UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
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þ | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended January 2, 2010
OR
| | |
o | | 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: 001-08769
R.G. BARRY CORPORATION
(Exact name of registrant as specified in its charter)
| | |
OHIO | | 31-4362899 |
| | |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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13405 Yarmouth Road NW, Pickerington, Ohio | | 43147 |
| | |
(Address of principal executive offices) | | (Zip Code) |
614-864-6400
(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 such filing requirements for the past 90 days. Yesþ Noo
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yeso Noo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filero | | Accelerated filero | | Non-accelerated filero | | Smaller reporting companyþ |
| | | | (Do not check if a smaller reporting company) | | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Shares, $1 Par Value, Outstanding as of January 29, 2010 — 10,830,439
Index to Exhibits at page 23
R.G. BARRY CORPORATION
INDEX TO QUARTERLY REPORT ON FORM 10-Q
For the Second Quarter of Fiscal 2010
(Quarterly Period Ended January 2, 2010)
2
“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995:
Some of the disclosures in this Quarterly Report on Form 10-Q contain forward-looking statements that involve substantial risks and uncertainties. You can identify these statements by forward-looking words such as “may,” “will,” “expect,” “could,” “should,” “anticipate,” “believe,” “estimate,” or words with similar meanings. Any statements that refer to projections of our future performance, anticipated trends in our business and other characterizations of future events or circumstances are forward-looking statements. These statements, which are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995, are based upon our current plans and strategies and reflect our current assessment of the risks and uncertainties related to our business. These risks could include, but are not limited to, things such as: our continuing ability to source products from third parties located outside North America; competitive cost pressures; the loss of retailer customers to competitors, consolidations, bankruptcies or liquidations; shifts in consumer preferences; the impact of the highly seasonal nature of our business upon our operations; inaccurate forecasting of consumer demand; difficulties liquidating excess inventory; disruption of our supply chain or distribution networks; and our investment of excess cash in certificates of deposit and other non-auction rate marketable securities. You should read this Quarterly Report on Form 10-Q carefully, because the forward-looking statements contained in it (1) discuss our future expectations; (2) contain projections of our future results of operations or of our future financial condition; or (3) state other “forward-looking” information. The risk factors described in this Quarterly Report on Form 10-Q and in our other filings with the Securities and Exchange Commission, in particular “Item 1A. Risk Factors” of Part I of our Annual Report on Form 10-K for the fiscal year ended June 27, 2009 (the “2009 Form 10-K”), give examples of the types of uncertainties that may cause actual performance to differ materially from the expectations we describe in our forward-looking statements. If the events described in “Item 1A. Risk Factors” of Part I of our 2009 Form 10-K occur, they could have a material adverse effect on our business, operating results and financial condition. You should also know that it is impossible to predict or identify all risks and uncertainties related to our business. Consequently, no one should consider any such list to be a complete set of all potential risks and uncertainties. Forward-looking statements speak only as of the date on which they are made, and we undertake no obligation to update any forward-looking statement to reflect circumstances or events that occur after the date on which the statement is made to reflect unanticipated events. Any further disclosures in our filings with the Securities and Exchange Commission should also be considered.
Definitions
As used in this Quarterly Report on Form 10-Q, unless the context otherwise requires, references to “our,” “us,” “we” and the “Company” refer to R.G. Barry Corporation and its consolidated subsidiaries when applicable. In addition, the terms listed below reflect the respective periods noted:
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Fiscal 2010 | | 53 weeks ending July 3, 2010 |
Fiscal 2009 | | 52 weeks ended June 27, 2009 |
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First Half of Fiscal 2010 | | 27 weeks ended January 2, 2010 |
First Half of Fiscal 2009 | | 26 weeks ended December 27, 2008 |
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Second Quarter of Fiscal 2010 | | 14 weeks ended January 2, 2010 |
Second Quarter of Fiscal 2009 | | 13 weeks ended December 27, 2008 |
3
PART I — FINANCIAL INFORMATION
ITEM 1 — FINANCIAL STATEMENTS
R.G. BARRY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
| | | | | | | | |
| | January 2, 2010 | | | June 27, 2009 | |
| | (unaudited) | | | | |
ASSETS | | | | | | | | |
Cash and cash equivalents | | $ | 15,375 | | | $ | 14,259 | |
Short-term investments | | | 21,976 | | | | 24,977 | |
Accounts receivable (less allowances of $9,400 and $2,725, respectively) | | | 21,394 | | | | 9,503 | |
Inventory | | | 16,839 | | | | 8,499 | |
Deferred tax assets — current | | | 1,410 | | | | 2,621 | |
Prepaid expenses | | | 707 | | | | 723 | |
| | | | | | |
Total current assets | | | 77,701 | | | | 60,582 | |
| | | | | | |
Property, plant and equipment, at cost | | | 11,773 | | | | 11,254 | |
Less accumulated depreciation and amortization | | | 7,878 | | | | 7,511 | |
| | | | | | |
Net property, plant and equipment | | | 3,895 | | | | 3,743 | |
| | | | | | |
Deferred tax assets — noncurrent | | | 7,743 | | | | 7,685 | |
Other assets | | | 3,082 | | | | 3,073 | |
| | | | | | |
Total assets | | $ | 92,421 | | | $ | 75,083 | |
| | | | | | |
| | | | | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | |
Short-term notes payable | | $ | 1,750 | | | $ | 1,750 | |
Current installments of long-term debt | | | 94 | | | | 90 | |
Accounts payable | | | 7,382 | | | | 3,887 | |
Accrued expenses | | | 6,243 | | | | 3,979 | |
| | | | | | |
Total current liabilities | | | 15,469 | | | | 9,706 | |
| | | | | | |
Long-term debt, excluding current installments | | | 49 | | | | 97 | |
Accrued retirement costs and other | | | 19,565 | | | | 19,372 | |
| | | | | | |
Total liabilities | | | 35,083 | | | | 29,175 | |
| | | | | | |
| | | | | | | | |
Commitments and contingencies (note 10) | | | | | | | | |
| | | | | | | | |
Shareholders’ equity: | | | | | | | | |
Preferred shares, $1 par value per share: Authorized 3,775 Class A shares, 225 Series I Junior Participating Class A Shares, and 1,000 Class B Shares; none issued | | | — | | | | — | |
Common shares, $1 par value per share: Authorized 22,500 shares; issued and outstanding 10,820 and 10,722 shares, respectively (excluding treasury shares of 1,025 and 1,008, respectively) | | | 10,820 | | | | 10,722 | |
Additional capital in excess of par value | | | 18,421 | | | | 16,940 | |
Accumulated other comprehensive loss | | | (11,148 | ) | | | (11,049 | ) |
Retained earnings | | | 39,245 | | | | 29,295 | |
| | | | | | |
Total shareholders’ equity | | | 57,338 | | | | 45,908 | |
| | | | | | |
Total liabilities and shareholders’ equity | | $ | 92,421 | | | $ | 75,083 | |
| | | | | | |
See accompanying notes to condensed consolidated financial statements.
