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 July 6, 2001
OR
{ } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number 000-05083
SAUCONY, INC.
(Exact name of registrant as specified in its charter)
Massachusetts 04-1465840
(State or other jurisdiction of (I.R.S. employer identification number)
incorporation or organization)
13 Centennial Drive, Peabody, MA 01960
(Address, including zip code, of principal executive offices)
978-532-9000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ X ] No [ ]
The shares outstanding of each of the Registrants classes of Common Stock as of
August 13, 2001 are set forth below:
Class Outstanding as of August 13, 2001
----- ---------------------------------
Class A Common Stock-$.33 1/3 Par Value 2,566,747
Class B Common Stock-$.33 1/3 Par Value 3,515,803
---------
6,082,550
SAUCONY, INC. AND SUBSIDIARIES
INDEX
Pages
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements - Unaudited
Condensed Consolidated Balance Sheets as of July 6, 2001
and January 5, 2001...................................................3
Condensed Consolidated Statements of Income for the
thirteen and twenty-six weeks ended July 6, 2001 and June 30, 2000....4
Condensed Consolidated Statements of Cash Flows for the
thirteen and twenty-six weeks ended July 6, 2001 and June 30, 2000....5
Notes to Condensed Consolidated Financial Statements --
July 6, 2001........................................................6-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.....................................10-19
Item 3. Quantitative and Qualitative Disclosures about Market Risk...........19
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders..................20
Item 6. Exhibits and Reports on Form 8-K.....................................20
Signature.....................................................................21
PART I. FINANCIAL INFORMATION
SAUCONY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
(Amounts in thousands)
ASSETS
July 6, January 5,
2001 2001
---- ----
Current assets:
Cash and cash equivalents....................................................$ 8,286 $ 4,738
Accounts receivable.......................................................... 29,003 26,706
Inventories.................................................................. 31,790 38,404
Prepaid expenses and other current assets.................................... 2,917 3,683
--------- ----------
Total current assets....................................................... 71,996 73,531
--------- ----------
Property, plant and equipment, net.............................................. 7,479 7,581
--------- ----------
Other assets.................................................................... 1,922 2,173
--------- ----------
Total assets....................................................................$ 81,397 $ 83,285
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable................................................................$ 2,533 $ 2,596
Current maturities of long-term debt......................................... 82 204
Accounts payable............................................................. 5,854 6,654
Accrued expenses and other current liabilities............................... 4,601 6,465
--------- ----------
Total current liabilities.................................................. 13,070 15,919
--------- ----------
Long-term obligations:
Long-term debt............................................................... 47 34
Deferred income taxes........................................................ 2,082 2,140
Other long-term obligations.................................................. 196 187
--------- ----------
Total long-term obligations................................................ 2,325 2,361
--------- ----------
Minority interest in consolidated subsidiaries.................................. 439 385
--------- ----------
Stockholders' equity:
Common stock, $.33 1/3 par value............................................. 2,250 2,244
Additional paid in capital................................................... 17,398 17,112
Retained earnings............................................................ 53,164 51,642
Accumulated other comprehensive income....................................... (1,345) (792)
---------- -----------
71,467 70,206
Less: Common stock held in treasury, at cost............................... (5,417) (5,285)
Notes receivable..................................................... (297) (296)
Unearned compensation................................................ (190) (5)
---------- -----------
Total stockholders' equity........................................ 65,563 64,620
--------- ----------
Total liabilities and stockholders' equity......................................$ 81,397 $ 83,285
========= ==========
See notes to condensed consolidated financial statements
SAUCONY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THIRTEEN WEEKS AND TWENTY-SIX WEEKS ENDED JULY 6, 2001 AND JUNE 30, 2000
(Unaudited)
(Amounts in thousands, except per share data)
Thirteen Thirteen Twenty-Six Twenty-Six
Weeks Weeks Weeks Weeks
Ended Ended Ended Ended
July 6, 2001 June 30, 2000 July 6, 2001 June 30, 2000
------------ ------------- ------------ -------------
Net sales.................................................$ 35,491 $ 43,979 $ 79,184 $ 90,827
Other revenue ............................................ (36) 49 67 73
--------- --------- -------- --------
Total revenue ............................................ 35,455 44,028 79,251 90,900
--------- --------- -------- --------
Costs and expenses
Cost of sales.......................................... 23,638 27,165 53,632 56,568
Selling expenses....................................... 6,587 6,897 13,008 13,962
General and administrative expenses.................... 4,803 4,352 9,777 9,136
Loss on disposition of cycling division................ -- 2,944 -- 2,944
-------- --------- --------- --------
Total costs and expenses............................. 35,028 41,358 76,417 82,610
-------- --------- --------- --------
Operating income.......................................... 427 2,670 2,834 8,290
Non-operating income (expense)
Interest, net.......................................... (44) (230) (104) (362)
Foreign currency....................................... 109 1 196 (46)
Other.................................................. 16 (43) (18) 44
-------- ---------- ---------- --------
Income before income taxes and minority interest.......... 508 2,398 2,908 7,926
Provision for income taxes................................ 312 1,015 1,327 3,312
Minority interest in income of consolidated subsidiaries.. 20 10 59 33
-------- --------- --------- --------
Net income................................................$ 176 $ 1,373 $ 1,522 $ 4,581
======== ========= ========= ========
Per share amounts:
Earnings per common share - basic......................$ 0.03 $ 0.22 $ 0.25 $ 0.73
======== ======== ========= ========
Earnings per common share - diluted....................$ 0.03 $ 0.22 $ 0.25 $ 0.71
======== ======== ========= ========
Weighted average common shares and
equivalents outstanding for diluted EPS................ 6,152 6,376 6,173 6,410
======== ========= ========= ========
Cash dividends per share of common stock.................. 0 0 0 0
======== ========= ========= ========
See notes to condensed consolidated financial statements
