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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For Quarter Ended Commission File Number:
SEPTEMBER 30, 2004 0-21026
----------------- -----------------------
ROCKY SHOES & BOOTS, INC.
-------------------------
(Exact name of registrant as specified in its charter)
OHIO 31-1364046
---- ----------
(State of Incorporation) (IRS Employer Identification Number)
39 E. CANAL STREET
NELSONVILLE, OHIO 45764
-----------------------
(Address of principal executive offices)
(740) 753-1951
--------------------------------------------------
(Registrant's telephone number, including area code)
(Former name, former address, and former Fiscal year if changed since last
report.)
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 twelve (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 ninety (90) days.
Yes [X] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
4,620,170 common shares, no par value, outstanding at October 29, 2004
ROCKY SHOES & BOOTS, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
PAGE
NUMBER
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Condensed Consolidated Balance Sheets
September 30, 2004 and 2003 (Unaudited) and December 31, 2003 3
Unaudited Condensed Consolidated Statements of Income
For the Three Months and Nine Months Ended September 30, 2004 and 2003 4
Unaudited Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2004 and 2003 5
Notes to Interim Unaudited Condensed Consolidated Financial Statements 6 - 10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 11 - 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
Item 4. Controls and Procedures 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
2
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
ROCKY SHOES & BOOTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2004 September 30, 2003
Unaudited December 31, 2003 Unaudited
------------------ ----------------- ------------------
ASSETS :
CURRENT ASSETS:
Cash and cash equivalents $ 780,739 $ 2,159,050 $ 1,374,062
Trade receivables - net 45,522,136 19,532,287 39,806,328
Other receivables 782,285 830,131 822,451
Inventories 38,738,153 38,068,187 42,216,415
Deferred income taxes 959,810 959,810 578,951
Prepaid expenses 809,482 1,045,238 1,633,904
------------------ ----------------- ------------------
Total current assets 87,592,605 62,594,703 86,432,111
FIXED ASSETS - net 20,091,910 17,610,238 17,953,270
DEFERRED PENSION ASSET 2,499,524 1,499,524 1,651,222
OTHER ASSETS 4,853,982 4,470,371 3,858,374
------------------ ----------------- ------------------
TOTAL ASSETS $ 115,038,021 $ 86,174,836 $ 109,894,977
================== ================= ==================
LIABILITIES AND SHAREHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable $ 6,704,676 $ 2,810,161 $ 7,775,924
Current maturities - long term debt 525,596 503,934 497,005
Accrued expenses:
Income taxes 2,354,207 1,929,808 1,542,626
Taxes - other 382,846 372,432 377,883
Salaries and wages 2,270,769 1,885,896 1,992,671
Other 1,328,492 882,434 1,109,559
------------------ ----------------- ------------------
Total current liabilities 13,566,586 8,384,665 13,295,668
LONG TERM DEBT-less current maturities 32,388,913 17,514,994 40,780,812
DEFERRED LIABILITIES 2,495,578 1,890,500 1,954,277
------------------ ----------------- ------------------
TOTAL LIABILITIES 48,451,077 27,790,159 56,030,757
SHAREHOLDERS' EQUITY:
Common stock, no par value;
10,000,000 shares authorized; issued and outstanding
September 30, 2004 - 4,620,170; December 31, 2003-
4,360,400; September 30, 2003 - 4,126,930 36,674,834 34,880,199 32,819,489
Accumulated other comprehensive loss (1,950,400) (1,950,400) (2,311,749)
Retained earnings 31,862,510 25,454,878 23,356,480
------------------ ----------------- ------------------
Total shareholders' equity 66,586,944 58,384,677 53,864,220
------------------ ----------------- ------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 115,038,021 $ 86,174,836 $ 109,894,977
================== ================= ==================
See notes to the interim unaudited condensed consolidated financial statements.
