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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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: 0-21026
ROCKY SHOES & BOOTS, INC.
(Exact name of registrant as specified in its charter)
OHIO 31-1364046
(State or Other Jurisdiction of (I.R.S. Employer
Icorporation or Organization) Identification No.)
39 E. CANAL STREET, NELSONVILLE, OHIO 45764
(Address of Principal Executive Offices, Including Zip Code)
(740) 753-1951
(Registrant's Telephone Number, Including Area Code)
NOT APPLICABLE
(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 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to the
filing requirements for at least the past 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 [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 5,226,850 shares of Common
Stock, no par value, were outstanding at April 30, 2005.
FORM 10-Q
ROCKY SHOES & BOOTS, INC.
TABLE OF CONTENTS
PAGE
NUMBER
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Condensed Consolidated Balance Sheets
March 31, 2005 and 2004 (Unaudited), and December 31, 2004 3
Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 2005 and 2004 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2005 and 2004 (Unaudited) 5
Notes to Interim Unaudited Condensed Consolidated Financial
Statements 6 - 11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 12 - 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
Item 4. Controls and Procedures. 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits 18
SIGNATURE 19
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ROCKY SHOES & BOOTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2005 March 31, 2004
Unaudited December 31, 2004 Unaudited
-------------- ------------------ ----------------
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents $ 1,844,354 $ 5,060,859 $ 1,164,802
Trade receivables - net 50,121,610 27,182,198 17,657,161
Other receivables 1,164,271 1,114,959 842,220
Inventories 69,334,020 32,959,124 35,135,584
Deferred income taxes 1,297,850 230,151 959,810
Income tax receivable 2,134,642 2,264,531
Prepaid expenses 1,053,732 588,618 1,132,264
-------------- ------------------ ----------------
Total current assets 126,950,479 69,400,440 56,891,841
FIXED ASSETS - net 22,563,726 20,179,486 17,325,445
DEFERRED PENSION ASSET 1,347,825 1,347,824 1,499,524
IDENTIFIED INTANGIBLES 47,190,117 2,561,427 2,659,652
GOODWILL 18,637,115 1,557,861 1,557,861
OTHER ASSETS 4,347,912 1,658,616 280,799
-------------- ------------------ ----------------
TOTAL ASSETS $ 221,037,174 $ 96,705,654 $ 80,215,122
============== ================== ================
LIABILITIES AND SHAREHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable $ 11,879,873 $ 4,349,248 $ 2,082,062
Current maturities - long term debt 6,376,401 6,492,020 511,006
Accrued expenses:
Income taxes 380,652
Taxes - other 438,624 422,692 451,917
Salaries and wages 2,310,280 1,295,722 644,661
Plant closing costs 75,500
Other 4,285,853 1,228,708 346,083
-------------- ------------------ ----------------
Total current liabilities 25,291,031 13,788,390 4,491,881
LONG TERM DEBT-less current maturities 91,746,122 10,044,544 13,998,680
DEFERRED INCOME TAXES 18,527,196 1,205,814 262,907
DEFERRED LIABILITIES 1,182,172 296,108 1,794,876
-------------- ------------------ ----------------
TOTAL LIABILITIES 136,746,521 25,334,856 20,548,344
SHAREHOLDERS' EQUITY:
Common stock, no par value;
10,000,000 shares authorized; issued and outstanding
March 31, 2005 - 5,226,850; December 31, 2004 -
4,694,670; March 31, 2004 - 4,532,226 50,224,513 38,399,114 36,089,849
Accumulated other comprehensive loss (1,077,586) (1,077,586) (1,950,400)
Retained earnings 35,143,726 34,049,270 25,527,329
-------------- ------------------ ----------------
Total shareholders' equity 84,290,653 71,370,798 59,666,778
-------------- ------------------ ----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 221,037,174 $ 96,705,654 $ 80,215,122
============== ================== ================
See notes to the interim unaudited condensed consolidated financial
statements.