4
R.G. BARRY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
| | | | | | | | | | | | | | | | |
| | Second Quarter | | | First Half | |
| | Fiscal 2010 | | | Fiscal 2009 | | | Fiscal 2010 | | | Fiscal 2009 | |
| | (unaudited) | | | (unaudited) | | | (unaudited) | | | (unaudited) | |
| | | | | | | | | | | | | | | | |
Net sales | | $ | 55,574 | | | $ | 48,853 | | | $ | 85,023 | | | $ | 74,482 | |
Cost of sales | | | 31,612 | | | | 29,569 | | | | 48,770 | | | | 45,038 | |
| | | | | | | | | | | | |
Gross profit | | | 23,962 | | | | 19,284 | | | | 36,253 | | | | 29,444 | |
Selling, general and administrative expenses | | | 10,776 | | | | 9,668 | | | | 19,586 | | | | 18,256 | |
| | | | | | | | | | | | |
Operating profit | | | 13,186 | | | | 9,616 | | | | 16,667 | | | | 11,188 | |
Interest income, net | | | 27 | | | | 87 | | �� | | 176 | | | | 232 | |
| | | | | | | | | | | | |
Earnings, before income taxes | | | 13,213 | | | | 9,703 | | | | 16,843 | | | | 11,420 | |
Income tax expense | | | 4,987 | | | | 3,653 | | | | 6,353 | | | | 4,265 | |
| | | | | | | | | | | | |
Net earnings | | $ | 8,226 | | | $ | 6,050 | | | $ | 10,490 | | | $ | 7,155 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Net earnings per common share | | | | | | | | | | | | | | | | |
Basic | | $ | 0.76 | | | $ | 0.57 | | | $ | 0.97 | | | $ | 0.67 | |
| | | | | | | | | | | | |
Diluted | | $ | 0.74 | | | $ | 0.56 | | | $ | 0.96 | | | $ | 0.67 | |
| | | | | | | | | | | | |
Average number of common shares outstanding | | | | | | | | | | | | | | | | |
Basic | | | 10,857 | | | | 10,609 | | | | 10,836 | | | | 10,602 | |
| | | | | | | | | | | | |
Diluted | | | 11,042 | | | | 10,712 | | | | 10,981 | | | | 10,717 | |
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See accompanying notes to condensed consolidated financial statements.
5
R.G. BARRY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| | | | | | | | |
| | First Half | | | First Half | |
| | Fiscal 2010 | | | Fiscal 2009 | |
| | (unaudited) | | | (unaudited) | |
| | | | | | | | |
Operating activities: | | | | | | | | |
Net earnings | | $ | 10,490 | | | $ | 7,155 | |
Adjustments to reconcile net earnings to net cash (used in) provided by operating activities: | | | | | | | | |
Depreciation and amortization | | | 403 | | | | 341 | |
Deferred income tax expense | | | 2,234 | | | | 3,929 | |
Excess tax benefit- stock based compensation | | | (1,107 | ) | | | — | |
Stock-based compensation expense | | | 507 | | | | 431 | |
Changes in: | | | | | | | | |
Accounts receivable | | | (11,891 | ) | | | (4,403 | ) |
Inventory | | | (8,340 | ) | | | (4,089 | ) |
Prepaid expenses and other | | | 7 | | | | 597 | |
Accounts payable | | | 3,495 | | | | 495 | |
Accrued expenses | | | 2,155 | | | | (1,195 | ) |
Accrued retirement costs and other, net | | | 36 | | | | (485 | ) |
| | | | | | |
Net cash (used in) provided by operating activities | | | (2,011 | ) | | | 2,776 | |
| | | | | | |
| | | | | | | | |
Investing activities: | | | | | | | | |
Purchases of property, plant and equipment, net | | | (555 | ) | | | (978 | ) |
Proceeds from sale or purchases of short-term investments | | | 3,001 | | | | (10,791 | ) |
| | | | | | |
Net cash provided by (used in) investing activities | | | 2,446 | | | | (11,769 | ) |
| | | | | | |
| | | | | | | | |
Financing activities: | | | | | | | | |
Repayment of short-term and long-term debt | | | (44 | ) | | | (41 | ) |
Proceeds from common shares options exercised | | | 159 | | | | 56 | |
Excess tax benefit- stock based compensation | | | 1,107 | | | | — | |
Dividends paid | | | (541 | ) | | | — | |
| | | | | | |
Net cash provided by financing activities | | | 681 | | | | 15 | |
| | | | | | |
| | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | 1,116 | | | | (8,978 | ) |
Cash and cash equivalents at the beginning of the period | | | 14,259 | | | | 14,210 | |
| | | | | | |
Cash and cash equivalents at the end of the period | | $ | 15,375 | | | $ | 5,232 | |
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See accompanying notes to condensed consolidated financial statements.
6
R.G. BARRY CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
for the Second Quarter and the First Half of Fiscal 2010 and the Second Quarter and the First Half of Fiscal 2009
(dollar amounts in thousands, except per share data and share data)
R.G. Barry Corporation, an Ohio corporation (the “Company”), is engaged, with its subsidiaries, in designing, sourcing, marketing and distributing accessory footwear products. The Company defines accessory footwear as a single segment business with a product category that encompasses primarily slippers, sandals, hybrid and active fashion footwear and slipper socks. The Company’s products are sold predominantly in North America through department stores, chain stores, warehouse clubs and mass merchandising channels of distribution.
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and have been prepared in accordance with the United States of America (“U.S.”) generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of SEC Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation of the financial condition and results of operations at the dates and for the interim periods presented, have been included. The financial information shown in the accompanying condensed consolidated balance sheet as of the end of fiscal 2009 is derived from the Company’s audited financial statements.
The Company’s reporting period is a fifty-two or fifty-three-week period (“fiscal year”), ending annually on the Saturday nearest June 30. Operating results for the second quarter and the first half of fiscal 2010 are not necessarily indicative of the annual results that may be expected for fiscal 2010. For further information, refer to the consolidated financial statements and notes thereto included in “Item 8 — Financial Statements and Supplementary Data.” of Part II of the 2009 Form 10-K.
In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Standards”.This Statement established theFASB Accounting Standards Codification™ (“Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. This Codification was adopted by the Company on June 28, 2009 and all technical accounting standard citations herein are based on the Codification.
2. | | Short-Term Investments and Fair Value |
At January 2, 2010, as part of its cash management and investment program, the Company maintained a portfolio of $21,976 in short-term investments, comprised of $16,000 of marketable investment securities in variable rate demand notes and $5,976 in other short-term investments. The marketable investment securities are classified as available-for-sale and are carried at cost, which approximates fair value based on level two assumptions as described below and used in the Company’s valuation methodology. The other short-term investments are classified as held-to-maturity securities and include several corporate bonds, which have individual maturity dates ranging from February 2010 to December 2010.
Financial Accounting Standards Board Accounting Standard Codification (“FASB ASC”) 820-10 (for the overall Subtopic of topic 820 on fair value measurements and disclosures) provides guidance on fair value measurements of financial assets and financial liabilities and for fair value measurements of nonfinancial items that are recognized or disclosed at fair value in the financial statements on a recurring basis. This accounting standard provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:
| • | | Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. |
| • | | Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. |
| • | | Level 3 inputs are unobservable inputs for the asset or liability. |
The level in the fair value hierarchy within which a fair measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement in its entirety.
