during the first nine months
of 2002 were 2.7% below the comparable period in 2001. The Company's average
selling price was also lower for the first nine months of 2002, decreasing 3.2%
from the same period last year. Sales of discontinued products increased $6.4
million in the first nine months of 2002 as compared to the same period in 2001.
Sales of the Stride Rite Children's Group increased 3% in the third quarter
of fiscal 2002, the result of a 7% increase in retail sales and a 2% decrease in
sales to wholesale accounts, as compared to the same period in
11
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
fiscal 2001. During the third quarter of 2002, sales at comparable,
company-owned Children's Group retail stores decreased 0.8% from the same period
of 2001. For the first nine months of 2002, sales of the Stride Rite Children's
Group increased 0.5% from the same period in 2001, with the retail portion
increasing 8.2% and the wholesale portion decreasing 8.0%. Sales at comparable,
company-owned retail stores decreased 1.4% during the first nine months of 2002,
compared to the same period in 2001. The increase in retail sales for the third
quarter and nine months is attributable to new stores that have opened during
the most recent twelve months. A weak back-to-school retailing environment
resulted in lower shipments to our licensed and trade accounts, adversely
impacting the wholesale sales of the Stride Rite brand for both the third
quarter and nine months. Decreased shipments of the Munchkin product line versus
the same period in the prior year, also contributed to the sales shortfall. At
the end of the third quarter of 2002, the Children's Group operated 226 stores,
up 7% from the 212 stores open at the end of the third quarter in 2001. The
Children's Group opened 53 new stores and closed 47 locations in the first nine
months of 2002. This includes, as previously disclosed, the Stride Rite
Children's Group exit from 46 leased department stores during the second quarter
of fiscal 2002. Historically, it has taken 12 to 15 months for new stores to
reach their planned operating performance. Additionally, the overall strength of
the economy and general retail environment can also impact the operating
performance of both new and existing company-owned stores. The sales reduction
resulting from the exit of the leased department stores is expected to be offset
by sales generated from the 57 new stores opened or scheduled to open during
fiscal 2002.
In the third quarter of fiscal 2002, sales of the Keds brand were 13% lower
than the comparable period of fiscal 2001. This quarterly decrease was largely
driven by sales shortfalls in the women's basics product line, a decrease in
Grasshopper's sales and lower closeout product sales activity. Offsetting a
portion of these decreases were sales of the PRO-Keds line, which is new for
2002 and increased sales of promotional styles. For the first nine months of
2002, Keds net sales declined 7% compared to the same period of fiscal 2001.
This sales decline was also primarily the result of shortfalls in the shipments
of women's basics product lines. Sales of the women's Champion style were
substantially lower for the first nine months of fiscal 2002, down 42% versus
the same period of 2001. In fiscal 2001 Keds had launched an updated Champion
and experienced the associated ramp-up in sales, which were not duplicated in
fiscal 2002. In addition, the Ready-to-Wash product line growth in the first
nine months of fiscal 2002 was not sufficient to offset the sales decrease
versus the prior year of the Stretch product line.
Sales of Tommy Hilfiger footwear products in the third quarter of fiscal
2002 increased 17% as compared to the same period in fiscal 2001. An important
part of the increase was driven by the expansion of retail distribution to
independents and shoe chain accounts. Sales increases were recorded in the
men's, women's and boys' product categories for the third quarter versus the
prior year. For the first nine months of 2002, sales of Tommy Hilfiger footwear
increased 2% as compared to the same period in 2001.
12
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Increased sales to independents, shoe chains and other retail distribution
were able to offset the sales decline caused by the continuing weakness of the
department store channel of distribution.
Sales of the Sperry Top-Sider brand increased 2% in the third quarter of
fiscal 2002, bringing the sales increase for the first nine months to 6% above
the comparable period of fiscal 2001. Sperry's third quarter and nine month
sales increases were largely the result of increased sales of women's products.
International revenues in the third quarter of fiscal 2002 were 11% above
the comparable period of 2001, due principally to higher shipments of Tommy
Hilfiger and Sperry Top-Sider products. For the first nine months of fiscal
2002, International revenues increased 7% from the comparable period of 2001.
Gross Profit
- ------------
During the first nine months of fiscal 2002, gross profit decreased
slightly, $0.9 million or 0.6% below the same period of 2001. This decrease
compares favorably to the net sales decrease of 1.3% versus the same period last
year. The consolidated gross profit percentage for the first nine months of 2002
increased 30 basis points, finishing at 37.1% in 2002 compared to 36.8% in 2001.