3
ROCKY SHOES & BOOTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
------------ ------------ ------------ ------------
NET SALES $ 50,052,894 $ 41,349,824 $ 99,368,970 $ 76,967,913
COST OF GOODS SOLD 34,056,404 28,264,032 69,977,667 53,681,609
------------ ------------ ------------ ------------
GROSS MARGIN 15,996,490 13,085,792 29,391,303 23,286,304
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 8,323,464 7,628,958 19,047,531 16,823,883
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 7,673,026 5,456,834 10,343,772 6,462,421
OTHER INCOME AND (EXPENSES):
Interest expense (422,120) (437,241) (955,561) (946,859)
Other - net (54,404) (18,744) 43,984 161,359
------------ ------------ ------------ ------------
Total other - net (476,524) (455,985) (911,577) (785,500)
------------ ------------ ------------ ------------
INCOME BEFORE INCOME
TAXES 7,196,502 5,000,849 9,432,195 5,676,921
INCOME TAX EXPENSE 2,309,143 1,533,254 3,024,563 1,736,076
------------ ------------ ------------ ------------
NET INCOME $ 4,887,359 $ 3,467,595 $ 6,407,632 $ 3,940,845
============ ============ ============ ============
NET INCOME PER SHARE
Basic $ 1.06 $ 0.84 $ 1.41 $ 0.94
============ ============ ============ ============
Diluted $ 0.98 $ 0.77 $ 1.30 $ 0.88
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING
Basic 4,605,800 4,109,147 4,530,867 4,178,942
============ ============ ============ ============
Diluted 4,992,319 4,512,886 4,943,929 4,459,783
============ ============ ============ ============
See notes to the interim unaudited condensed consolidated financial statements.
4
ROCKY SHOES & BOOTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended September 30,
2004 2003
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,407,632 $ 3,940,845
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 2,464,937 2,674,593
Deferred income taxes - 439,499
Deferred compensation and pension - net (394,922) 433,939
Loss on sale of fixed assets - 8,743
Stock issued as directors' compensation 66,885 -
Change in assets and liabilities:
Receivables (25,942,003) (24,172,447)
Inventories (669,966) (16,994,356)
Other current assets 235,756 (366,807)
Other assets (402,958) 136,614
Accounts payable 3,940,097 5,364,170
Accrued and other liabilities 760,740 2,701,903
-------------- --------------
Net cash used in operating activities (13,533,802) (25,833,304)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (4,467,840) (1,444,034)
Acquisition of business - (3,510,070)
Proceeds from sale of fixed assets - 51,029
-------------- --------------
Net cash used in investing activities (4,467,840) (4,903,075)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long term debt 91,920,037 86,558,753
Payments on long term debt (77,024,456) (56,255,485)
Purchase of treasury stock - (3,106,156)
Proceeds from exercise of stock options 1,727,750 636,607
-------------- --------------
Net cash provided by financing activities 16,623,331 27,833,719
-------------- --------------
DECREASE IN CASH AND CASH
EQUIVALENTS (1,378,311) (2,902,660)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 2,159,050 4,276,722
-------------- --------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 780,739 $ 1,374,062
-------------- --------------
See notes to the interim unaudited condensed consolidated financial statements.
5
ROCKY SHOES & BOOTS, INC.
AND SUBSIDIARIES
NOTES TO THE INTERIM UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS ENDED SEPTEMBER 30, 2004 AND 2003
1. INTERIM FINANCIAL REPORTING
In the opinion of management, the accompanying interim unaudited condensed
consolidated financial statements reflect all adjustments which are
necessary for a fair presentation of the financial results. All such
adjustments reflected in the interim unaudited condensed consolidated
financial statements are considered to be of a normal and recurring
nature. The results of the operations for the three-month and nine-month
periods ended September 30, 2004 and 2003 are not necessarily indicative
of the results to be expected for the whole year. Accordingly, these
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto contained in the
Company's Annual Report to the Shareholders on Form 10-K for the year
ended December 31, 2003.
Certain reclassifications have been made to the prior year amounts in
order to conform to the current year presentation.
The Company accounts for its stock option plans in accordance with APB
Opinion No. 25, under which no compensation cost has been recognized. Had
compensation cost for all stock option plans been determined consistent
with the SFAS No. 123, "Accounting for Stock Based Compensation," the
Company's net income and income per share would have resulted in the
amounts as reported below.