7
R.G. BARRY CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
for the Second Quarter and the First Half of Fiscal 2010 and the Second Quarter and the First Half of Fiscal 2009
(dollar amounts in thousands, except per share data and share data)
The following table presents assets and liabilities that are measured at fair value on a recurring basis (including items that are required to be measured at fair value and items for which the fair value option has been elected) at January 2, 2010:
| | | | | | | | | | | | | | | | |
| | | | | | Fair Value Measurements at Reporting Date Using: | |
| | | | | | Quoted Prices | | | | | | | |
| | | | | | in Active | | | Significant | | | | |
| | | | | | Markets for | | | Other | | | Significant | |
| | | | | | Identical | | | Observable | | | Unobservable | |
| | January 2, | | | Assets | | | Inputs | | | Inputs | |
| | 2010 | | | (Level 1) | | | (Level 2) | | | (Level 3) | |
Assets: | | | | | | | | | | | | | | | | |
Available-for-sale securities | | $ | 16,000 | | | | — | | | $ | 16,000 | | | | — | |
| | | | | | | | | | | | |
Total | | $ | 16,000 | | | | — | | | $ | 16,000 | | | | — | |
| | | | | | | | | | | | |
During fiscal 2009 or during the first half of fiscal 2010, the Company made no election to recognize or disclose in the financial statements on a nonrecurring basis any nonfinancial asset or nonfinancial liability under the provisions of FASB ASC 820-10 (for the overall Subtopic of topic 820).
3. | | Stock-Based Compensation |
FASB ASC 718 (for the Stock Compensation topic) requires the recognition of the fair value of stock-based compensation in the results of operations. The Company recognizes stock-based compensation expense over the requisite service period of the individual grantees, which generally equals the vesting period. The 2005 Long-Term Incentive Plan (the “2005 Plan”) was amended and restated by the Company to incorporate certain changes required by Section 409A of the Internal Revenue Code of 1986,as amended (the “Internal Revenue Code”). In addition, by shareholder action at the 2009 Annual Meeting of Shareholders, this plan was amended to provide for an additional 500,000 common shares to be made available under the plan (the “Amended 2005 Plan”). The Amended 2005 Plan is the only equity-based compensation plan under which future awards may be made to employees of the Company and non-employee directors of R.G. Barry Corporation other than the employee stock purchase plan in which employees of the Company may participate. The Company’s previous equity-based compensation plans remained in effect with respect to the then outstanding awards following the original approval of the 2005 Plan.
The Amended 2005 Plan provides for the granting of nonqualified stock options (“NQs”), incentive stock options (“ISOs”) that qualify under Section 422 of the Internal Revenue Code, stock appreciation rights, restricted stock, restricted stock units (“RSUs”), stock grants, stock units and cash awards, each as defined in the Amended 2005 Plan. Grants of restricted stock, RSUs, stock units and cash awards may also be performance-based awards, as defined in the Amended 2005 Plan.
Under the provisions of FASB ASC 718, the Company recorded, as part of selling, general and administrative expenses, $254 and $232 of stock-based compensation expense for the second quarter of fiscal 2010 and second quarter of fiscal 2009, respectively. The Company recognized stock-based compensation expense of $507 and $431 for the first half of fiscal 2010 and the first half of fiscal 2009, respectively. Where stock-based compensation is granted in the form of RSUs, the fair value for such grants is based on the market price of the Company’s common shares at the date of grant and is adjusted for projected forfeitures anticipated with respect to such awards. The Company did not grant any stock options during the first half of fiscal 2010 or the first half of fiscal 2009. The Company did not grant any RSUs during the second quarter of fiscal 2010 and granted 51,200 RSUs during the second quarter of fiscal 2009. The Company granted 121,200 and 139,800 RSUs to certain members of management during the first half of fiscal 2010 and the first half of fiscal 2009, respectively.
The Company has issued RSU-based grants in recent years as opposed to stock option grants. Total compensation cost of stock options granted but not yet vested as of January 2, 2010, was approximately $8, which will be recognized over a weighted-average period of approximately one to two years.
8
R.G. BARRY CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
for the Second Quarter and the First Half of Fiscal 2010 and the Second Quarter and the First Half of Fiscal 2009
(dollar amounts in thousands, except per share data and share data)
During the second quarter and the first half of fiscal 2010, the Company recognized gross excess tax benefits of $1,107 as additional paid-in-capital under the provisions of FASB ASC 718. These excess tax benefits were created in the periods from fiscal 2006 through the first half of fiscal 2010 based primarily on the exercise of nonqualified stock options and the vesting of restricted stock units during this period. Under FASB ASC 718, those excess tax benefits could not be recognized as an addition to paid-in capital until those benefits directly impacted taxes paid. Since the Company had existing net operating tax loss carryforward positions which were used to offset its tax liability, this recognition criteria was not met in the periods prior to the second quarter of fiscal 2010. All remaining net operating tax loss carryforward positions were fully used during the second quarter of fiscal 2010, and accordingly, the accumulated excess tax benefits were recognized as an addition to paid-in capital.
Plan activity with respect to stock options for the first half of fiscal 2010 was as follows:
| | | | | | | | | | | | |
| | Number of | | | Number of | | | Weighted- | |
| | common shares | | | common shares | | | Average | |
| | subject to ISOs | | | subject to NQs | | | exercise price | |
Outstanding at June 27, 2009 | | | 117,000 | | | | 146,200 | | | $ | 5.21 | |
Granted | | | — | | | | — | | | | — | |
Exercised | | | (32,000 | ) | | | (10,000 | ) | | | 3.79 | |
Expired/Cancelled | | | — | | | | — | | | | — | |
| | | | | | | | | |
Outstanding at January 2, 2010 | | | 85,000 | | | | 136,200 | | | $ | 5.41 | |
| | | | | | | | | |
Options exercisable at January 2, 2010 | | | 83,000 | | | | 136,200 | | | | | |
| | | | | | | | | | |
The following is a summary of the status of the Company’s RSUs as of January 2, 2010 and activity during the first half of fiscal 2010:
| | | | | | | | |
| | Number of | | | | |
| | common shares | | | Grant Date | |
| | underlying RSUs | | | Fair Value | |
Nonvested at June 27, 2009 | | | 319,500 | | | $ | 6.86 | |
Granted | | | 121,200 | | | | 7.61 | |
Vested | | | (59,000 | ) | | | 7.16 | |
Forfeited/Cancelled | | | (23,900 | ) | | | 7.21 | |
| | | | | | |
Nonvested at January 2, 2010 | | | 357,800 | | | $ | 7.04 | |
| | | | | | |
Total compensation cost of RSUs granted, but not yet vested, as of January 2, 2010 was approximately $2,133. This amount is expected to be recognized over a weighted-average period of approximately two to three years.
The aggregate intrinsic value, as defined in FASB ASC 718 (for the Stock Compensation topic), of stock options exercised and RSUs vested during the first half of fiscal 2010 and the first half of fiscal 2009 was $505 and $274, respectively.