SAUCONY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE TWENTY-SIX WEEKS ENDED JULY 6, 2001 AND JUNE 30, 2000
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(Unaudited)
(Amounts in thousands)
July 6, June 30,
2001 2000
---- ----
Cash flows from operating activities:
Net income.................................................................$ 1,522 $ 4,581
-------- ---------
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization.............................................. 978 1,010
Provision for bad debts and discounts...................................... 3,795 2,976
Loss on sale of cycling division........................................... -- 2,944
Deferred income tax expense (benefit)...................................... (648) 217
Other...................................................................... 91 44
Changes in operating assets and liabilities, net of effect of acquisitions,
dispositions and foreign currency adjustments:
Decrease (increase) in assets:
Marketable securities.................................................. 18 (41)
Accounts receivable.................................................... (6,204) (15,045)
Inventories............................................................ 5,965 (3,398)
Prepaid expenses and other current assets.............................. 274 (1,342)
Increase (decrease) in liabilities:
Accounts payable....................................................... (780) (52)
Accrued expenses....................................................... (678) (316)
--------- ----------
Total adjustments............................................................ 2,811 (13,003)
-------- ----------
Net cash provided (used) by operating activities................................ 4,333 (8,422)
-------- ----------
Cash flows from investing activities:
Purchases of property, plant and equipment................................... (701) (522)
Change in deferred charges, deposits and other............................... 24 32
Proceeds from the sale of cycling division................................... -- 1,350
-------- ---------
Net cash provided (used) by investing activities................................ (677) 860
--------- ---------
Cash flows from financing activities:
Net short-term borrowings.................................................... 147 8,516
Repayment of long-term debt and capital lease obligations.................... (185) (189)
Common stock repurchased..................................................... (133) (2,114)
Issuances of common stock, including options................................. 84 17
-------- ---------
Net cash provided (used) by financing activities................................ (87) 6,230
Effect of exchange rate changes on cash and cash equivalents.................... (21) 44
--------- ---------
Net increase (decrease) in cash and cash equivalents............................ 3,548 (1,288)
Cash and equivalents at beginning of period..................................... 4,738 3,515
-------- ---------
Cash and equivalents at end of period...........................................$ 8,286 $ 2,227
======== =========
Supplemental disclosure of cash flow information: Cash paid during the period
for:
Income taxes, net of refunds...............................................$ 664 $ 4,350
======== =========
Interest...................................................................$ 146 $ 339
======== =========
Non-cash investing and financing activities:
Property purchased under capital leases......................................$ 102 --
======== =========
See notes to condensed consolidated financial statements
SAUCONY, INC. AND SUBSIDIARIES
(the "Company")
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 6, 2001
(Unaudited)
(In thousands, except per share amounts)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and, therefore, do not
include all information and footnotes necessary for a fair presentation of
financial position, results of operations and cash flows in conformity with
generally accepted accounting principles. In the opinion of management, all
adjustments (consisting solely of normal recurring adjustments) necessary for a
fair presentation have been included. These interim consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements and the notes, thereto, included in the Company's Annual Report on
Form 10-K, as filed with the Securities and Exchange Commission, for the year
ended January 5, 2001. Operating results for twenty-six weeks ended July 6,
2001, are not necessarily indicative of the results for the entire year. Certain
reclassifications have been made in the June 30, 2000 presentation to conform to
the July 6, 2001 presentation.
NOTE 2 - NEW ACCOUNTING PRONOUNCEMENTS
EITF 00-10
In September 2000, the Emerging Issues Task Force ("EITF") reached a final
consensus on EITF Issue 00-10, "Accounting for Shipping and Handling Fees and
Costs." This consensus requires that all amounts billed to a customer in a sales
transaction related to shipping and handling, if any, represent revenue and
should be classified as revenue. Net sales and costs related to shipping and
handling reported by the Company in the prior year, have been reclassified to
conform to the requirements of EITF 00-10.
SFAS 141
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, "Business Combinations" (SFAS 141). SFAS
141 addresses financial reporting and accounting for business combinations and
supersedes Accounting Principles Board Opinion No. 16, (APB 16) "Business
Combinations", and Statement of Financial Accounting Standards No. 38,
"Accounting for Preacquisition Contingencies of Purchased Enterprises" (SFAS
38). SFAS 141 requires that business combinations in the scope of this Statement
are to be accounted for using one method, the purchase method. The provisions of
SFAS 141 apply to all business combinations initiated after June 30, 2001 and is
also applicable to all business combinations accounted for by the purchase
method for which the date of acquisition is July 1, 2001, or later.
SFAS 142
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets",
(SFAS 142). SFAS 142 addresses financial accounting and reporting for acquired
goodwill and other intangible assets acquired individually or with a group of
other assets (excluding those acquired in a business combination) at
acquisition. The statement also addresses financial accounting and reporting for
goodwill and other intangibles subsequent to their acquisition. SFAS 142
supersedes Accounting Principles Board Opinion No. 17, "Intangible Assets"
(APB17). All of the provisions of SFAS 142 will be applied to goodwill and other
intangible assets effective in the fiscal years beginning after December 15,
2001. Under SFAS 142 goodwill and other indefinite-lived intangibles will no
longer be amortized, but rather will be reviewed for impairment. An impairment
loss will be recognized if the carrying value of an intangible asset is not
recoverable and its carrying value exceeds its fair value. We will adopt SFAS in
the first quarter of fiscal 2002. Impairment losses for goodwill and
indefinite-lived intangible assets that arise due to the initial application of
this Statement are to be reported as resulting from a change in accounting
principle.
We have not determined the impact on our financial position or results of
operations on the initial adoption of SFAS 141 and SFAS 142.