3
ROCKY SHOES & BOOTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended
March 31,
2005 2004
------------ --------------
NET SALES $ 61,498,084 $ 21,882,089
COST OF GOODS SOLD 37,290,212 16,263,485
------------ --------------
GROSS MARGIN 24,207,872 5,618,604
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 20,661,683 5,327,691
------------ --------------
INCOME FROM OPERATIONS 3,546,189 290,913
OTHER INCOME AND (EXPENSES):
Interest expense (1,878,592) (258,573)
Other - net (9,248) 74,206
------------ --------------
Total other - net (1,887,840) (184,367)
INCOME BEFORE INCOME TAXES 1,658,349 106,546
INCOME TAX EXPENSE 563,895 34,095
------------ --------------
NET INCOME $ 1,094,454 $ 72,451
============ ==============
NET INCOME PER SHARE
Basic $ 0.21 $ 0.02
Diluted $ 0.20 $ 0.01
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING
Basic 5,163,371 4,428,023
============ ==============
Diluted 5,588,753 4,971,569
============ ==============
See notes to the interim unaudited condensed consolidated financial statements.
4
ROCKY SHOES & BOOTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 31,
2005 2004
------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,094,454 $ 72,451
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 1,251,883 751,090
Deferred compensation and pension - net 205,068 167,283
Loss on disposal of fixed assets 20,266
Stock issued as directors' compensation 60,000 50,000
Change in assets and liabilities, (net of effect of
acquisition):
Receivables 6,443,496 1,863,037
Inventories (1,701,352) 2,932,603
Other current assets (19,652) (87,026)
Other assets 386,199 (34,064)
Accounts payable 1,974,913 (738,652)
Accrued and other liabilities (366,181) (3,171,757)
------------- ------------
Net cash provided by operating activities 9,349,094 1,804,965
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (969,660) (449,621)
Acquisition of Business (91,120,802)
------------- ------------
Net cash used in investing activities (92,090,462) (449,621)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long term debt 149,666,062 22,879,008
Payments on long term debt (68,377,917) (26,388,250)
Debt financing costs (2,114,843)
Proceeds from exercise of stock options 351,561 1,159,650
------------- ------------
Net cash provided by (used in) financing activities 79,524,863 (2,349,592)
------------- ------------
DECREASE IN CASH AND CASH EQUIVALENTS (3,216,505) (994,248)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 5,060,859 2,159,050
------------- ------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 1,844,354 $ 1,164,802
============= ============
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 MARCH 31, 2005 AND 2004
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 unaudited interim consolidated financial
statements are considered to be of a normal and recurring nature. The
results of the operations for the three-month periods ended March 31, 2005
and 2004 are not necessarily indicative of the results to be expected for
the whole year. Accordingly, these c6ndensed consolidated financial
statements should be read in conjunction with the condensed consolidated
financial statements and notes thereto contained in the Company's Annual
Report to Shareholders on Form 10-K for the year ended December 31, 2004.
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 (loss) and earnings (loss) per share would have
resulted in the pro forma amounts as reported below.
Three Months Ended March 31,
2005 2004
-------------- ---------------
Net income as reported $ 1,094,454 $ 72,451
Deduct: Stock based employee
compensation expense determined under fair
value based method for all awards, net
of income taxes 231,708 153,015
-------------- ---------------
Pro forma net income (loss) $ 862,746 $ (80,564)
============== ===============
Earnings (loss) per share:
Basic - as reported $ 0.21 $ 0.02
Basic - pro forma $ 0.17 $ (0.02)
Diluted - as reported $ 0.20 $ 0.01
Diluted - pro forma $ 0.15 $ (0.02)
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:
March 31, 2005 December 31, 2004 March 31, 2004
-------------- ----------------- ---------------
Raw materials $ 6,333,803 $ 4,711,014 $ 5,091,278
Work-in Process 955,380 564,717 1,209,715
Finished good 61,572,412 26,565,240 27,338,615
Factory outlet finished goods 1,379,504 1,268,153 1,720,976
Reserve for obsolescence or
lower of cost or market (907,079) (150,000) (225,000)
-------------- ---------------- ---------------
Total $ 69,334,020 $ 32,959,124 $ 35,135,584
============== ================ ===============
3. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and federal, state and local income taxes was as
follows:
Three Months Ended
March 31,
2005 2004
----------- -----------
Interest $ 1,949,531 $ 241,558
=========== ===========
Federal, state and local
income taxes $ 450,000 $ 1,580,000
=========== ===========
The Company issued 484,261 common shares valued at $11,473,838, as part of
the purchase of the EJ Footwear Group.