Income tax expense for the second quarter and the first half of fiscal 2010 and the second quarter and the first half of fiscal 2009 differed from the amounts computed by applying the U.S. Federal income tax rate of 34% to earnings before income taxes as a result of the following:
| | | | | | | | | | | | | | | | |
| | Second Quarter | | | First Half | |
| | Fiscal 2010 | | | Fiscal 2009 | | | Fiscal 2010 | | | Fiscal 2009 | |
Computed “expected” tax expense | | $ | 4,492 | | | $ | 3,299 | | | $ | 5,727 | | | $ | 3,883 | |
State income tax expense, net of federal income tax benefit | | | 426 | | | | 314 | | | | 542 | | | | 369 | |
Other, net | | | 69 | | | | 40 | | | | 84 | | | | 13 | |
| | | | | | | | | | | | |
Total expense | | $ | 4,987 | | | $ | 3,653 | | | $ | 6,353 | | | $ | 4,265 | |
| | | | | | | | | | | | |
FASB ASC 740-10 (for the overall Subtopic of topic 740 on income taxes) prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. During the second quarter and the first half of fiscal 2010, there were no changes in evaluations made under FASB ASC 740-10 (for the overall Subtopic of topic 740 on income taxes). There were no reserves for uncertain tax positions existing at the end of the second quarter of fiscal 2010 or the end of the fiscal 2009.
9
R.G. BARRY CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
for the Second Quarter and the First Half of Fiscal 2010 and the Second Quarter and the First Half of Fiscal 2009
(dollar amounts in thousands, except per share data and share data)
5. | | Net Earnings Per Common Share |
Basic net earnings per common share is based on the weighted-average number of common shares outstanding during each reporting period. Diluted net earnings per common share is based on the weighted-average number of common shares outstanding during each reporting period, plus, when their effect is dilutive, potential common shares consisting of certain unexercised stock options convertible into common shares and unvested RSUs.
The following table presents a reconciliation of the denominator for each period in computing basic and diluted earnings per common share, with common shares in the table represented in thousands:
| | | | | | | | | | | | | | | | |
| | Second Quarter | | | First Half | |
| | Fiscal 2010 | | | Fiscal 2009 | | | Fiscal 2010 | | | Fiscal 2009 | |
Numerator: | | | | | | | | | | | | | | | | |
Net earnings | | $ | 8,226 | | | $ | 6,050 | | | $ | 10,490 | | | $ | 7,155 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Denominator: | | | | | | | | | | | | | | | | |
Weighted-average common shares outstanding | | | 10,857 | | | | 10,609 | | | | 10,836 | | | | 10,602 | |
Effect of potentially dilutive securities: stock options and RSUs | | | 185 | | | | 103 | | | | 145 | | | | 115 | |
| | | | | | | | | | | | |
Weighted-average common shares outstanding, assuming dilution | | | 11,042 | | | | 10,712 | | | | 10,981 | | | | 10,717 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Basic net earnings per common share | | $ | 0.76 | | | $ | 0.57 | | | $ | 0.97 | | | $ | 0.67 | |
| | | | | | | | | | | | |
Diluted net earnings per common share | | $ | 0.74 | | | $ | 0.56 | | | $ | 0.96 | | | $ | 0.67 | |
| | | | | | | | | | | | |
The Company excludes stock options to purchase common shares from the calculation of diluted earnings per common share when they are anti-dilutive, measured using the average market price of the underlying common shares during the reporting periods. Excluded stock options are shown below:
| | | | | | | | | | | | | | | | |
| | Second Quarter | | | First Half | |
| | Fiscal 2010 | | | Fiscal 2009 | | | Fiscal 2010 | | | Fiscal 2009 | |
Stock options excluded from the calculation of diluted earnings per common share | | | — | | | | 162 | | | | — | | | | 162 | |
| | | | | | | | | | | | |
Inventory by category consisted of the following:
| | | | | | | | |
| | January 2, 2010 | | | June 27, 2009 | |
Raw materials | | $ | 158 | | | $ | 90 | |
Finished goods | | | 16,681 | | | | 8,409 | |
| | | | | | |
Total inventory | | $ | 16,839 | | | $ | 8,499 | |
| | | | | | |
Inventory write-downs, recognized as a part of cost of sales, were $519 and $253 for the second quarter of fiscal 2010 and second quarter of fiscal 2009, respectively, and $654 and $350 for the first half of fiscal 2010 and first half of fiscal 2009, respectively.
7. | | Employee Retirement Plans |
The Company used a measurement date of June 27, 2009 to make the required expense computations for the second quarter and first half of fiscal 2010 and a measurement date of March 31, 2008 for the second quarter and first half of fiscal 2009.
The Company expects to make payments in the aggregate of $2,559 in fiscal 2010 to the funded, qualified associates’ retirement plan and meet its current year payment obligation on the unfunded, nonqualified supplemental retirement plans. Through January 2, 2010, payments of approximately $329 were made into the funded, qualified associates’ retirement plan and payments of approximately $1,083 were made to participants in the unfunded, nonqualified supplemental retirement plans. The $1,083 paid to participants in the nonqualified supplemental retirement plans included a lump sum payment of $748 made to a former executive upon his retirement as full settlement of his nonqualified supplemental retirement plan benefit. Based on interest rates existing at the date of settlement during the first quarter of fiscal 2010, the Company recognized a settlement loss of $185 in pension expense and an additional other comprehensive loss adjustment, net of tax, of $99 based on a re-measurement of remaining nonqualified supplemental retirement plan liabilities.
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R.G. BARRY CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
for the Second Quarter and the First Half of Fiscal 2010 and the Second Quarter and the First Half of Fiscal 2009
(dollar amounts in thousands, except per share data and share data)
The components of net periodic benefit cost for the retirement plans in the aggregate during each period noted below consisted of the following:
| | | | | | | | | | | | | | | | |
| | Second Quarter | | | First Half | |
| | Fiscal 2010 | | | Fiscal 2009 | | | Fiscal 2010 | | | Fiscal 2009 | |
Service cost | | $ | — | | | $ | 11 | | | $ | 9 | | | $ | 22 | |
Interest cost | | | 571 | | | | 605 | | | | 1,143 | | | | 1,210 | |
Expected return on plan assets | | | (493 | ) | | | (551 | ) | | | (986 | ) | | | (1,102 | ) |
Net amortization | | | 173 | | | | 71 | | | | 346 | | | | 142 | |
Settlement loss | | | — | | | | — | | | | 185 | | | | — | |
| | | | | | | | | | | | |
Total pension expense | | $ | 251 | | | $ | 136 | | | $ | 697 | | | $ | 272 | |
| | | | | | | | | | | | |
Comprehensive income, which is reflected as a component of shareholders’ equity, includes net earnings and pension related adjustments as follows:
| | | | | | | | | | | | | | | | |
| | Second Quarter | | | First Half | |
| | Fiscal 2010 | | | Fiscal 2009 | | | Fiscal 2010 | | | Fiscal 2009 | |
Net earnings | | $ | 8,226 | | | $ | 6,050 | | | $ | 10,490 | | | $ | 7,155 | |
Pension related adjustments, net of tax | | | — | | | | — | | | | (99 | ) | | | — | |
| | | | | | | | | | | | |
Total comprehensive income | | $ | 8,226 | | | $ | 6,050 | | | $ | 10,391 | | | $ | 7,155 | |
| | | | | | | | | | | | |
Accumulated other comprehensive loss as of January 2, 2010 and June 27, 2009 was $11,148 and $11,049, respectively, and relates to the Company’s qualified associates’ retirement plan and nonqualified supplemental retirement plans.