The gross profit rate performance improved in the third quarter of 2002 compared
to the same period in 2001, 37.1% in 2002 compared to 35.6% in the 2001 third
fiscal quarter. The increased promotional sales activity in support of the
wholesale brands sales continued into the third quarter. This negatively
impacted the gross profit comparisons. Offsetting the adverse effect of the
wholesale units lower gross profit percentage were: greater retail store sales,
which generally have a greater gross profit percentage; higher retail average
selling prices; and lower company-owned retail store markdowns. The Company's
LIFO provision had a favorable impact on gross profit comparisons for the first
nine months of 2002, with LIFO decreasing gross profit by $0.1 million (less
than 0.1% of net sales) in 2002 compared to a reduction of $1.1 million (0.3% of
net sales) in 2001.
Operating Costs
- ---------------
Selling and administrative expenses in the third quarter of fiscal 2002
increased 6.7% versus the same period in the prior fiscal year. Selling and
administrative expense as a percent of net sales in the third fiscal quarter
increased 1.6 percentage points from the same period in the prior year. This
increase in the expense level for the third quarter was primarily due to costs
associated with the Company's retail expansion. Selling and administrative
expenses in the first nine months of fiscal 2002 decreased $2.6 million or 2%
from the spending level in the first nine months of 2001. Selling and
administrative expenses as a percent of net sales in the first nine months
decreased 0.2 percentage points from the same period of 2001 (28.3% in 2002
compared to 28.5% in 2001). The expense level in the first nine months of fiscal
2002 compared favorably to the same period in fiscal 2001. This
13
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
improvement was primarily due to the impact in the prior year of executive
termination charges, which totaled $1.8 million, along with the planned
reduction in advertising spending and lower operating expenditures in fiscal
2002 resulting from the corporate restructuring initiated in the fourth quarter
of fiscal 2001.
Advertising expenses for the first nine months of fiscal 2002 represented
4.6% of net sales, which were below the 5.8% spending rate in the comparable
period of fiscal 2001. The reduction in advertising expense was primarily due to
lower Keds spending. In the prior year, additional Keds advertising spending was
used to support the launch of the updated Champion product line. Distribution
expenses represented 3.5% of net sales in the first nine months of fiscal 2002,
which was favorable to the 3.7% rate during the comparable period of fiscal
2001. Retail store expenses were higher for the first nine months of fiscal 2002
due to the number of company-owned new stores opened as part of our retail
expansion, 53 by Stride Rite Children's Group and 1 by Keds. As previously
announced, the Company successfully exited the operation of 46 leased department
stores during the second quarter of fiscal 2002. The costs of exiting the leased
department store business were included as part of the restructuring charge
recorded during the fourth quarter of fiscal 2001. The associated reduction in
expense from exiting the leased department stores partially offset the higher
new store expenses. Newly opened stores typically have higher expense levels due
to start up and operational costs until they establish their normal financial
operating performance. Operating expenses for non-comparable retail stores
increased $8.7 million for the first nine months of fiscal 2002 compared to the
same period in the prior fiscal year and was partially offset by a $2.1 million
cost savings in exiting the 46 leased department stores.
Other Income and Taxes
- ----------------------
Other income (expense) increased pre-tax income by $0.1 million in the
first nine months of fiscal 2002 compared to an increase of $0.4 million in the
similar period of fiscal 2001. Interest income for the first nine months of 2002
was $1.0 million, down from the $2.5 million for the first nine months of fiscal
2001. The $1.5 million decrease in interest income is the result of
significantly lower average interest rates on investments during the current
year as well as the realization of a gain in fiscal 2001 on a long-term
investment. Interest expense in the first nine months of fiscal 2002 decreased
to $0.6 million compared to $1.4 million in 2001. The average interest rate on
borrowed funds was 2.7% during the first nine months, significantly lower than
the 5.8% rate during the comparable period last year. Average short-term
borrowings in the first nine months of 2002 were $19.5 million, 29% lower than
the average borrowings of $27.6 million in the comparable period of fiscal 2001.
14
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The effective income tax rate was 31.8% for the first nine months of fiscal
2002 versus 32.4% for the same period in the prior fiscal year. The lower tax
rate is based on the year-end projected tax rate. The tax rate in both years
reflects a reduction in the need for certain tax accruals recorded in prior
periods, which were no longer required.
Net Income
- ----------
Net income for the first nine months of fiscal 2002 increased $1.1 million,
up 4.5% from the income earned in the same period of fiscal 2001. Lower selling
and administrative expenses and a lower effective income tax rate were
sufficient to offset the impact of lower sales and gross profits. Prior year
operating expenses included the $1.2 million after-tax cost of the executive
termination charges. As a result, the Company's return on net sales of 6.0% in
the first nine months of fiscal 2002 was improved versus the 5.7% in the first
nine months of 2001.