NOTE 3 - INVENTORIES
Inventories at July 6, 2001 and January 5, 2001 consisted of the following:
July 6, January 5,
2001 2001
---- ----
Finished goods.........................$ 27,524 $ 31,529
Work in progress....................... 600 827
Raw materials.......................... 3,666 6,048
----------- -----------
$ 31,790 $ 38,404
=========== ===========
NOTE 4 - EARNINGS PER SHARE
Thirteen Weeks Ended Thirteen Weeks Ended
July 6, 2001 June 30, 2000
--------------------------- --------------------------
Earnings Earnings Earnings Earnings
per per per per
Common Common Common Common
Share - Share - Share - Share -
Basic Diluted Basic Diluted
--------- --------- --------- --------
Consolidated income
Net income available for common
shares and assumed conversions....................$ 176 $ 176 $ 1,373 $ 1,373
========== ========= ========== ==========
Weighted-average common shares
and equivalents outstanding:...................... 6,074 6,074 6,224 6,224
Effect of dilutive securities:
Employee stock options.......................... 0 78 0 152
---------- --------- ---------- ----------
6,074 6,152 6,224 6,376
========== ========= ========== ==========
Earnings per share:
Net income........................................$ 0.03 $ 0.03 $ 0.22 $ 0.22
========== ========= ========= ==========
Twenty-Six Weeks Ended Twenty-Six Weeks Ended
July 6, 2001 June 30, 2000
--------------------------- --------------------------
Earnings Earnings Earnings Earnings
per per per per
Common Common Common Common
Share - Share - Share - Share -
Basic Diluted Basic Diluted
Consolidated income
Net income available for common
shares and assumed conversions....................$ 1,522 $ 1,522 $ 4,581 $ 4,581
========== ========= ========== ==========
Weighted-average common shares
and equivalents outstanding:...................... 6,078 6,078 6,245 6,245
Effect of dilutive securities:
Employee stock options.......................... 0 95 0 165
---------- --------- ---------- ----------
6,078 6,173 6,245 6,410
========== ========= ========== ==========
Earnings per share:
Net income........................................$ 0.25 $ 0.25 $ 0.73 $ 0.71
========== ========= ========= ==========
Options to purchase 564,000 and 244,000 shares of common stock, outstanding at
July 6, 2001 and June 30, 2000, respectively, were not included in the
computations of diluted EPS, for the respective periods, since the options were
anti-dilutive.
NOTE 5 - STATEMENT OF COMPREHENSIVE INCOME
Thirteen Thirteen Twenty-Six Twenty-Six
Weeks Weeks Weeks Weeks
Ended Ended Ended Ended
July 6, 2001 June 30, 2000 July 6, 2001 June 30, 2000
------------ ------------- ------------ -------------
Net income................................................$ 176 $ 1,373 $ 1,522 $ 4,581
Other comprehensive income:
Foreign currency translation adjustment, net
of tax benefit of $69, $25, $226 and $78.............. (146) (35) (375) (121)
Cash flow hedges
Cumulative effect of change in accounting
principle, net of tax provision of $5............... -- -- 10 --
Reclassification adjustments, net of tax
benefit of $8 and $12............................... (16) -- (23) --
Net income during period, net of tax provision
of $36 and $24...................................... 78 -- 44 --
------- -------- -------- -------
Total other comprehensive income, net of tax.............. (84) (35) (344) (121)
-------- --------- --------- --------
Comprehensive income......................................$ 92 $ 1,338 $ 1,178 $ 4,460
======= ======== ======== =======
NOTE 6 - OPERATING SEGMENT DATA
The Company's operating segments are organized based on the nature of products
and consist of the Saucony segment and Other Products segment. The determination
of the reportable segments for the thirteen and twenty-six weeks ended July 6,
2001 and June 30, 2000, as well as the basis of measurement of segment profit or
loss, is consistent with the segment reporting disclosed in the Company's Annual
Report on Form 10-K for the fiscal year ended January 5, 2001.
Thirteen Thirteen Twenty-Six Twenty-Six
Weeks Weeks Weeks Weeks
Ended Ended Ended Ended
July 6, 2001 June 30, 2000 July 6, 2001 June 30, 2000
------------ ------------- ------------ -------------
Revenues:
Saucony.....................................$ 30,834 $ 38,620 $ 69,885 $ 81,018
Other Products.............................. 4,621 5,408 9,366 9,882
--------- ---------- --------- ---------
Total revenue...........................$ 35,455 $ 44,028 $ 79,251 $ 90,900
========= ========== ========= =========
Income (loss) before income taxes and minority interest:
Saucony.....................................$ 661 $ 5,845 $ 3,187 $ 12,141
Other Products.............................. (153) (3,447) (279) (4,215)
---------- ----------- ---------- ----------
Total...................................$ 508 $ 2,398 $ 2,908 $ 7,926
========= ========== ========= =========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read the following discussion together with the condensed
consolidated financial statements and related notes appearing elsewhere in this
Quarterly Report on Form 10-Q. This Item contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934 that involve risks and uncertainties. All
statements other than statements of historical fact included in this report are
forward-looking statements. When used in this report, the words "will",
"believes", "anticipates", "intends", "estimates", "expects", "projects" and
similar expressions are intended to identify forward-looking statements,
although not all forward-looking statements contain these identifying words.
Actual results may differ materially from those included in such forward-looking
statements. Important factors which could cause actual results to differ
materially include those set forth in our Annual Report on Form 10-K under "Item
7 - Management's Discussion and Analysis of Financial Condition and Results of
Operations - Certain Other Factors That May Affect Future Results" ("Certain
Factors") filed by us with the Securities and Exchange Commission on April 4,
2001, which Certain Factors discussion is filed as Exhibit 99.1 to this report
and incorporated herein by this reference. The forward-looking statements
provided by us in this report represent our estimates as of the date this report
is filed with the Securities and Exchange Commission. We anticipate that
subsequent events and developments will cause these estimates to change.
However, while we may elect to update our forward-looking statements in the
future, we specifically disclaim any obligation to do so. The forward-looking
statements contained in this report should not be relied upon as representing
our estimates as of any date subsequent to the date this report is filed with
the Securities and Exchange Commission.
Dollar amounts throughout this Item 2 are in thousands, except per share
amounts.