9. | | Related Party Transactions |
Under an existing agreement, the Company is obligated for up to two years after the death of the Company’s non-executive chairman (“chairman”) to purchase, if the estate elects to sell, up to $4,000 of the Company’s common shares, at their then fair market value. To fund its potential obligation to purchase such common shares, the Company maintains two insurance policies on the life of the chairman. The cumulative cash surrender value of the policies approximates $2,677, which is included in other assets in the accompanying Condensed Consolidated Balance Sheets. Effective in March 2004 and continuing through the end of the second quarter of fiscal 2010, the Company has borrowed against the cash surrender value of one of these policies. For a period of 24 months following the chairman’s death, the Company has a right of first refusal to purchase any common shares owned by the chairman at the time of his death if his estate elects to sell such common shares and has the right to purchase such common shares on the same terms and conditions as the estate proposes to sell such common shares to a third party.
10. | | Contingent Liabilities |
The Company is from time to time involved in claims and litigation considered normal in the ordinary course of its business. While it is not feasible to predict the ultimate outcome, in the opinion of management, the resolution of such matters is not expected to have a material adverse effect on the Company’s annual financial position, statements of income and cash flows.
The Company monitored and evaluated any subsequent events for footnote disclosures or adjustments required in its condensed consolidated financial statements for the second quarter and the first half of fiscal 2010 through the date on which its condensed consolidated financial statements for the second quarter and the first half of fiscal 2010 were issued filed as part of this Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission.
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R.G. BARRY CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
for the Second Quarter and the First Half of Fiscal 2010 and the Second Quarter and the First Half of Fiscal 2009
(dollar amounts in thousands, except per share data and share data)
12. | | Recently Issued Accounting Standards |
In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Standards”.This Statement identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP in the United States (the “GAAP hierarchy”). This Statement establishes theFASB Accounting Standards Codification™ (“Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. This Codification standard (FASB ASC Topic 105 on generally accepted accounted principles) was adopted on June 28, 2009. This change impacted disclosure references only and had no effect on the Company’s financial position or its results of operations.
In December 2008, the FASB issued a modification to FASB ASC 715-20-50-2 (for paragraph 2 of section 715-20-50 on disclosures for defined pension benefit plans).This modification expands the guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. FASB ASC 715-20-50-2 was adopted on June 28, 2009 and will impact annual disclosures provided at the end of fiscal 2010. No application was required for any earlier periods presented for comparative purposes. Since FASB ASC 715-20-50-2 deals only with disclosure guidance, this modification will not have an effect on the Company’s financial position or its results of operations.
..
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R.G. BARRY CORPORATION AND SUBSIDIARIES
| | |
ITEM 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Introduction
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide investors and others with information we believe is necessary to understand the Company’s financial condition, changes in financial condition, results of operations and cash flows. Our MD&A should be read in conjunction with the Company’s Condensed Consolidated Financial Statements and related Notes to Condensed Consolidated Financial Statements and other information included in this Quarterly Report on Form 10-Q. This Quarterly Report on Form 10-Q should also be read in conjunction with our 2009 Form 10-K.
Unless the context otherwise requires, references in this MD&A to “our”, “us”, “we” or the “Company” refer to R.G. Barry Corporation and its consolidated subsidiaries when applicable.
Results of Operations
During the second quarter of fiscal 2010, net sales were $55.6 million, representing a $6.7 million or 13.8% increase over the comparable quarter in fiscal 2009. The quarter-on-quarter increase in net sales primarily reflected increased shipments to customers in the off price and mass merchandising channels. The increase in shipments to our customers in the off-price channel resulted from specific actions to develop and market product for customers in that channel as part of our strategy to expand distribution. The second quarter of fiscal 2010 contained one more week than the second quarter of fiscal 2009 and this additional week did not have a significant effect on sales reported for the second quarter and the first half of fiscal 2010 as compared to sales reported for the second quarter and the first half of fiscal 2009.
For the first half of fiscal 2010, net sales were $85.0 million, representing a $10.5 million, or 14.2%, increase over the comparable first half of fiscal 2009. This net sales increase reflected primarily increased shipments in the mass merchandising and off price channels, as noted also for the second quarter above, with all other channels reflecting flat to nominal net sales increases over the same period in the prior year.
Gross profit for the second quarter of fiscal 2010 was $24.0 million, or 43.1% of net sales, compared to $19.3 million, or 39.5% of net sales for the second quarter in fiscal 2009. Gross profit for the first half of fiscal 2010 was $36.3 million, or 42.6% of net sales, compared to $29.4 million, or 39.5% of net sales, for the first half in fiscal 2009. The increase in gross profit dollars and percentage points as a percent of net sales reflected both increased shipments for the second quarter and first half of fiscal 2010 over the same prior year periods and the impact of lower product costs due primarily to supplier capacity and reduction of oil prices in the period in which we placed our fall season orders versus the same period in the prior year.
Selling, general and administrative (“SG&A”) expenses were 19.4% and 19.8% as a percent of net sales for the second quarter of fiscal 2010 and second quarter of fiscal 2009, respectively. The quarter-on-quarter net increase of $1.1 million reflected primarily the net impact of increased advertising for our Dearfoams® brand and increased payroll expenses during the period offset, in part, by lower bad debt and other operating expenses.
SG&A expenses were 23.0% and 24.5% as a percent of net sales for the first half of fiscal 2010 and first half of fiscal 2009, respectively. The period-on-period net increase of $1.3 million reflected primarily the net impact of increased advertising for our Dearfoams® brand and increased payroll expenses during the period, offset, in part, by lower bad debt and other operating expenses.
For the second quarter and first half of fiscal 2010, we recorded a reduction in net interest income of $60 and $56, respectively, as compared to the same periods in the prior year. This decrease in net interest income resulted from the lower interest rates being available and paid with respect to our investment portfolio during the second quarter and the first half of fiscal 2010 versus the comparable periods in the prior year.
During the second quarter of fiscal 2010 and the second quarter of fiscal 2009, we reported income tax expense of $5.0 million and $3.7 million, respectively. The tax rates for the second quarter of fiscal 2010 and second quarter of fiscal 2009 were 37.7% and 37.6%, respectively. During the first half of fiscal 2010 and the first half of fiscal 2009, we reported income tax expense of $6.4 million and $4.3 million, respectively. The tax rates for the first half of fiscal 2010 and first half of fiscal 2009 were 37.7% and 37.3%, respectively.
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Based on the results of operations noted above, we reported net earnings of $8.2 million or $0.74 per diluted common share for the second quarter of fiscal 2010 and approximately $6.1 million or $0.56 per diluted common share for the second quarter of fiscal 2009.
Based on the results of operations noted above, we reported net earnings of $10.5 million or $0.96 per diluted common share for the first half of fiscal 2010 and approximately $7.2 million or $0.67 per diluted common share for the first half of fiscal 2009.