Three Months Ended September 30, Nine Months Ended September 30,
2004 2003 2004 2003
---- ---- ---- ----
Net income as reported $ 4,887,359 $ 3,467,595 $ 6,407,632 $ 3,940,845
Deduct: Stock based employee
compensation expense
determined under fair value
based method for all awards, net 205,125 - 634,970 333,640
------------- ------------- ------------- -------------
Pro forma net income $ 4,682,234 $ 3,467,595 $ 5,772,663 $ 3,607,205
============= ============= ============= =============
Earnings per share:
Basic - as reported $ 1.06 $ 0.84 $ 1.41 $ 0.94
Basic - pro forma $ 1.02 $ 0.84 $ 1.27 $ 0.86
Diluted - as reported $ 0.98 $ 0.77 $ 1.30 $ 0.88
Diluted - pro forma $ 0.94 $ 0.77 $ 1.17 $ 0.82
The pro forma amounts are not representative of the effects on reported
net income for future years.
6
2. INVENTORIES
Inventories are comprised of the following:
September 30, December 31, September 30,
2004 2003 2002
---- ---- ----
Raw materials $ 6,110,035 $ 5,087,468 $ 5,424,458
Work-in-Process 1,690,521 878,091 949,095
Finished goods 29,166,558 31,168,371 34,486,579
Factory outlet finished goods 1,996,039 1,299,257 1,728,283
Reserve for obsolescence or
lower of cost or market (225,000) (365,000) (372,000)
------------ ------------ ------------
Total $ 38,738,153 $ 38,068,187 $ 42,216,415
============ ============ ============
3. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and Federal, state and local income taxes was as
follows:
Nine Months Ended
September 30,
2004 2003
---- ----
Interest $ 877,324 $ 937,343
========== ==========
Federal, state and local
income taxes - net $2,580,000 $ 90,000
========== ==========
Non-cash payments:
Capital lease $ 505,000
==========
Accounts payable at September 30, 2004 and September 30, 2003 include a
total of $45,582 and $177,276, respectively, relating to the purchase of
fixed assets.
4. PER SHARE INFORMATION
Basic earnings per share (EPS) is computed by dividing net income
applicable to common shareholders by the basic weighted average number of
common shares outstanding during each period. The diluted earnings per
share computation includes common share equivalents, when dilutive. There
are no adjustments to net income necessary in the calculation of basic and
diluted earnings per share.
A reconciliation of the shares used in the basic and diluted income per
common share
7
computation for the three months and nine months ended September 30, 2004
and 2003 is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
---- ---- ---- ----
Basic weighted average
shares outstanding 4,605,800 4,109,147 4,530,867 4,178,942
Diluted securities:
Stock options 386,519 403,739 413,062 280,841
--------- --------- --------- ---------
Diluted weighted average
shares outstanding 4,992,319 4,512,886 4,943,929 4,459,783
========= ========= ========= =========
5. RECENTLY ADOPTED FINANCIAL ACCOUNTING STANDARDS
In December 2003, the FASB issued Revised SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits" ("SFAS No.
132"). SFAS No. 132 revises the annual disclosure requirements for
pensions and postretirement plans to include additional disclosures about
assets, obligations, cash flows, and net periodic benefit costs of defined
benefit pension and other defined benefit postretirement plans. SFAS No.
132 also revises the interim disclosure requirements to include
disclosures of the net periodic benefit costs for each period in which an
income statement is presented and the employer's contributions paid and
expected to be paid during the current fiscal year, if the contributions
are significantly different than previously disclosed amounts. The
Statement is effective for financial statements with fiscal years ending
after December 15, 2003. For interim-period disclosures, the Statement is
effective for interim periods beginning after December 15, 2003. We have
adopted this Statement for interim-period disclosures in these condensed
consolidated financial statements, and we will adopt the annual
disclosures with our December 31, 2004 Form 10-K. The adoption of FAS No.
132 does not have an impact on our financial condition or results of
operations, as it pertains only to disclosure provisions.