Highlights
Thirteen Weeks and Twenty-Six Weeks Ended
July 6, 2001 Compared to Thirteen Weeks and
Twenty-Six Weeks Ended June 30, 2000
Increase (Decrease)
Thirteen Weeks Twenty-Six Weeks
-------------------- ---------------------
Net sales............................................ ($8,488) (19.3%) ($11,643) (12.8%)
Gross profit......................................... (4,961) (29.5%) (8,707) (25.4%)
Selling, general and administrative expenses......... 141 1.3% (313) (1.4%)
$ Change
Thirteen Weeks Twenty-Six Weeks
-------------- ----------------
Operating income......................................... ($2,243) ($5,456)
Income before income taxes............................... (1,890) (5,018)
Net income............................................... (1,197) (3,059)
Percent of Net Sales
Thirteen Weeks Twenty-Six Weeks
-------------- ----------------
2001 2000 2001 2000
---- ---- ---- ----
Gross profit......................................... 33.4% 38.2% 32.3% 37.7%
Selling, general and administrative expenses......... 32.1 25.6 28.8 25.4
Operating income..................................... 1.2 6.1 3.6 9.1
Income before income taxes........................... 1.4 5.5 3.7 8.7
Net income........................................... .5 3.1 1.9 5.0
The following table sets forth the approximate contribution to net sales (in
dollars and as a percentage of consolidated net sales) attributable to our
Saucony segment and our Other Products segment for the thirteen and twenty-six
weeks ended July 6, 2001 and June 30, 2000:
Thirteen Weeks Ended
July 6, 2001 June 30, 2000
-------------------------- -------------------------
Saucony........................$ 30,871 87.0% $ 38,574 87.7%
Other Products................. 4,620 13.0% 5,405 12.3%
----------- --------- --------- -------
Total..........................$ 35,491 100.0% $ 43,979 100.0%
=========== ========= ========= =======
Twenty-Six Weeks Ended
Saucony........................$ 69,823 88.2% $ 80,936 89.1%
Other Products................. 9,361 11.8% 9,891 10.9%
----------- --------- --------- -------
Total..........................$ 79,184 100.0% $ 90,827 100.0%
=========== ========= ========= =======
Thirteen Weeks Ended July 6, 2001 Compared to Thirteen Weeks Ended June 30, 2000
Consolidated Net Sales
Net sales decreased $8,488, or 19%, to $35,491 in the thirteen weeks ended July
6, 2001 from $43,979 in the thirteen weeks ended June 30, 2000. The impact of
exchange rate fluctuation on net sales was minimal in the thirteen weeks ended
July 6, 2001. Excluding sales of our former cycling division in the thirteen
weeks ended June 30, 2000, net sales in the thirteen weeks ended July 6, 2001
would have been 16% lower than the thirteen weeks ended June 30, 2000.
On a geographic basis, domestic sales decreased $9,738, or 25%, to $29,102 in
the thirteen weeks ended July 6, 2001 from $38,840 in the thirteen weeks ended
June 30, 2000. International sales increased $1,250, or 24%, to $6,389 in the
thirteen weeks ended July 6, 2001 from $5,139 in the thirteen weeks ended June
30, 2000. At constant exchange rates, the international sales increase in the
thirteen weeks ended July 6, 2001 would have represented a 28% increase over the
thirteen weeks ended June 30, 2000.
Saucony Segment
Worldwide net sales of Saucony branded footwear and apparel decreased $7,703, or
20%, to $30,871 in the thirteen weeks ended July 6, 2001 from $38,574 in the
thirteen weeks ended June 30, 2000, due primarily to a 26% decrease in domestic
footwear unit volume and lower domestic wholesale per pair average selling
prices. The average domestic wholesale per pair selling prices decreased 2% in
the thirteen weeks ended July 6, 2001 versus the thirteen weeks ended June 30,
2000, due primarily to an increase in special makeup footwear unit volumes and
closeout footwear unit volumes, both of which are sold at lower wholesale per
pair average selling prices.
Domestic net sales decreased $9,399, or 28%, to $24,734 in the thirteen weeks
ended July 6, 2001 from $34,133 in the thirteen weeks ended July 6, 2001, due
primarily to a 26% decrease in footwear unit volumes and lower average wholesale
per pair selling prices. The footwear unit volume decrease in the thirteen weeks
ended July 6, 2001 was primarily due to a 67% decrease in Original footwear unit
volumes, partially offset by a 31% increase in technical footwear unit volumes.
The increase in technical footwear unit volumes is due primarily to a 215%
increase in special makeup footwear unit volumes and a 47% increase in closeout
footwear unit volumes. The average wholesale per pair selling prices for
domestic footwear decreased due to a change in the product mix to increased
special make up and closeout footwear, offset by higher average wholesale per
pair selling prices for Original footwear, due to a change in the product mix to
higher priced products. Sales of closeout footwear accounted for approximately
8% of domestic Saucony net sales in the thirteen weeks ended July 6, 2001
compared to 3% in the thirteen weeks ended June 30, 2000. The Originals footwear
accounted for 26% of domestic footwear unit volume in the thirteen weeks ended
July 6, 2001 versus 58% in the thirteen weeks ended June 30, 2000. The unit
volume decrease in Originals footwear was primarily due to the lack of new
product introductions targeted to our core Originals customer base and a shift
in consumer preference.
International net sales increased $1,696, or 38%, to $6,137 in the thirteen
weeks ended July 6, 2001 from $4,441 in the thirteen weeks ended June 30, 2000,
due primarily to a 52% increase in footwear unit volumes, partially offset by
lower average wholesale per pair selling prices and the negative impact of the
stronger U.S. dollar against European currencies. The footwear average wholesale
per pair selling price decreased primarily due to the significant increase in
our international distributor Original footwear unit volume sold to our Japanese
distributor, which are sold at lower wholesale per pair average selling prices.
Footwear unit volumes at our international distributor business, and our
European and Canadian subsidiaries, increased 120% and 2%, respectively, in the
thirteen weeks ended July 6, 2001 versus the thirteen weeks ended June 30, 2000.