Seasonality
Although our various product lines are sold on a year-round basis, the demands for specific products or styles are highly seasonal. For example, the demand for gift-oriented slipper products is higher in the fall holiday season than it is in the spring and summer seasons. As the timing of product shipments and other events affecting the retail business may vary and shift, results for any particular quarter may not be indicative of results for the full year.
Looking ahead to beyond fiscal 2010
Looking beyond fiscal 2010, our strategies continue to center on growing market share in existing channels; opening new retail opportunities; expanding our business internationally; and growing through appropriate acquisitions. We have demonstrated that for 14 consecutive quarters our model can perform at or above levels consistent with top quartile performance, and we remain confident that we can continue to deliver top-quartile performance that drives growth and long-term shareholder value.
Liquidity and Capital Resources
Our only source of revenue and our primary source of cash flow come from our operating activities. When cash inflows are less than cash outflows, we also have access to funds under our Bank Facility, as described further below in this section, subject to its terms. We may seek to finance future capital investment programs through various methods, including, but not limited to, cash flow from operations and borrowings under our current or additional credit facilities.
Our liquidity requirements arise from the funding of our working capital needs, which include primarily inventory, other operating expenses and accounts receivable, funding of capital expenditures, payment of income tax and repayment of our indebtedness. Generally, most of our product purchases from third-party manufacturers are acquired on an open account basis, and to a lesser extent, through trade letters of credit. Such trade letters of credit are drawn against our Bank Facility at the time of shipment of the products and reduce the amount available under our Bank Facility when issued.
Cash and cash equivalents on hand were approximately $15.4 million at January 2, 2010 compared to $5.2 million at December 27, 2008 and $14.3 million at June 27, 2009. Short-term investments were approximately $22.0 million at January 2, 2010, $22.7 million at December 27, 2008 and $25.0 million at June 27, 2009. At the end of the second quarter of fiscal 2010, we carried a portfolio of $22.0 million in short-term investments, including $16.0 million of marketable investment securities consisting of variable rate demand notes and $6.0 million of other short-term investments. The marketable investment securities are classified as available-for-sale securities. These marketable investment securities are carried at cost, which approximates fair value based on FASB ASC 820-10 (for the overall Subtopic of topic 820 on fair value measurements and disclosures) level two input assumptions used in our valuation methodology. The other short-term investments are classified as held-to-maturity securities and include several corporate bonds. These other short-term investments have individual maturity dates ranging from February 2010 to December 2010.
Operating Activities
During the first half of fiscal 2010 and the comparable period of fiscal 2009, our profitable operations used cash of approximately $2.0 million and provided cash of $2.8 million, respectively. The operating cash flows during these periods primarily reflected the impact of timing in our shipments and inventory purchased in each of those periods as well as the timing of sales and collections in accounts receivable. During all of fiscal 2009 and the first half of fiscal 2010, we funded our operations entirely by using our cash flow from operations.
Our working capital ratio, which is calculated by dividing total current assets by total current liabilities, was 5.0:1 at January 2, 2010, 6.7:1 at December 27, 2008 and 6.2:1 at June 27, 2009. The decrease in this ratio from June 27, 2009 to January 2, 2010 primarily reflected the impact of increases in accounts receivable, inventory and current liabilities due to the seasonality of our business. The decrease in the ratio from December 27, 2008 to January 2, 2010 primarily reflected higher levels of receivables, inventory and current liabilities due to the timing and level of customer shipments, the timing of inventory purchases and related payments.
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We anticipate that we will continue to fund our operations in the future by using our internal cash reserves. At the end of the first half fiscal 2010, we had fully utilized all net operating loss tax carry forward positions carried over from the end of fiscal 2009 and have begun to pay U.S. Federal income taxes.
Changes in the primary components of our working capital accounts for the first half of fiscal 2010 and the first half of fiscal 2009, respectively, were as follows:
| • | | Net accounts receivable increased by $11.9 million and $4.4 million in the first half of fiscal 2010 and the first half of fiscal 2009, respectively. The change in net accounts receivable during these reporting periods primarily reflected the timing of and volume of shipments of finished goods inventory to our customers consistent with the seasonality of our business, and the timing of cash collections and customer deductions for promotions and other allowances. |
| • | | Net inventories increased by $8.3 million and $4.1 million during the first half of fiscal 2010 and 2009 respectively. The increases reflected the net effect of the timing of purchases of finished goods from third-party manufacturers and shipments to our customers in the first half of fiscal 2010 and the first half of fiscal 2009 in line with the seasonality of our business. |
| • | | Accounts payable increased by $3.5 million and $495 thousand during the first half of fiscal 2010 and 2009, respectively. These changes were due primarily to the timing of purchases and payment for finished goods inventory in line with the seasonality of our business. |
| • | | Accrued expenses increased by $2.2 million and decreased by $1.2 million during the first half of fiscal 2010 and 2009, respectively. The increase in the change in accrued expenses in the first half of fiscal 2010 compared to decrease in the first half of fiscal 2009 is primarily due to the increase in income tax accruals at the end of the second quarter in fiscal 2010, since we have full utilized all of our net operating tax loss carry forward positions. |
Investing Activities
During the first half of fiscal 2010 and the first half of fiscal 2009, our investing activities provided $2.4 million and used $11.8 million in cash, respectively. During the first half of fiscal 2010, our investing activities involved primarily the liquidation of $3.0 million in short-term investments, offset by $555 thousand in capital expenditures. The cash provided from investment activities is primarily due to the liquidation of short-term investments during the first half of fiscal 2010 and reflects the net impact of holding more cash and cash equivalents versus short-term investments as compared to the cash and cash equivalents versus short-term investments position at the end of the first half of fiscal 2009. This shift reflects the availability and types of investments in which funds could be invested in fiscal 2010 to date versus the same period in fiscal 2009.
Financing activities
During the first half of fiscal 2010, financing activities provided $681 thousand in cash. This financing cash inflow included: (i) $1.1 million in tax benefits associated with stock compensation; (ii) $159 thousand in proceeds from stock options exercised by employees during the period, offset in part by (iii) $541 thousand in dividend payments consistent with our current policy and (iv) a $44 thousand payment made on our outstanding debt obligations.
2010 Liquidity
We believe our sources of cash and cash equivalents, short-term investments, cash from operations and funds available under our Bank Facility, as described below, will be adequate to fund our operations and capital expenditures through the remainder of fiscal 2010.
15
Bank Facility
Our Company is party to an unsecured credit facility with The Huntington National Bank (“Huntington”). The original facility dated March 29, 2007 was modified on June 26, 2009. Under this second modification of the Bank Facility, Huntington is obligated to advance us funds for a period of two and a half years ending with December 31, 2011 up to the following amounts:
| | | | | | | | |
| | July to December | | | January to June | |
Fiscal 2010 | | $12 million | | $5 million |
Fiscal 2011 | | $10 million | | $5 million |
Fiscal 2012 | | $8 million | | | | |
The Bank Facility is subject to a one-year renewal option after December 31, 2011. The terms of the Bank Facility require the Company to satisfy certain financial covenants including (a) satisfying a minimum fixed charge coverage ratio of not less than 1.25 to 1.0 which is calculated on a trailing 12-month basis, and (b) maintaining a consolidated net worth of not less than $44 million, increased annually by 50% of the Company’ consolidated net income after June 28, 2009. The Bank Facility must be rested for 30 consecutive days beginning in February of each year. Also, the borrowing under the Bank Facility may not exceed 80% of the Company’s eligible accounts receivable plus 50% of its eligible inventory at any one time. As of January 2, 2010, we were in compliance with these financial covenants.