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 computation for the three months ended March 31, 2005 and
2004 is as follows:
7
Three Months Ended
March 31,
2005 2004
--------- ---------
Basic weighted average
shares outstanding 5,163,371 4,428,023
Diluted stock options: 425,382 543,546
--------- ---------
Diluted weighted average
shares outstanding 5,588,753 4,971,569
========= =========
Anti-diluted weighted average
shares outstanding 35,000 3,387
========= =========
5. RECENTLY ADOPTED FINANCIAL ACCOUNTING STANDARDS
In December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123(R)"), which
is a revision of SFAS No. 123, "Accounting for Stock-Based Compensation."
The statement supersedes APB Opinion No. 25, "Accounting for Stock Issued
to Employees" and SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure - an amendment of FASB Statement No. 123." The
statement also amends SFAS No. 95, "Statement of Cash Flows." The
statement requires that the cost resulting from all share-based payment
transactions be recognized in the financial statements. SFAS 123(R)
establishes fair value as the measurement objective in accounting for
share-based payment arrangements and requires all entities to apply a fair
value based measurement method in accounting for share-based payment
transactions with employees, except for equity instruments held by
employee share ownership plans. SFAS 123(R) applies to all awards granted
after the required effective date (the beginning of the first annual
reporting period that begins after June 15, 2005 in accordance with the
Securities and Exchange Commission's delay of the original effective date
of SFAS 123(R)) and to awards modified, repurchased or canceled after that
date. As a result, beginning January 1, 2006, the Company will adopt SFAS
123(R) and begin reflecting the stock option expense determined under fair
value based methods in our income statement rather than as pro forma
disclosure in the notes to the financial statements.
In March 2005, the Securities and Exchange Commission issued Staff
Accounting Bulletin Number 107 ("SAB 107") that provided additional
guidance to public companies relating to share-based payment transactions
and the implementation of SFAS 123(R), including guidance regarding
valuation methods and related assumptions, classification of compensation
expense and income tax effects of share-based payment arrangements.
The Company has not completed its assessment of the impact or method of
adoption of SFAS 123(R) and SAB 107.
6. ACQUISITION
On January 6, 2005, the Company completed the purchase of 100% of the
issued and outstanding voting limited interests of EJ Footwear LLC,
Georgia Boot LLC, and HM Lehigh Safety Shoe Co. LLC (the "EJ Footwear
Group") from SILLC Holdings LLC.
8
The EJ Footwear Group was acquired to expand the Company's branded product
lines, principally occupational products. The aggregate purchase price for
the interests of EJ Footwear Group, including an initial closing date
working capital adjustment, was $91.1 million in cash plus 484,261 shares
of the Company's common stock valued at $11,473,838. Common stock value is
based on the average closing share price during the three days preceding
and three days subsequent to the date of the agreement.
On January 6, 2005, to fund the acquisition of EJ Footwear Group, the
Company entered into a loan and security agreement with GMAC Commercial
Finance LLC, refinancing its former $45,000,000 revolving line of credit,
for certain extensions of credit (the "Credit Facility"). The Credit
Facility is comprised of (i) a five-year revolving credit facility up to a
principal amount of $100,000,000 with an interest rate of LIBOR plus two
and a half percent (2.5%) or prime plus one percent (1.0%) and (ii) a
three-year term loan in the principal amount of $18,000,000 with an
interest rate of LIBOR plus three and a quarter percent (3.25%) or prime
plus one and three quarters percent (1.75%). The Credit Facility is
secured by a first priority perfected security interest in all presently
owned and hereafter acquired domestic personal property of the Borrowers,
subject to specified exceptions. Also on January 6, 2005, the Company
entered into a note agreement (the "Note Purchase Agreement") with
American Capital Financial Services, Inc., as agent, and American Capital
Strategies, Ltd., as lender (collectively, "ACAS"), regarding $30,000,000
in six-year Senior Secured Term B Notes with an interest rate of LIBOR
plus eight percent (8.0%). The Note Purchase Agreement provides, among
other terms, that (i) the ACAS Second Lien Term Loan will be senior
indebtedness of the Company, secured by essentially the same collateral as
the Credit Facility, (ii) such note facility will be "last out" in the
event of liquidation of the Company and its subsidiaries, and (iii)
principal payments on such note facility will begin in the fourth year of
such note facility.