6. ACQUISITION
On April 15, 2003, the Company completed the purchase of certain assets
from Gates-Mills, Inc. ("Gates"). Under the terms of the Purchase
Agreement, Rocky acquired all of the intellectual property of Gates,
including ownership of the Gates (R) trademark, selected raw material and
finished goods inventory, and certain records in connection with the Gates
business in exchange for a total purchase price of $4.9 million, of which
$3.5 million had been expended through September 30, 2003.
7. CAPITAL STOCK
The Company was authorized to repurchase up to 500,000 shares of our
outstanding common shares. Purchases occurred on the open market and/or in
privately negotiated transactions as market conditions warranted. As of
March 31, 2003, the Company had purchased a total of 499,933 shares at an
average price of $6.38. No additional shares have been repurchased since
March 31, 2003.
8
For the nine months ended September 30, 2004, options for 256,200 of the
Company's common stock were exercised at an average price of $6.68. The
outside members of the Board of Directors received a total of 3,570 shares
in lieu of cash as part of their director compensation.
8. RETIREMENT PLANS
SFAS No. 132 (revised 2003), "Employers' Disclosures about Pensions and
Other Postretirement Benefits," generally requires additional disclosures
to those in the original Statement 132 about the assets, obligations, cash
flows, and net periodic benefit cost of defined benefit pension plans and
other defined benefit postretirement plans.
Net pension cost of the Company's plans is as follows:
Three Months Ended Nine Months Ended
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
Service cost $ 128,080 $ 96,923 $ 384,238 $ 290,769
Interest 90,758 150,870 378,406 $ 452,610
Expected return on assets (86,391) (138,247) (386,198) $(414,741)
Amortization of unrecognized net loss 32,141 44,660 101,327 $ 133,980
Amortization of unrecognized transition obligation 4,076 4,077 12,230 $ 12,231
Amortization of unrecognized prior service cost 33,849 33,848 101,545 $ 101,544
--------- --------- --------- ---------
Net pension cost $ 202,513 $ 192,131 $ 591,548 $ 576,393
========= ========= ========= =========
The Company's unrecognized benefit obligations existing at the date of
transition for the non-union plan is being amortized over 21 years.
Actuarial assumptions used in the accounting for the plans were as
follows:
SEPTEMBER 30,
2004 2003
Discount rate 5.75% 5.75%
Average rate of increase in compensation levels
(non-union only) 3.0% 3.0%
Expected long-term rate of return on plan assets 8.0% 8.0%
The Company's desired investment result is a long-term rate of return on
assets that is at least a 8%. The target rate of return for the plans have
been based upon the assumption that returns will approximate the long-term
rates of return experienced for each asset class in the Company's
investment policy. The Company's investment guidelines are based upon an
investment horizon of greater than five years, so that interim
fluctuations should be viewed with appropriate perspective. Similarly, the
Plan's strategic asset allocation is based on this long-term perspective.
The Company contributed $1.0 million to the plan in the nine months ended
September 30, 2004. At this time the Company does not plan any further
contributions in 2004.
9
In 2001, the Company announced a restructuring plan to consolidate and
realign the Company's footwear manufacturing operations. As part of the
plan, 67 employees were eliminated and the plan assets were frozen as of
September 30, 2001. In April of 2004 the remaining assets of the Union
pension plan were used to purchase individual annuities for the terminated
employees. In September of 2004, the remaining restructuring accrual
balance of $63,228 was recorded as pension liability. No further
contributions will be made to the plan.
9. LONG-TERM DEBT
On September 18, 2000, the Company entered into a three-year loan and
security agreement with GMAC Business Credit, LLC ("GMAC") refinancing its
former bank revolving line of credit based on the collateral value of its
accounts receivable and inventory. On October 21, 2002 the Company
extended the agreement two years. On September 14, 2004, the Company
extended the agreement two additional months. This loan and security
agreement permits a borrowing base to a maximum of $45,000,000. Interest
on the revolving credit facility is payable monthly at GMAC's prime rate,
and the entire principal is due November 30, 2005.