The Bank Facility provides that Huntington will issue on behalf of the Company letters of credit with a maximum aggregate value of up to $1.5 million. The aggregate dollar amount of outstanding letters of credit is deducted from the available balance under the Bank Facility. At January 2, 2010, we had $11.1 million available under the Bank Facility, which was reduced by the aggregate amount of $900 thousand in letters of credit outstanding.
The interest rate on the Bank Facility is a variable rate equal to LIBOR plus 2.75%. The applicable interest rate on the Bank Facility at January 2, 2010 was 2.98%, assuming a 30-day LIBOR rate of .23% on that date. Additionally, the modified agreement requires us to pay a quarterly unused line fee at the rate of 3/8% of the average unused Bank Facility balance. During the first half of fiscal 2010, we did not use the Bank Facility and incurred unused line fees of approximately $13 thousand. We incurred a commitment fee of approximately $43 thousand on the loan modification effective as of June 26, 2009 and $9 thousand of this fee was amortized as expense during the first half of fiscal 2010.
Other Long-Term Indebtedness and Current Installments of Long-Term Debt
As of January 2, 2010, we reported approximately $94 thousand as current installments of long-term debt, which represented the current portion of our obligation associated with the agreement originally entered into with the mother of our chairman as disclosed in Note (15) of the Notes to Consolidated Financial Statements included in our 2009 Form 10-K. At January 2, 2010, we reported approximately $49 thousand as consolidated long-term debt, all of which was related to the obligation under this agreement.
Contractual Obligations
There have been no material changes to “Contractual Obligations” since the end of fiscal 2009, other than routine payments. For more detail on contractual obligations, please refer to the discussion under the caption “Liquidity and Capital Resources — Other Matters Impacting Liquidity and Capital Resources-Contractual Obligations” in “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations” of Part II of our 2009 Form 10-K.
Critical Accounting Policies and Use of Significant Estimates
The preparation of financial statements in accordance with U.S. GAAP requires that we make certain estimates. These estimates can affect reported revenues, expenses and results of operations, as well as the reported values of certain assets and liabilities. We make these estimates after gathering as much information from as many resources, both internal and external, as are available at the time. After reasonably assessing the conditions that exist at the time, we make these estimates and prepare consolidated financial statements accordingly. These estimates are made in a consistent manner from period to period, based upon historical trends and conditions and after review and analysis of current events and circumstances. We believe these estimates reasonably reflect the current assessment of the financial impact of events whose actual outcomes will not become known to us with certainty until sometime in the future.
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The following discussion of critical accounting policies is intended to bring to the attention of readers those accounting policies that management believes are critical to the Company’s consolidated financial statements and other financial disclosures. It is not intended to be a comprehensive list of all of our significant accounting policies that are more fully described in Notes (1) (a) through (u) of the Notes to Consolidated Financial Statements in “Item 8 — Financial Statements and Supplementary Data.” of Part II of our 2009 Form 10-K.
A summary of the critical accounting policies requiring management estimates follows:
| a) | | We recognize revenue when the following criteria are met: |
| • | | goods are shipped from our warehouses and other third-party distribution locations, at which point our customers take ownership and assume risk of loss; |
| • | | collection of the relevant receivable is probable; |
| • | | persuasive evidence of an arrangement exists; and |
| • | | the sales price is fixed or determinable. |
| | | In certain circumstances, we sell products to customers under arrangements which provide for return privileges, discounts, promotions and other sales incentives. At the time we recognize revenue, we reduce our measurement of revenue by an estimate of the potential future returns and allowable retailer promotions and incentives, and recognize a corresponding reduction in reported trade accounts receivable. These estimates have traditionally been, and continue to be, sensitive to and dependent on a variety of factors including, but not limited to, quantities sold to our customers and the related selling and marketing support programs; channels of distribution; sell-through rates at retail; the acceptance of the styling of our products by consumers; the overall economic environment; consumer confidence leading towards and through the holiday selling season; and other related factors. During the second quarter and first half of fiscal 2010, we recognized favorable reserve adjustments that benefited our earnings before income tax by $387 thousand related to our customer incentive reserves of $1.2 million established at June 27, 2009. During the second quarter and first half of fiscal 2009, we recognized favorable reserve adjustments that benefited our earnings before income tax by $313 thousand related to our customer incentive reserves of $1.5 million established at June 28, 2008. |
| | | We monitor the creditworthiness of our customers and the related collection of monies owed to us. In circumstances where we become aware of a specific customer’s inability to meet its financial obligations, a specific reserve for bad debts is taken as a reduction to accounts receivable to reduce the net recognized receivable to the amount reasonably expected to be collected. For all other customers, we recognize estimated reserves for bad debts based on our historical collection experience, the financial condition of our customers, an evaluation of current economic conditions and anticipated trends, each of which are subjective and require certain assumptions. Actual charges for uncollectible amounts have not differed materially from our estimates in prior periods. |
| b) | | We value inventories using the lower of cost or market, based upon the first-in, first-out (“FIFO”) costing method. We evaluate our inventories for any reduction in realizable value in light of the prior selling season, the overall economic environment and our expectations for the upcoming selling seasons, and we record the appropriate write-downs based on this evaluation. During the second quarter and the first half of fiscal 2010, we recognized $519 thousand and $654 thousand, respectively, in inventory write-downs as part of cost of sales as compared to $253 thousand and $350 thousand, respectively, recognized as inventory write-downs as part of cost of sales in the second quarter and the first half of fiscal 2009, respectively. |
| c) | | We make an assessment of the amount of income taxes that will become currently payable or recoverable for the just concluded period, and the deferred tax costs or benefits that will become realizable for income tax purposes in the future, as a consequence of differences between results of operations as reported in conformity with U.S. GAAP, and the requirements of the income tax codes existing in the various jurisdictions where we operate. In evaluating the future benefits of deferred tax assets, we examine our capacity for generating future taxable profit. In addition, we make ongoing assessments of income tax exposures that may arise at the Federal, state or local tax levels. As a result of these evaluations, any exposure deemed more likely than not will be quantified and accrued as tax expense during the period and reported in a reserve for uncertain tax positions. Any identified exposures will be subjected to continuing assessment and estimates will be revised accordingly as information becomes available to us. We had no tax reserve for uncertain tax positions at the end of the second quarter of fiscal 2010, the end of the second quarter of fiscal 2009, or the end of fiscal 2009 at either the state or Federal tax levels. |
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| d) | | We establish assumptions to measure our pension liabilities and project the long-term rate of return expected on the invested pension assets in our qualified associates’ retirement plan. Changes in assumptions, which may be caused by conditions in the debt and equity markets, changes in asset mix, and plan experience, could have a material effect on our pension obligations and expenses, and can affect our net income, assets, and shareholders’ equity. Changes in assumptions may also result in voluntary or mandatory requirements to make additional contributions to our qualified associates’ retirement plan. These assumptions are reviewed and reset as appropriate at the pension measurement date commensurate with the end of our fiscal year end, and we monitor these assumptions over the course of the fiscal year. |
| e) | | There are various other accounting policies that also require management’s judgment. For an additional discussion of all of our significant accounting policies, please see Notes (1) (a) through (u) of the Notes to Consolidated Financial Statements in “Item 8 — Financial Statements and Supplementary Data.” of Part II of our 2009 Form 10-K. |
Actual results may vary from these estimates as a consequence of activities after the period-end estimates have been made. These subsequent activities will have either a positive or negative impact upon the results of operations in a period subsequent to the period when we originally made the estimate.