The purchase price will be allocated to the Company's tangible and
intangible assets and liabilities based upon estimated fair values as of
the date of the acquisition. The Company is in the process of obtaining
appraisals of all tangible and intangible assets and liabilities to
establish the fair values and determining the income tax basis of assets
and liabilities acquired. As the purchase price allocation has not been
completed, the amounts assigned to finite and indefinite life intangibles,
and the related amortizations periods and the related deferred taxes have
not been determined. Goodwill resulting from the transaction will not be
tax deductible. The purchase price is preliminarily allocated, based on
management's estimates, as follows:
PURCHASE PRICE ALLOCATION
Cash $ 89,503,000
Common shares - 484,261 11,473,858
Transaction costs 1,617,802
Total $ 102,594,640
ALLOCATED TO
Current assets $ 65,899,403
Fixed assets and other assets 3,220,733
Identified intangibles 44,800,000
Goodwill 17,079,254
Liabilities (11,067,250)
Deferred taxes - long term (17,337,500)
9
Cash purchase price is subject to an additional final working capital
payment of approximately $1.8 million. Estimated amounts are subject to
final allocation based on independent appraisal of the fair value of
assets acquired and final determination of income tax basis of assets and
liabilities. The Company also incurred $0.9 million of transaction costs
related to securing the financing for the transaction and will amortize
the costs over an average of five years.
Gross Accumulated Carrying
DECEMBER 31, 2004 Amount Additions Amortization Amount
-------------------------- ------------ --------------- ------------ ---------------
Trademarks $ 2,225,887 $ 2,225,887
Patents 467,336 131,796 335,540
Goodwill 1,649,732 91,871 1,557,861
------------ --------------- ------------ --------------
Total Intangibles $ 4,342,955 $ - $ 223,667 $ 4,119,288
============ =============== ============ ==============
Gross EJ Footwear Accumulated Carrying
MARCH 31, 2005 (UNAUDITED) Amount Acquisition Amortization Amount
-------------------------- ------------ --------------- ------------ ---------------
Trademarks $ 2,225,887 $ 41,500,000 $ 43,725,887
Patents 467,336 2,300,000 253,106 2,514,230
Customer Relationships 1,000,000 50,000 950,000
Goodwill 1,649,732 17,079,254 91,871 18,637,115
------------ --------------- ------------ ---------------
Total Intangibles $ 4,342,955 $ 61,879,254 $ 394,977 $ 65,827,232
============ =============== ============ ===============
ESTIMATE OF AGGREGATE AMORTIZATION EXPENSE:
Year ending December 31, 2005 686,000
Year ending December 31, 2006 686,000
Year ending December 31, 2007 686,000
Year ending December 31, 2008 686,000
Year ending December 31, 2009 686,000
Additional intangibles acquired during the quarter ended March 31, 2005
relate the acquisition of the EJ Footwear Group.
The results of operations of EJ Footwear Group are included in the results
of operations of the Company effective January 1, 2005, as management
determined that results of operations were not significant and no material
transactions occurred during the period from January 1, 2005 to January 6,
2005.
7. CAPITAL STOCK
On May 11, 2004, shareholders of the Company approved the 2004 Stock
Incentive Plan. This Stock Incentive Plan includes 750,000 of the
Company's common shares that may be granted for stock options and
restricted stock awards. As of March 31, 2005, the Company is authorized
to issue 528,935 options under their existing plans.
For the three months ended March 31, 2005, options for 45,574 of the
Company's common stock were exercised at an average price of $7.71.
10
8. RETIREMENT PLANS
Net pension cost of the Company's plans is as follows:
MARCH 31,
2005 2004
Service cost $ 130,966 $ 128,079
Interest 132,265 161,513
Expected return on assets (170,931) (171,074)
Amortization of unrecognized net loss 21,404 35,411
Amortization of unrecognized transition obligation 4,077 4,077
Amortization of unrecognized prior service cost 33,848 33,848
------------ -------------
Net pension cost $ 151,629 $ 191,854
============ =============
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:
MARCH 31,
2005 2004
Discount rate 5.75 % 5.75 %
Average rate of increase in compensation levels 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 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 expects to make contributions to the plan in 2005 of
approximately $1.0 million. At March 31, 2005, no Company contribution had
been made.