The unit volume increase at our international subsidiaries is due to a 21%
increase in unit volume shipments at our Canadian subsidiary, which was
partially offset by a 18% decrease in unit volume shipments at our European
subsidiaries. International distributor sales into the Japanese footwear market
accounted for 19% of international sales in the thirteen weeks ended July 6,
2001, compared to 3% in the thirteen weeks ended June 30, 2000.
Other Products Segment
Worldwide sales of Other Products decreased $785, or 15%, to $4,620 in the
thirteen weeks ended July 6, 2001 from $5,405 in the thirteen weeks ended June
30, 2000, due primarily to the elimination of sales resulting from the cycling
division divestiture in June 2000, partially offset by a 54% increase in sales
at our factory outlet stores and sales generated by our Hyde Authentics footwear
line.
Domestic net sales of Other Products decreased $339, or 7%, to $4,368 in the
thirteen weeks ended July 6, 2001 from $4,707 in the thirteen weeks ended June
30, 2000, due primarily to the elimination of sales resulting from the cycling
division divestiture, partially offset by increased sales at our factory outlet
division stores due to the net addition of three factory outlet stores and sales
generated by our Hyde Authentics footwear line.
International net sales of Other Products decreased $446, or 64%, to $252 in the
thirteen weeks ended July 6, 2001 from $698 in the thirteen weeks ended June 30,
2000, due primarily to the elimination of sales resulting from the cycling
division divestiture.
Net sales from the cycling division, which are included in our Other Product
segment, represented approximately 4% of consolidated net sales for the thirteen
weeks ended June 30, 2000.
Costs and Expenses
Our gross margin in the thirteen weeks ended July 6, 2001 decreased 4.8% to
33.4% from 38.2% in the thirteen weeks ended June 30, 2000, due primarily to a
change in the domestic Saucony product mix to lower levels of first quality,
full margin footwear. Other factors contributing to the decreased margin in the
thirteen weeks ended July 6, 2001 were increased sales of special makeup and
closeout footwear, which carry lower margins, manufacturing inefficiencies,
increased inventory reserves, domestic pricing pressures, and to a lesser
extent, the negative impact of the stronger U.S. dollar on our European margins
and changes in the geographic mix of sales.
Selling, general and administrative expenses as a percentage of net sales
increased 6.5% to 32.1% in the thirteen weeks ended July 6, 2001 from 25.6% in
2000. In absolute dollars, selling, general and administrative expenses
increased $141, or 1%, to $11,390 in the thirteen weeks ended July 6, 2001 from
$11,249 in the thirteen weeks ended June 30, 2000. This increased spending in
the thirteen weeks ended July 6, 2001 was due primarily to increased provisions
for doubtful accounts, increased operating expenses associated with the factory
outlet expansion and, to a lesser extent, increased print media advertising.
These increases were partially offset by reduced operating expenses resulting
from the cycling division divestiture and, to a lesser extent, decreased
variable selling expenses and, due to diminished financial performance, lower
incentive compensation.
Net interest expense decreased $186, to $44, in the thirteen weeks ended July 6,
2001 from $230 in the thirteen weeks ended June 30, 2000, due primarily to lower
borrowings on our domestic credit facility and, to a lesser extent, lower
interest rates and increased interest income.
Income Before Tax and Minority Interest
Thirteen Weeks Ended
--------------------
July 6, June 30,
2001 2000
---- ----
Segment
Saucony........................$ 661 $ 5,845
Other Products................. (153) (3,447)
---------- ---------
Total..........................$ 508 $ 2,398
========= ========
Income before tax decreased $1,890 in the thirteen weeks ended July 6, 2001 to
$508 compared to $2,398 in the thirteen weeks ended June 30, 2000, due primarily
to lower pre-tax income realized by the domestic Saucony segment due to lower
sales, lower gross margins and increased operating expenses, partially offset by
improved profitability in our Saucony international business. The improvement in
our Other Products segment income before tax in the thirteen weeks ended July 6,
2001 was primarily due to the pre-tax loss of $2,944 recorded as a result of the
divestiture of the cycling division in the thirteen weeks ended June 30, 2000.
Income Taxes
The provision for income taxes decreased to $312 in the thirteen weeks ended
July 6, 2001 from $1,015 in the thirteen weeks ended June 30, 2000, due
primarily to lower pre-tax income realized by the domestic Saucony segment. The
effective tax rate increased 19.1% to 61.4% in the thirteen weeks ended July 6,
2001 from 42.3% in the thirteen weeks ended June 30, 2000 due primarily to a
shift in the composition of domestic and foreign pre-tax earnings and increased
deferred tax valuation allowances.
Net Income
Net income for the thirteen weeks ended July 6, 2001 decreased to $176, or $0.03
per diluted share, compared to $1,373, or $0.22 per diluted share, in the
thirteen weeks ended June 30, 2000. The loss on the sale of the cycling division
in the thirteen weeks ended June 30, 2000 reduced net income and diluted
earnings per share by $1,727 and $0.27 per share, respectively.
Weighted average common shares and equivalent shares used to calculate diluted
earnings per share were 6,152 and 6,376, respectively, in the thirteen weeks
ended July 6, 2001 and June 30, 2000.
Twenty-Six Weeks Ended July 6, 2001 Compared to Twenty-Six Weeks Ended June 30,
2000
Consolidated Net Sales
Net sales decreased $11,643, or 13%, to $79,184 in the twenty-six weeks ended
July 6, 2001 from $90,827 in the twenty-six weeks ended June 30, 2000. At
constant exchange rates, the net sales decrease in the twenty-six weeks ended
July 6, 2001 would have been 12% lower than the twenty-six weeks ended June 30,
2000. Excluding sales of our former cycling division in the twenty-six weeks
ended June 30, 2000, net sales in the twenty-six weeks ended July 6, 2001 would
have been 10% lower than the twenty-six weeks ended June 30, 2000.