Recently Issued Accounting Standards
See “Note (12). Recently Issued Accounting Standards” of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for a description of recent accounting pronouncements.
| | |
ITEM 3 — Quantitative and Qualitative Disclosures About Market Risk |
Market Risk Sensitive Instruments — Foreign Currency
During all of fiscal 2009 and through the first half of fiscal 2010, substantially all of our sales and all purchases were denominated in U.S. Dollars. Accordingly, the Company did not have any foreign currency risk during the first half of fiscal 2010.
Market Risk Sensitive Instruments — Interest Rates
Our principal market risk exposure relates to the impact of changes in short-term interest rates that may result from the floating rate nature of our Bank Facility. At January 2, 2010, we had no borrowings outstanding under the Bank Facility. Based on our projected future funding needs for the remainder of fiscal 2010, we do not expect any significant borrowings under our Bank Facility to fund our current operations. We typically do not hedge our exposure to floating interest rates.
Interest rate changes impact the level of earnings from short-term investments; changes in long-term interest rates also affect the measurement of pension liabilities performed on an annual basis.
| | |
ITEM 4 — Controls and Procedures |
Not Applicable.
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| | |
ITEM 4T — Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
With the participation of the President and Chief Executive Officer (the principal executive officer) and the Senior Vice President-Finance and Chief Financial Officer (the principal financial officer), the Company’s management has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the quarterly period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, the Company’s President and Chief Executive Officer and the Company’s Senior Vice President-Finance and Chief Financial Officer have concluded that:
| a. | | information required to be disclosed by the Company in this Quarterly Report on Form 10-Q and the other reports that the Company files or submits under the Exchange Act would be accumulated and communicated to the Company’s management, including its principal executive officer and its principal financial officer, as appropriate to allow timely decisions regarding required disclosure; |
| b. | | information required to be disclosed by the Company in this Quarterly Report on Form 10-Q and the other reports that it files or submits under the Exchange Act would be recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms; and |
| c. | | the Company’s disclosure controls and procedures were effective as of the end of the quarterly period covered by this Quarterly Report on Form 10-Q. |
Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the Company’s quarterly period ended January 2, 2010, 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 |
No response required.
Please see the “Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995 at the front of this Quarterly Report on Form 10-Q and “Item 1A. Risk Factors” of Part I of our 2009 Form 10-K for information regarding risk factors. There have been no material changes from the risk factors previously disclosed in “Item 1A.Risk Factors” of Part I of our 2009 Form 10-K.
| | |
Item 2. | | Unregistered Sales of Equity Securities and Use of Proceeds |
(a) and (b) Not applicable
(c) Neither R.G. Barry Corporation nor any “affiliated purchaser” of R.G. Barry Corporation, as defined in Rule 10b-18 (a) (3) under the Securities Exchange Act of 1934, as amended, purchased any common shares of R.G. Barry Corporation during the quarterly period ended January 2, 2010. The Company does not currently have in effect a publicly announced repurchase plan or program.
| | |
Item 3. | | Defaults Upon Senior Securities |
(a), (b) Not Applicable
| | |
Item 4. | | Submission of Matters to a Vote of Security Holders |
| (a) | | Our 2009 Annual Meeting of Shareholders was held on October 29, 2009. A total of 10,760,878 common shares were outstanding and entitled to vote at the Annual Meeting. At the Annual Meeting, 9,838,789, or 91.4% of the outstanding common shares entitled to vote, were represented in person or by proxy. |
| (b) | | The shareholders elected the following individuals to serve as directors for three-year terms expiring at the 2012 Annual Meeting of Shareholders: |
| | | Janice Page For: 6,519,251 Withheld: 3,319,538 Broker Non-Votes: none |
| | | Harvey Weinberg For: 6,598,189 Withheld: 3,240,600 Broker Non-Votes: none |
| | | Greg Tunney For: 7,560,411 Withheld: 2,278,378 Broker Non-Votes: none |
| | | The shareholders elected the following individual to serve as directors for a two-year term expiring at the 2011 Annual Meeting of Shareholders: |
| | | David Lauer For: 6,517,866 Withheld: 3,320,923 Broker Non-Votes: none |
| | | In addition to the individuals elected at the 2009 Annual Meeting of Shareholders, directors whose terms of office continued after the Annual Meeting are (i) Nicholas DiPaolo, David Nichols, and Edward Stan, whose terms expire at the 2010 Annual Meeting of Shareholders; and (ii) Thomas Von Lehman and Gordon Zacks, whose terms expire at the 2011 Annual Meeting of Shareholders. |
| | | Roger Lautzenhiser, whose term would have expired at the 2011 Annual Meeting of Shareholders, as previously reported, retired from the Board of Directors immediately prior to the 2009 Annual Meeting of Shareholders. |
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| (c) | | In our 2009 Annual Meeting of Shareholders, the shareholders also adopted a proposal to amend the R.G. Barry Corporation Amended and Restated 2005 Long-Term Incentive Plan in order to authorize the issuance of an additional 500,000 common shares under the Plan and to reapprove the material terms of the performance criteria under the Plan as follows: |
|
| | | For: 3,740,119 Against: 893,941 Broker Non-Votes: 6,126,818 |
|
| (d) | | Not Applicable |
| | |
Item 5. | | Other Information |
None.
See Index to Exhibits at page 23.
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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.
| | | | |
| R.G. BARRY CORPORATION Registrant | |
Date: February 10, 2010 | By: | /s/ José G. Ibarra | |
| | José G. Ibarra | |
| | Senior Vice President — Finance and Chief Financial Officer (Principal Financial Officer) (Duly Authorized Officer) | |
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R.G. BARRY CORPORATION
INDEX TO EXHIBITS
| | | | |
Exhibit No. | | Description | | Location |
| | | | |
10.1 | | R.G. Barry 2010 Management Bonus Plan | | Filed herewith |
| | | | |
10.2 | | R.G. Barry Corporation Amended and Restated 2005 Long-Term Incentive Plan (reflects amendments approved by shareholders on October 29, 2009). | | Filed herewith |
| | | | |
31.1 | | Rule 13a-14(a)/15d-14(a) Certifications (Principal Executive Officer) | | Filed herewith |
| | | | |
31.2 | | Rule 13a-14(a)/15d-14(a) Certifications (Principal Financial Officer) | | Filed herewith |
| | | | |
32.1 | | Section 1350 Certifications (Principal Executive Officer and Principal Financial Officer) | | Filed herewith |
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