Liquidity and Capital Resources
- -------------------------------
At August 30, 2002, the Company's balance sheet reflects a current ratio of
4.4 to 1 with no long-term debt. The Company's cash and cash equivalents totaled
$74.0 million at the end of the latest quarter, well above the prior year's cash
and cash equivalents total of $17.4 million. When combined with
intermediate-term fixed income investments, which are included in other assets,
total available cash and investments amounted to $74.3 million at August 30,
2002 compared to $29.7 million in 2001. The Company uses its $75 million
revolving credit facility to fund seasonal working capital needs. No borrowings
under this line of credit were outstanding as of August 30, 2002 or August 31,
2001.
During the first nine months of fiscal 2002, $50.1 million of cash was
provided from operations. This positive cash flow amount was favorable to the
$9.1 million of cash used by operations during the same period in fiscal 2001.
At August 30, 2002, accounts receivable and inventory levels totaled $148.0
million, a decrease of $43.5 million or 23% below the $191.5 million asset
amount at the end of the third quarter of 2001. Accounts receivable at the end
of the third quarter of 2002 decreased $13.5 million or 16% compared to the
prior year. This compares favorably to the 0.4% decrease in wholesale sales in
the third quarter of fiscal 2002 versus the same period last year. Days sales
outstanding at the end of the third quarter were 45 days, a reduction of nine
days from the same quarter in the prior year. Much of this improvement is the
result of more effectively pursuing past due receivables and customer
chargebacks. Inventories were also lower at the end of the third quarter of
2002, down $30.1 million or 28% from the 2001 level. This continuation of the
improvement seen in inventory levels during the first half of the year is the
result of a continued effort to monitor the sell-through performance of our
larger retail customers to better forecast product demand. Shortened lead times
have also allowed reductions in certain inventory quantities.
15
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Additions to property and equipment totaled $10.6 million in the first nine
months of fiscal 2002, above the $8.1 million spending for the same period in
fiscal 2001. The increased capital expenditures in fiscal 2002 resulted from
higher spending on opening new retail stores somewhat offset by lower spending
for information technology. During the first nine months of 2002, the Company
repurchased 1,665,300 shares of its common stock for a total cost of
approximately $12.0 million. At August 30, 2002, the Company had 349,300 shares
remaining on the repurchase authorization approved by the Board of Directors in
December 1999. Subsequently, in September 2002 the Company's Board of Directors
reauthorized the repurchase of an additional 5 million shares of its common
stock.
We purchase the majority of our products from the Asia-Pacific region and
are dependent on transporting those products via ship to the West Coast of the
United States. For a period of time, due to a West Coast labor dispute, the
shipping ports were closed, causing a disruption in the movement of goods to our
distribution centers. At this time, it is unclear how long this disruption in
our receipt of goods will last. Depending upon the length of time of the product
delays to our warehouses, this could result in our customers postponing or
canceling orders. The corresponding financial impact, although uncertain, could
adversely affect sales, profits and working capital levels in the fourth quarter
of fiscal 2002 and into fiscal 2003.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Within the 90 days prior to the date of this report, the Company carried
out an evaluation under the supervision and with the participation of the
Company's management, including the Company's Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to the Exchange Act Rule
12a-14. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company (including its consolidated subsidiaries) required to be
included in the Company's periodic filings with the Securities and Exchange
Commission.
(b) Changes in internal controls.
None.
16
PART II - OTHER INFORMATION
THE STRIDE RITE CORPORATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following exhibits are contained in this
--------
report:
None
(b) Reports on Form 8-K
-------------------
There were no reports filed on Form 8-K during the most recent
quarterly period.
17
THE STRIDE RITE CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned duly authorized.
THE STRIDE RITE CORPORATION
---------------------------
(Registrant)
Date: October 11, 2002 By: /s/ Frank A. Caruso
--------------------------
Frank A. Caruso
Chief Financial Officer
18
I, David M. Chamberlain, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q for the period ending
August 30, 2002 of The Stride Rite Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the effective-
ness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: October 11, 2002 /s/ David M. Chamberlain
------------------------ ------------------------------------
David M. Chamberlain,
Chairman and CEO
19
I, Frank A. Caruso, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q for the period ending
August 30, 2002 of The Stride Rite Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the effective-
ness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: October 11, 2002 /s/ Frank A. Caruso
------------------------ ------------------------------------
Frank A. Caruso
Chief Financial Officer
20