On a geographic basis, domestic sales decreased $14,475, or 18%, to $65,240 in
the twenty-six weeks ended July 6, 2001 from $79,715 in the twenty-six weeks
ended June 30, 2000. International sales increased $2,832, or 26%, to $13,944 in
the twenty-six weeks ended July 6, 2001 from $11,112 in the twenty-six weeks
ended June 30, 2000. At constant exchange rates, the international sales
increase in the twenty-six weeks ended July 6, 2001 would have represented a 31%
increase over the twenty-six weeks ended June 30, 2000.
Saucony Segment
Worldwide net sales of Saucony branded footwear and apparel decreased $11,113,
or 14%, to $69,823 in the twenty-six weeks ended July 6, 2001 from $80,936 in
the twenty-six weeks ended June 30, 2000, due primarily to an 18% decrease in
domestic footwear unit volume and lower domestic wholesale per pair average
selling prices. The average domestic wholesale per pair selling prices decreased
3% in the twenty-six weeks ended July 6, 2001 versus the twenty-six weeks ended
June 30, 2000, due primarily to an increase in closeout footwear and special
makeup footwear unit volumes, both of which are sold at lower wholesale per pair
average selling prices.
Domestic net sales decreased $14,348, or 20%, to $56,651 in the twenty-six weeks
ended July 6, 2001 from $70,999 in the twenty-six weeks ended July 6, 2001, due
primarily to an 18% decrease in footwear unit volumes and lower average
wholesale per pair selling prices. The footwear unit volume decrease in the
twenty-six weeks ended July 6, 2001 was primarily due to a 54% decrease in
Original footwear unit volumes, partially offset by a 33% increase in technical
footwear unit volumes. The increase in technical footwear unit volumes is due
primarily to a 95% increase in closeout footwear unit volumes and a 67% increase
in special makeup footwear unit volumes. The average wholesale per pair selling
prices for domestic footwear decreased due to a change in the product mix to
increased closeout and special makeup footwear unit volume and lower average
wholesale per pair selling prices for technical footwear, due to a change in the
product mix to lower priced products. Average wholesale per pair selling prices
for Originals footwear were comparable to the selling prices in the twenty-six
weeks ended June 30, 2000. Sales of closeout footwear accounted for
approximately 11% of domestic Saucony net sales in the twenty-six weeks ended
July 6, 2001 compared to 4% in the twenty-six weeks ended June 30, 2000. The
Originals footwear accounted for 33% of domestic footwear unit volume in the
twenty-six weeks ended July 6, 2001 versus 58% in the twenty-six weeks ended
June 30, 2000. The unit volume decrease in Originals footwear was primarily due
to the lack of new product introductions targeted to our core Originals customer
base and a shift in consumer preference.
International net sales increased $3,235, or 33%, to $13,172 in the twenty-six
weeks ended July 6, 2001 from $9,937 in the twenty-six weeks ended June 30,
2000, due primarily to a 52% increase in footwear unit volumes, partially offset
by lower average wholesale per pair selling prices and the negative impact of
the stronger U.S. dollar against European currencies. The footwear average
wholesale per pair selling price decreased primarily due to the significant
increase in our international distributor Original footwear unit volume sold to
our Japanese distributor, which are sold at lower wholesale per pair average
selling prices. Footwear unit volumes at our international distributor business,
and our European and Canadian subsidiaries, increased 109% and 16%,
respectively, in the twenty-six weeks ended July 6, 2001 versus the twenty-six
weeks ended June 30, 2000. The unit volume increase at our international
subsidiaries is due to a 45% increase in unit volume shipments at our Canadian
subsidiary, which was partially offset by a 2% decrease in unit volume shipments
at our European subsidiaries. International distributor sales into the Japanese
footwear market accounted for 20% of international sales in the twenty-six weeks
ended July 6, 2001, compared to 2% in the twenty-six weeks ended June 30, 2000.
Other Products Segment
Worldwide sales of Other Products decreased $530, or 5%, to $9,361 in the
twenty-six weeks ended July 6, 2001 from $9,891 in the twenty-six weeks ended
June 30, 2000, due primarily to the elimination of sales resulting from the
cycling division divestiture in June 2000, partially offset by a 26% increase in
sales of our Hind brand apparel, a 50% increase in sales at our factory outlet
stores and sales generated by our Hyde Authentics footwear line.
Domestic net sales of Other Products decreased $127, or 2%, to $8,589 in the
twenty-six weeks ended July 6, 2001 from $8,716 in the twenty-six weeks ended
June 30, 2000 due primarily to the elimination of sales resulting from the
cycling division divestiture, partially offset by a 31% increase in Hind apparel
unit volume and a 1% increase in the average wholesale unit selling prices for
our Hind apparel brand, increased sales at our factory outlet division stores
due to the net addition of three factory outlet stores and sales generated by
our Hyde Authentics footwear line.
International net sales of Other Products decreased $403, or 34%, to $772 in the
twenty-six weeks ended July 6, 2001 from $1,175 in the twenty-six weeks ended
June 30, 2000, due primarily to the elimination of sales resulting from the
cycling division divestiture.
Net sales from the cycling division, which are included in our Other Product
segment, represented approximately 4% of consolidated net sales for the
twenty-six weeks ended June 30, 2000.
Costs and Expenses
Our gross margin in the twenty-six weeks ended July 6, 2001 decreased 5.4% to
32.3% from 37.7% in the twenty-six weeks ended June 30, 2000, due primarily to
our decision to reduce domestic Saucony footwear inventories, which resulted in
increased sales of closeout footwear. Other factors contributing to the
decreased margin in the twenty-six weeks ended July 6, 2001 were a change in
domestic Saucony product mix to lower levels of first quality, full margin
footwear, increased sales of special make-up footwear, manufacturing
inefficiencies, increased inventory reserves, domestic pricing pressures, and to
a lesser extent, the negative impact of the stronger U.S. dollar on our European
margins and changes in the geographic mix of sales.