On July 26, 2004 the Second Amendment to Lease Agreement by and between
William Brooks Real Estate Company ("Lessor"), an Ohio corporation, 25% of
which is currently owned by Mike Brooks, and the Company ("Lessee") was
signed. The Lessor agrees to sell and convey to Lessee and the Lessee
agrees to buy and pay for the Leased Premises on or before January 31,
2005, for a purchase price of $505,000. The Company believes that these
terms are no less favorable to the Company than it could have obtained
from unrelated parties. The Company has recorded the lease as a capital
lease, and the debt is recorded as a current liability.
10
PART 1 - FINANCIAL INFORMATION
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, information derived
from the Company's Interim Unaudited Condensed Consolidated Financial
Statements, expressed as a percentage of net sales. The discussion that follows
the table should be read in conjunction with the Interim Unaudited Condensed
Consolidated Financial Statements of the Company.
PERCENTAGE OF NET SALES
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
---- ---- ---- ----
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of Goods Sold 68.0% 68.4% 70.4% 69.7%
----- ----- ----- -----
Gross Margin 32.0% 31.6% 29.6% 30.3%
SG&A expenses 16.6% 18.4% 19.2% 21.9%
----- ----- ----- -----
Income from Operations 15.4% 13.2% 10.4% 8.4%
===== ===== ===== =====
THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2003
Net Sales
Net sales increased in the third quarter 2004 to $50.1 million compared to $41.3
million for the same period in 2003. This 21.3% increase was attributable to an
increase in branded sales of 15.2% and shipments of boots to the U.S. military.
The $4.0 million increase in branded sales was lead by increased sales of rugged
outdoor and occupational footwear and ROCKY(R) apparel. Shipments of boots for
delivery to the U.S. military were $5.1 million in third quarter 2004 compared
to none for the same period last year.
Gross Margin
Gross profit was $16.0 million, or 32% of net sales for the third quarter 2004
compared to $13.1 million, or 31.6% of net sales, for the same period in the
prior year. The increase in gross margin percentage resulted from the sales mix
of increased branded sales with higher gross profit margin, which offset lower
profit margins on boots the Company manufactures for delivery to the U.S.
military.
11
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses were $8.3 million, or
16.6% of net sales, for the quarter ended September 30, 2004 compared to $7.6
million, or 18.4% of net sales, for the same period in the prior year. The
decline in SG&A expenses as a percentage of sales was attributable to nominal
SG&A expenses related to the sales of boots for delivery to the U.S. military.
The increase in SG&A expenses was primarily due to expenses related to the
Sarbanes-Oxley Act of 2002 of $0.3 million, and distribution costs associated
with the growth in branded product sales that increased $0.3 million as compared
to a year ago.
Interest Expense
Interest expense was $0.4 million in the third quarter 2004 compared to $0.4
million for the same period the prior year. The Company's funded debt as of
September 30, 2004 was $32.9 million. This is $8.4 million or 20.3% below funded
debt on the same date last year. The Company's average debt was $31.5 million
for the three months ended September 30, 2004, compared with $38.8 the same
period in 2003. The average rate of interest for the three months ended
September 30 was 5.2% in 2004 compared to 4.4% in 2003.
Income Taxes
Income tax expense for the quarter ended September 30, 2004 was $2.3 million
compared to $1.5 million for the same period a year ago. The Company's effective
tax rate was 32.1% for the three months ended September 30, 2004 versus 30.7%
for the same period in 2003. The increase in the effective tax rate in 2004 over
2003 is due primarily to the increase in sales of sourced products and boots
sold to the U. S. military, which are taxed at U.S. effective tax rates.
NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 2003
Net Sales
Net sales increased in the nine months ended September 30, 2004 to $99.4 million
compared to $77.0 million for the same period in 2003. This represents a 29.1%
increase and is attributable to a $9.6 million increase in branded sales and
$12.8 million increase in sales to the U.S. military when compared to the prior
year. The branded sales increase was led by sales of occupational footwear,
ROCKY(R) apparel and rugged outdoor footwear.