The Company also sponsors 401(k) savings plans for substantially all of
its employees. The Company provides contributions to the plans on a
discretionary basis for workers covered under the defined benefits pension
plan, and matches eligible employee contributions up to 4% of applicable
salary for qualified employees not covered by the defined benefits pension
plan. Total Company contributions to 401(k) plans were $0.1 million in
2005 and none in 2004.
11
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 our 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 our Interim Unaudited Condensed Consolidated
Financial Statements.
PERCENTAGE OF NET SALES
Three Months Ended
March 31,
2005 2004
------ ------
Net Sales 100.0% 100.0%
Cost of Goods Sold 60.6% 74.3%
----- -----
Gross Margin 39.4% 25.7%
----- -----
Selling, General and
Administrative Expenses 33.6% 24.3%
----- -----
Income from Operations 5.8% 1.3%
===== =====
THREE MONTHS ENDED MARCH 31, 2005 COMPARED TO THREE MONTHS ENDED MARCH 31, 2004
Net Sales
Net sales increased to a first quarter total of $61.5 million compared to $21.9
million for the same period in 2004. The first quarter results reflect the
acquisition of EJ Footwear, which contributed $39.9 million during the
three-month period ended March 31, 2005.
Gross Margin
Gross margin in the first quarter of 2005 increased to $24.2 million, or 39.4%
of net sales, from $5.6 million or 25.7% of net sales, for the same period last
year. The 1370 basis point increase is primarily attributable to sales of EJ
Footwear product which carry a higher gross margin than our Rocky products, as
well as a decrease in shipments to the U.S. military in the first quarter of
fiscal 2005 compared to the first quarter of fiscal 2004. Military boots are
sold at lower gross margins than branded product.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses were $20.7 million, or
33.6% of net sales for the first quarter of 2005 compared to $5.3 million, or
24.3% of net sales, a year ago. The increase is primarily a result of higher
SG&A associated with the EJ Footwear business.
12
Interest Expense
Interest expense was $1.9 million in the quarter ended March 31, 2005 compared
to $0.3 million the prior year. The increase was primarily due to interest on
borrowings to finance the EJ Footwear Group acquisition.
Income Taxes
Income tax expense for the quarter ended March 31, 2005 was $0.6 million
compared $0.03 million for the same period a year ago. Our effective tax rate
was 34.0% for the three months ended March 31, 2005 versus 32.0% for the same
period in 2004. The increase in the effective tax rate in 2005 over 2004 is due
primarily to the EJ Footwear Group income being subject to U.S. effective tax
rates.
LIQUIDITY AND CAPITAL RESOURCES
We principally fund working capital requirements and capital expenditures
through income from operations, borrowings under our credit facility and other
indebtedness. Working capital is primarily used to support changes in accounts
receivable and inventory because of our 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 March 31, 2005, we had working capital of $101.7 million versus $52.4 million
on the same date last year and $62.5 million at December 31, 2004.
Our 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 $100.0 million. As of March 31, 2005, we had borrowed $45.4 million
against our then currently available line of credit of $66.1 million compared
with $9.1 million and $29.4 million respectively in the same period of 2004.
We generated cash flow from operations of $9.3 million in the first three months
of 2005 compared to $1.8 million in the same period of 2004. The collection of
accounts receivable and increase in accounts payable were partially offset by
the increase in inventory. All of the respective balance sheet fluctuations
reflect the acquisition of the EJ Footwear Group in 2005.
The principal use of cash flows in investing activities for the first three
months of 2005 and 2004 has been for the acquisition of the EJ Footwear Group in
2005, and investment in property, plant, and equipment. In the first three
months of 2005, property, plant, and equipment expenditures were $1.0 million
versus $0.4 million in the same period of 2004. The current year expenditures
primarily represent investments in expansion of the workspace at our
distribution center, as well as sales fixtures and displays. We do not expect to
incur significant fixed asset additions related to the EJ operations.