Selling, general and administrative expenses as a percentage of net sales
increased 3.4% to 28.8% in the twenty-six weeks ended July 6, 2001 from 25.4% in
2000. In absolute dollars, selling, general and administrative expenses
decreased $313, or 1%, to $22,785 in the twenty-six weeks ended July 6, 2001
from $23,098 in the twenty-six weeks ended June 30, 2000. This decreased
spending in the twenty-six weeks ended July 6, 2001 was due primarily to reduced
operating expenses resulting from the cycling division divestiture and, to a
lesser extent, decreased television media, account-specific advertising and
promotion, variable selling expenses and, due to diminished financial
performance, lower incentive compensation. These decreases were partially offset
by increased provisions for doubtful accounts, increased operating expenses
associated with the factory outlet expansion and, to a lesser extent, increased
professional fees.
Net interest expense decreased $258, to $104 in the twenty-six weeks ended July
6, 2001 from $362 in the thirteen weeks ended June 30, 2000 due primarily to
lower borrowings on our domestic credit facility and, to a lesser extent, lower
interest rates and increased interest income.
Income Before Tax and Minority Interest
Twenty-Six Weeks Ended
----------------------
July 6, June 30,
2001 2000
---- ----
Segment
Saucony..............................$ 3,187 $ 12,141
Other Products....................... (279) (4,215)
---------- ---------
Total................................$ 2,908 $ 7,926
========= ========
Income before tax decreased $5,018 in the twenty-six weeks ended July 6, 2001 to
$2,908 compared to $7,926 in the twenty-six weeks ended June 30, 2000, due
primarily to lower pre-tax income realized by the domestic Saucony segment due
to lower sales, lower gross margins and proportionately higher operating
expenses, partially offset by improved profitability in our Saucony
international business. The improvement in our Other Products segment income
before tax in the twenty-six weeks ended July 6, 2001 was primarily due to the
pre-tax loss of $2,944 recorded as a result of the divestiture of the cycling
division in the twenty-six weeks ended June 30, 2000.
Income Taxes
The provision for income taxes decreased to $1,327 in the twenty-six weeks ended
July 6, 2001 from $3,312 in the twenty-six weeks ended June 30, 2000, due
primarily to lower pre-tax income realized by the domestic Saucony segment. The
effective tax rate increased 3.8% to 45.6% in the twenty-six weeks ended July 6,
2001 from 41.8% in the twenty-six weeks ended June 30, 2000, due primarily to a
shift in the composition of domestic and foreign pre-tax earnings and increased
deferred tax valuation allowances.
Net Income
Net income for the twenty-six weeks ended July 6, 2001 decreased to $1,522, or
$0.25 per diluted share, compared to $4,581, or $0.71 per diluted share, in the
twenty-six weeks ended June 30, 2000. The loss on the sale of the cycling
division in the twenty-six weeks ended June 30, 2000 reduced net income and
diluted earnings per share by $1,727 and $0.27 per share, respectively.
Weighted average common shares and equivalent shares used to calculate diluted
earnings per share were 6,173 and 6,410, respectively, in the twenty-six weeks
ended July 6, 2001 and June 30, 2000.
Liquidity and Capital Resources
As of July 6, 2001, our cash and cash equivalents totaled, $8,286, an increase
of $3,548 from January 5, 2001. The increase in cash, for the twenty-six weeks
ended July 6, 2001, was due primarily to cash provided by operations of $4,333
and to a lesser extent, increased borrowings of $147 under our foreign credit
facilities and the receipt of $84 from issuances of shares of our common stock.
The increase was partially offset by cash outlays of $701 for capital assets,
the repayment of long-term debt of $185 and the repurchase of shares of our
common stock of $133.
Our accounts receivable increased $2,409, net of the provision for bad debts and
discounts, due to increased sales of our Saucony footwear products in the
twenty-six weeks ended July 6, 2001. Our days sales outstanding for accounts
receivable decreased to 67 days in the twenty-six weeks ended July 6, 2001 from
72 days in the twenty-six weeks ended June 30, 2000 due to a shift in the sales
mix to products and programs with shorter payment terms. The provision for bad
debts and discounts increased to $3,795, in the twenty-six weeks ended July 6,
2001 from $2,976 in the twenty-six weeks ended June 30, 2000 due to an increase
in the provision for doubtful accounts. Inventories decreased $5,965 in the
twenty-six weeks ended July 6, 2001 due primarily to our decision to reduce
domestic Saucony footwear inventories, which had increased in the fourth quarter
of fiscal 2000. Our inventory turns ratio remained constant at 3.2 turns for
both the twenty-six weeks ended July 6, 2001 and the twenty-six weeks ended June
30, 2000. The number of day's sales in inventory decreased to 108 days in the
twenty-six weeks ended July 6, 2001 from 115 days in the twenty-six weeks ended
June 30, 2000 due to lower inventories at July 6, 2001.
Principal factors (other than net income, accounts receivable, provision for bad
debts and discounts and inventory) affecting our operating cash flows in the
twenty-six weeks ended July 6, 2001 included a decrease of $780 in accounts
payable (due to lower inventory levels), a decrease of $678 in accrued expenses
(due primarily to the payment of fiscal 2000 incentive compensation and lower
operating expense accruals) and a decrease in prepaid expenses of $274 (due to
the timing of income tax payments).
During the twenty-six weeks ended July 6, 2001, we repurchased approximately
19,000 shares of our common stock for a total expenditure of $133. Since the
approval of the stock buyback program by the Board of Directors in May 1998, we
have repurchased a total of 467,000 shares of our common stock for a total
expenditure of $4,364. Our primary lender extended the term for repurchases of
additional shares of our common stock, granted under a prior amendment to the
credit facility, through July 31, 2001. On July 31, 2001, our primary lender
extended the termination date of our revolving credit agreement until October 1,
2001. We expect to have a credit facility in place prior to October 1, 2001
under terms and conditions similar to the current facility.