Gross Margin
Gross profit for the nine months ended September 30, 2004 was $29.4 million, or
29.6% of net sales compared to $23.3 million, or 30.3% of net sales, the prior
year. The decrease in gross margin percentage was due to shipments of boots for
delivery to the U.S. military and related start-up costs for these boots in 2004
compared to none for the same period last year. The Company sells military boots
at lower gross margin than its branded products.
12
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses were $19.0 million, or
19.2% of net sales, for the nine months ended September 30, 2004 compared to
$16.8 million, or 21.9% of net sales, the prior year. The decline in SG&A
expenses as a percentage of sales was attributable to nominal SG&A expenses
related to the sales of boots for delivery to the U.S. military. The increase in
SG&A expenses was primarily due to commissions that increased $0.4 million,
advertising expenses that increased $0.3 million, distribution costs associated
with the growth in branded product sales that increased $0.5 million, industry
trade show expense that increased $0.3 million and expenses related to the
Sarbanes-Oxley Act of 2002 that increased $0.3 when compared to a year ago.
Interest Expense
Interest expense for the nine months ended September 30, 2004 increased to $1.0
million versus $0.9 million for the same period a year ago. The increase in
interest is the result of a higher effective rate of interest for the nine
months ended September 30, 2004. The Company's average debt was $21.3 million
for the nine months ended September 30, 2004, compared with $22.7 the same
period in 2003. The average rate of interest for the nine months ended September
30 was 6.0% in 2004 compared to 5.6% in 2003.
Income Taxes
Income taxes for the nine months ended September 30, 2004 increased to $3.0
million compared to $1.7 million the same period last year. The Company's
effective tax rate of 32.1% for the nine months ended September 30, 2004
compares with an effective tax rate 30.6% for the same period a year ago. The
increase in the effective tax rate in 2004 over 2003 is due primarily to the
increase in sales of sourced products and boots sold to the U.S. military, which
are taxed at U.S. effective tax rates.
Liquidity and Capital Resources
The Company principally funds working capital requirements and capital
expenditures through income from operations, borrowings under its credit
facility and other indebtedness. Working capital is primarily used to support
changes in accounts receivable and inventory because of the Company's seasonal
business cycle and business expansion. These requirements are generally lowest
in the months of January through March of each year and highest during the
months of May through October. At September 30, 2004, the Company had working
capital of $74.0 million versus $73.1 million on the same date last year and
$54.2 million at December 31, 2003.
The Company's line of credit provides for advances based on a percentage of
eligible accounts receivable and inventory with maximum borrowings under the
line of credit of $45.0 million. As of September 30, 2004, the Company had
borrowed $27.8 million against its then currently available line of credit of
$44.3 million compared with $35.7 million and $41.5 million respectively in the
same period of 2003.
The Company's cash flow used in operations was $13.5 million in the first nine
months of 2004 compared to $25.8 million in the same period of 2003. Increases
in accounts receivable was partially offset by an increase in accounts payable,
both the result of increased sales volume.
13
The increase in accrued liabilities was due to the increase of income taxes that
resulted from the increased year-to-date operating results of fiscal 2004. Most
of the respective balance sheet fluctuations reflect the seasonal nature of the
Company's business, and the increased sales and bookings for the current year.
The principal use of cash flows in investing activities for the first nine
months of 2004 and 2003 has been for the acquisition and investment in property,
plant, and equipment. In the first nine months of 2003 the Company acquired
certain assets of Gates-Mills, Inc. The Gates-Mills, Inc. assets were acquired
for $3.5 million in 2003. In the first nine months of 2004, property, plant, and
equipment expenditures were $4.5 million versus $1.4 million in the same period
of 2003. The current year expenditures primarily represent investments in
expansion of the workspace at the Company's distribution center, retail outlet,
as well as sales fixtures and displays.
The Company's net cash provided by financing activities for the nine months
ended September 30, 2004 was $16.6 million, comprised of the proceeds from the
exercise of stock options of $1.7 million, as well as a net increase on its
revolving credit facility and long-term mortgage facility of $14.9 million.