Our net cash provided by financing activities for the three months ended March
31, 2005 was $79.5 million, comprised of the net cash proceeds from debt
financing of $81.2 million, the proceeds from the exercise of stock options of
$0.4 million, offset by debt financing costs of $2.1 million.
13
INFLATION
We cannot determine the precise effects of inflation; however, inflation
continues to have an influence on the cost of materials, salaries, and employee
benefits. We attempt 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. A summary
of our significant accounting policies is included in the Notes to Consolidated
Financial Statements included in the Annual Report on Form 10-K for the year
ended December 31, 2004.
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.
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, generally at
the time of shipment. 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.
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 customer returns and 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.
14
Sales returns and allowances:
Revenue principally consists of sales to customers. Revenue is recognized upon
shipment of product 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.
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.
Intangible assets:
Goodwill, trademarks and patents 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.
Pension benefits:
Accounting for pensions 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 annually. See Note 9, "Retirement Plans,"
to the consolidated financial statements included in the Annual Report on Form
10-K for the year ended December 31, 2004 for information on these plans and
the assumptions used.
Pension 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 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, 2004. 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
non-union workers of the Company. A union plan, which was frozen in 2001, was
settled in April 2004.
15
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 to the amount that it believes is more likely than not to be
realized. 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, at December 31, 2004, a provision of
$157,000 has been made for U.S. taxes on the repatriation of $3,000,000 of
accumulated undistributed earnings of Five Star through December 31, 2004. At
December 31, 2004, after the planned repatriation above, approximately
$6,839,000 is remaining that would become taxable upon repatriation to the
United States. During 2005, the Company will complete its evaluation of foreign
earnings and may repatriate up to an additional $5,000,000 of accumulated
undistributed earnings, which could result in up to $260,000 of additional tax.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995.
Except for the historical information contained herein, the matters discussed in
this Quarterly Report on Form 10-Q include certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, 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 our and
management's intent, belief and expectations, such as statements concerning our
future profitability and our operating and growth strategy. Words such as
"believe," "anticipate," "expect," "will," "may," "should," "intend," "plan,"
"estimate," "predict," "potential," "continue," "likely" and similar expressions
are intended to identify forward-looking statements. Investors are cautioned
that all forward-looking statements contained in this Quarterly Report on Form
10-Q and in other statements we make involve risks and uncertainties including,
without limitation, the factors set forth under the caption "Business - Business
Risks" included in our Annual Report on Form 10-K for the year ended December
31, 2004, and other factors detailed from time to time in our other filings with
the Securities and Exchange Commission. One or more of these factors have
affected, and in the future could affect our businesses and financial results in
the future and could cause actual results to differ materially from plans and
projections. Although we believe that the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate. Therefore, there can be no assurance that the
forward-looking statements included in this Quarterly Report on Form 10-Q will
prove to be accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by us or any other person that our
objectives and plans will be achieved. All forward-looking statements made in
this Quarterly Report on Form 10-Q are based on information presently available
to our management. We assume no obligation to update any forward-looking
statements.
16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes since December 31, 2004.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures. As of the end of the period covered by this
report, our management carried out an evaluation, with the participation of our
principal executive officer and principal financial officer, of the
effectiveness of our 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, our principal executive officer and principal
financial officer concluded that our 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.
Internal Controls. There were no changes in our internal controls over financial
reporting that occurred during our most recent fiscal quarter that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
17
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
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
EXHIBIT EXHIBIT
NUMBER DESCRIPTION
31(a)* Certification pursuant to Exchange Act Rules 13a-14(a)
and 15d-14(a) of the Chief Executive Officer.
31(b)* Certification pursuant to Exchange Act Rules 13a-14(a)
and 15d-14(a) of the Chief Financial Officer.
32(a)+ Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, of the Chief Executive Officer.
32(b)+ Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, of the Chief Financial Officer.
- ----------------
* Filed with this report.
+ Furnished with this report.
18
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: May 10, 2005 /s/ James E. McDonald
-------------------------------------------------
James E. McDonald, Executive Vice President and
Chief Financial Officer*
* In his capacity as Executive Vice President and Chief Financial Officer, Mr.
McDonald is duly authorized to sign this report on behalf of the Registrant.
19