Overall Liquidity
Our liquidity is contingent upon a number of factors, principally our future
operating results. Management believes that our current cash and cash
equivalents, credit facilities and internally generated funds are adequate to
meet our working capital requirements and to fund our capital investment needs
and debt service payments.
INFLATION AND CURRENCY RISK
The effect of inflation on our results of operations over the past three years
has been minimal. The impact of currency fluctuation on our purchase of
inventory from foreign suppliers has been minimal as the transactions were
denominated in U.S. dollars. We are, however, subject to currency fluctuation
risk with respect to the operating results of our foreign subsidiaries and
certain foreign currency denominated payables. We have entered into forward
foreign exchange contracts to minimize certain transaction currency risks. We
believe that our forward foreign currency contracts function as economic hedges
of our cash flows and that our foreign exchange management program effectively
minimizes certain transaction currency risks.
ACCOUNTING PRONOUNCEMENTS
SFAS 141
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, "Business Combinations" (SFAS 141). SFAS
141 addresses financial reporting and accounting for business combinations and
supersedes Accounting Principles Board Opinion No. 16, (APB 16) "Business
Combinations", and Statement of Financial Accounting Standards No. 38,
"Accounting for Preacquisition Contingencies of Purchased Enterprises" (SFAS
38). SFAS 141 requires that business combinations in the scope of this Statement
are to be accounted for using one method, the purchase method. The provisions of
SFAS 141 apply to all business combinations initiated after June 30, 2001 and is
also applicable to all business combinations accounted for by the purchase
method for which the date of acquisition is July 1, 2001, or later.
SFAS 142
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets",
(SFAS 142). SFAS 142 addresses financial accounting and reporting for acquired
goodwill and other intangible assets acquired individually or with a group of
other assets (excluding those acquired in a business combination) at
acquisition. The statement also addresses financial accounting and reporting for
goodwill and other intangibles subsequent to their acquisition. SFAS 142
supersedes Accounting Principles Board Opinion No. 17, "Intangible Assets"
(APB17). All of the provisions of SFAS 142 will be applied to goodwill and other
intangible assets effective in the fiscal years beginning after December 15,
2001. Under SFAS 142 goodwill and other indefinite-lived intangibles will no
longer be amortized, but rather will be reviewed for impairment. An impairment
loss will be recognized if the carrying value of an intangible asset is not
recoverable and its carrying value exceeds its fair value. We will adopt SFAS in
the first quarter of fiscal 2002. Impairment losses for goodwill and
indefinite-lived intangible assets that arise due to the initial application of
this Statement are to be reported as resulting from a change in accounting
principle.
We have not determined the impact on our financial position or results of
operations on the initial adoption of SFAS 141 and SFAS 142.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We have performed an analysis to assess the potential effect of reasonably
possible near-term changes in inflation and foreign currency exchange rates. The
effect of inflation on our results of operations over the past three years has
been minimal. The impact of currency fluctuation on the purchase of inventory by
us from foreign suppliers has been non-existent as all the transactions were
denominated in U.S. dollars. However, we are subject to currency fluctuation
risk with respect to the operating results of our foreign subsidiaries and
certain foreign currency denominated payables. We have entered into certain
forward foreign exchange contracts to minimize the transaction currency risk.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
At the 2001 Annual Meeting of Stockholders of the Company (the "Annual Meeting")
held on May 24, 2001, the following matters were acted upon by the stockholders
of the Company:
1. The election of John M. Connors, Jr., John H. Fisher, Phyllis H. Fisher,
Charles A. Gottesman, Robert J. LeFort, Jr., and John J. Neuhauser as
directors of the Company.
2. The approval of the Company's 2001 Employee Stock Purchase Plan.
The results of the voting on each of the matters presented to stockholders at
the Annual Meeting are set forth below:
Votes Votes Broker
For Against Abstentions Non-votes
------- ------- ----------- ---------
1. Election of Directors
John M Connors, Jr. 2,365,830 21,095 -- N.A.
John H. Fisher 2,365,820 21,105 -- N.A.
Phyllis H. Fisher 2,365,830 21,095 -- N.A.
Charles A. Gottesman 2,365,830 21,095 -- N.A.
Robert J. LeFort, Jr. 2,365,830 21,095 -- N.A.
John J. Neuhauser 2,365,830 21,095 -- N.A.
2. The approval of the Company's
2001 Employee Stock
Purchase Plan 1,642,747 19,355 4,076 720,947
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
The Exhibits filed as part of this Quarterly Report on Form 10-Q
are listed on the Exhibit Index immediately preceding such
Exhibits, which Exhibit Index is incorporated herein by
reference.
b. Reports on Form 8-K
Other than Current Reports on Form 8-K which have been previously
reported by the Company, the Company did not file any Current
Reports on Form 8-K during the quarter ended July 6, 2001.
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Saucony, Inc.
Date: August 16, 2001 By: /s/ Michael Umana
---------------------
Michael Umana
Senior Vice President,
Chief Operating Officer and
Chief Financial Officer
(Duly authorized officer and
principal financial officer)
EXHIBIT INDEX
Exhibit No. Description
10.1 Letter Amendment dated July 31, 2001 to the Revolving Credit
Agreement dated August 31, 1998 between State Street Bank and
Trust Company and file registrant.
10.2(1) 2001 Employee Stock Purchase Plan
99.1(2) Certain Factors That May Affect Future Results
- ------------
(1) Previously filed with the Securities and Exchange Commission
as an Exhibit to the registrant's Registration Statement on
Form S-8 (File No. 333-65974 and incorporated herein by
reference.
(2) Previously filed with the Securities and Exchange Commission
under the heading "Certain Factors That May Affect Future
Results" on pages 21-23 of the registrant's Annual Report on
Form 10-K for the fiscal year ended January 5, 2001 and
incorporated herein by reference. Such Annual Report on Form
10-K shall not be deemed filed herewith, except to the extent
that portions thereof are expressly incorporated by reference
herein.