Inflation
The Company cannot determine the precise effects of inflation; however,
inflation continues to have an influence on the cost of materials, salaries, and
employee benefits. The Company attempts to offset the effects of inflation
through increased selling prices, productivity improvements, and reduction of
costs.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discuss the Company's consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these consolidated financial statements
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period.
Management regularly reviews its accounting policies to make certain they are
current and also provide readers of the consolidated financial statements with
useful and reliable information about our operating results and financial
condition. These include, but are not limited to, matters related to accounts
receivable, inventories, pension benefits, and income taxes. Implementation of
these accounting policies includes estimates and judgments by management based
on historical experience and other factors believed to be reasonable. This may
include judgments about the carrying value of assets and liabilities based on
considerations that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions.
Management believes the following critical accounting policies are most
important to the portrayal of the Company's financial condition and results of
operations, and require more significant judgments and estimates in the
preparation of its consolidated financial statements.
14
Revenue Recognition:
Customer sales are recognized when revenue is realized and earned. The Company
recognizes revenue when the risk and title passes to the customer. Customer
sales are recorded net of allowances for estimated returns, trade promotions and
other discounts, which are recognized as a deduction from sales at the time of
sale.
Sales returns and allowances:
Revenue principally consists of sales to customers, and, to a lesser extent,
license fees. Revenue is recognized upon passage of title to customers, while
license fees are recognized when earned. The Company records a reduction to
gross sales based on estimated customer returns and allowances. These reductions
are influenced by historical experience, based on customer returns and
allowances. The actual amount of sales returns and allowances realized may
differ from the Company's estimates. If the Company determines that sales
returns or allowances should be either increased or decreased, then the
adjustment would be made to net sales in the period in which such a
determination is made.
Accounts receivable allowances:
Management maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. If the
financial condition of the Company's customers were to deteriorate, resulting in
an impairment of their ability to make payments, additional allowances may be
required. Management also records estimates for discounts offered to customers.
Should a greater proportion of customers return goods and take advantage of
discounts than estimated by the Company, additional allowances may be required.
Inventories:
Management identifies slow moving or obsolete inventories and estimates
appropriate loss provisions related to these inventories. Historically, these
loss provisions have not been significant as the vast majority of the Company's
inventories are considered saleable and the Company has been able to liquidate
slow moving or obsolete inventories through the Company's factory outlet stores
or through various discounts to customers. Should management encounter
difficulties liquidating slow moving or obsolete inventories, additional
provisions may be necessary. Management regularly reviews the adequacy of its
inventory reserves and makes adjustments to them as required.
Pension benefits:
Accounting for pensions and other postretirement benefits involves estimating
the cost of benefits to be provided well into the future and attributing that
cost over the time period each employee works. To accomplish this, extensive use
is made of assumptions about inflation, investment returns, mortality, turnover,
medical costs and discount rates. These assumptions are reviewed at least
annually.
Pension and post-retirement benefit expenses are determined by actuaries using
assumptions concerning the discount rate, expected return on plan assets and
rate of compensation increase. An actuarial analysis of benefit obligations and
plan assets is determined as of September 30 each year. The funded status of the
Company's plans and reconciliation of accrued pension cost
15
is determined annually as of December 31. Further discussion of the Company's
pension and post-retirement benefit plans and related assumptions is included in
Note 9, Retirement Plans, to the consolidated financial statements included in
the Annual Report on Form 10-K for the year ended December 31, 2003. Actual
results would be different using other assumptions. Management records an
accrual for pension costs associated with the Company sponsored noncontributory
defined benefit pension plans covering the union and non-union workers of the
Company. The union plan was frozen in 2001 and no additional benefits have been
earned under this plan since that time; the obligations under this plan were
settled in April 2004. Future adverse changes in market conditions or poor
operating results of underlying plan assets could result in losses or a higher
accrual.
Income taxes:
Currently, management has not recorded a valuation allowance to reduce its
deferred tax assets. The Company has considered future taxable income and
ongoing prudent and feasible tax planning strategies in assessing the need for a
valuation allowance, however in the event the Company were to determine that it
would not be able to realize all or part of its net deferred tax assets in the
future, an adjustment to the deferred tax assets would be charged to income in
the period such determination was made. Finally, if the Company decided to
repatriate all or a portion of its earnings in its Five Star subsidiary to the
United States, the Company's effective tax rate would increase.
Intangible Assets:
The Company had $4.3 million of intangible assets at September 30, 2004 and $4.1
million at December 31, 2003. Goodwill and trademarks are tested for impairment
at least annually by comparing the fair value of the reporting units to their
carrying values. Fair values are estimated using discounted cash flow
methodologies that are based on projections of the amounts and timing of future
revenues and cash flows. Based on this testing, none of our goodwill nor
trademarks were impaired as of December 31, 2003, and no impairment indicators
have occurred since that date.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995.
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934, as amended,
and Section 27A of the Securities Act of 1933, as amended, which are intended to
be covered by the safe harbors created thereby. Those statements include, but
may not be limited to, all statements regarding intent, beliefs, expectations,
projections, forecasts, and plans of the Company and its management. Investors
are cautioned that such statements involve risks and uncertainties, including,
but not limited to, changes in consumer demand, seasonality, impact of weather,
competition, reliance on suppliers, changing retailing trends, reliance on
foreign manufacturing, changes in tax rates, limited protection of proprietary
technology, and other risks, uncertainties and factors described in the
Company's most recent Annual Report on Form 10-K and other filings from time to
time with the Securities and Exchange Commission. One or more of these factors
have affected, and in the future could affect the Company's business and
financial results and cause actual results to differ materially from plans and
projections. Although the Company and its management believe that the
assumptions underlying the forward-looking statements contained herein are
reasonable,
16
any of the assumptions could be inaccurate. Therefore, there can be no assurance
that the forward-looking statements included herein will prove to be accurate.
In light of the significant uncertainties inherent in the forward-looking
statements contained herein, the inclusion of such information should not be
regarded as a representation by the Company, its management or any other person
that the Company's objectives and plans will be achieved. All forward-looking
statements made herein are based on information presently available to the
management of the Company. The Company undertakes no obligation to publicly
update or revise any forward-looking statements.
17
PART 1 - FINANCIAL INFORMATION
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes since December 31, 2003.
ITEM 4 - CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company's management
carried out an evaluation, with the participation of the Company's principal
executive officer and principal financial officer, of the effectiveness of the
Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) promulgated under the Securities Exchange Act of 1934). Based upon
that evaluation, the Company's principal executive officer and principal
financial officer concluded that the Company's disclosure controls and
procedures were effective as of the end of the period covered by this report. It
should be noted that the design of any system of controls is based in part upon
certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions, regardless of how remote.
There were no changes in the Company's internal controls over financial
reporting that occurred during the Company's most recent fiscal quarter that
have materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
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PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
See Note 7 to the Condensed Consolidated Financial Statements for further
discussion.
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
10.1 Second Amendment to Lease Agreement, dated as of July 26,
2004, between Rocky Shoes & Boots, Inc. and the William Brooks
Real Estate Company.
31.1 Certification of CEO under Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 Certification of CFO under Section 302 of the Sarbanes-Oxley
Act of 2002.
32.1 Certification of CEO under Section 906 of the Sarbanes-Oxley
Act of 2002.
32.2 Certification of CFO under Section 906 of the Sarbanes-Oxley
Act of 2002.
(b) Reports on Form 8-K.
1) Form 8-K dated July 27, 2004, filed with the Securities and
Exchange Commission on July 29, 2004 pursuant to Item 12,
regarding the Company's financial results for the second
quarter ended June 30, 2004.
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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 thereunto duly authorized.
ROCKY SHOES & BOOTS, INC.
Date: November 3, 2004 /s/ James E. McDonald
--------------------------------------
James E. McDonald, Vice President and
Chief Financial Officer*
* In his capacity as Vice President and Chief Financial Officer, Mr.
McDonald is duly authorized to sign this report on behalf of the
Registrant.
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