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 April 5, 2002
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 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 [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Shares Outstanding
----- as of May 13, 2002
----------------------
Class A Common Stock-$.33 1/3 Par Value Per Share 2,566,747
Class B Common Stock-$.33 1/3 Par Value Per Share 3,529,439
---------
6,096,186
SAUCONY, INC. AND SUBSIDIARIES
INDEX
Page
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements - Unaudited
Condensed Consolidated Balance Sheets as of April 5, 2002
and January 4, 2002...............................................3
Condensed Consolidated Statements of Income for the
thirteen weeks ended April 5, 2002 and April 6, 2001..............4
Condensed Consolidated Statements of Cash Flows for the
thirteen weeks ended April 5, 2002 and April 6, 2001..............5
Notes to Condensed Consolidated Financial Statements --
April 5, 2002..................................................6-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................11-17
Item 3. Quantitative and Qualitative Disclosures about Market Risk.......17
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................................17
Signature.................................................................18
Exhibit Index.............................................................19
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS - UNAUDITED
SAUCONY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
ASSETS
April 5, January 4,
2002 2002
---- ----
(unaudited)
Current assets:
Cash and cash equivalents....................................................$ 15,271 $ 22,227
Accounts receivable.......................................................... 25,469 14,742
Inventories.................................................................. 24,987 28,404
Prepaid expenses and other current assets.................................... 3,640 4,165
--------- ----------
Total current assets....................................................... 69,367 69,538
--------- ----------
Property, plant and equipment, net.............................................. 6,223 6,989
--------- ----------
Other assets.................................................................... 1,547 1,573
--------- ----------
Total assets....................................................................$ 77,137 $ 78,100
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt.........................................$ 73 $ 88
Accounts payable............................................................. 4,927 6,635
Accrued expenses and other current liabilities............................... 4,589 5,602
--------- ----------
Total current liabilities.................................................. 9,589 12,325
--------- ----------
Long-term obligations:
Deferred income taxes........................................................ 1,944 1,949
Other long-term obligations.................................................. 209 204
--------- ----------
Total long-term obligations................................................ 2,153 2,153
--------- ----------
Minority interest in consolidated subsidiaries.................................. 525 460
--------- ----------
Stockholders' equity:
Common stock, $.33 1/3 par value............................................. 2,254 2,250
Additional paid in capital................................................... 17,464 17,398
Retained earnings............................................................ 52,003 50,702
Accumulated other comprehensive loss......................................... (1,278) (1,301)
---------- -----------
70,443 69,049
Less: Common stock held in treasury, at cost............................... (5,417) (5,417)
Notes receivable..................................................... -- (303)
Unearned compensation................................................ (156) (167)
---------- -----------
Total stockholders' equity........................................ 64,870 63,162
--------- ----------
Total liabilities and stockholders' equity......................................$ 77,137 $ 78,100
========= ==========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
SAUCONY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THIRTEEN WEEKS ENDED APRIL 5, 2002 AND APRIL 6, 2001
(Unaudited)
(In thousands, except per share amounts)
Thirteen Weeks Thirteen Weeks
Ended Ended
April 5, 2002 April 6, 2001
------------- -------------
Net sales.......................................................................$ 34,787 $ 43,693
Other revenue .................................................................. 64 103
---------- ----------
Total revenue .................................................................. 34,851 43,796
---------- ----------
Costs and expenses
Cost of sales................................................................ 22,888 29,994
Selling expenses............................................................. 4,961 6,421
General and administrative expenses.......................................... 4,732 4,974
--------- ----------
Total costs and expenses................................................... 32,581 41,389
--------- ----------
Operating income................................................................ 2,270 2,407
Non-operating income (expense)
Interest, net................................................................ 24 (60)
Foreign currency............................................................. (25) 87
Other........................................................................ 63 (34)
--------- -----------
Income before income taxes and minority interest................................ 2,332 2,400
Provision for income taxes...................................................... 967 1,015
Minority interest in income of consolidated subsidiaries........................ 64 39
--------- ----------
Net income......................................................................$ 1,301 $ 1,346
========= ==========
Per share amounts:
Earnings per common share:
Basic........................................................................$ 0.21 $ 0.22
========= ==========
Diluted......................................................................$ 0.21 $ 0.22
========= ==========
Weighted average common shares outstanding:
Basic........................................................................ 6,085 6,081
========= ==========
Diluted...................................................................... 6,120 6,188
========= ==========
Cash dividends per share of common stock........................................ 0 0
========= ==========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
SAUCONY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THIRTEEN WEEKS ENDED APRIL 5, 2002 AND APRIL 6, 2001
(Unaudited)
(In thousands)
April 5, April 6,
2002 2001
---- ----
Cash flows from operating activities:
Net income.................................................................$ 1,301 $ 1,346
-------- ---------
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization.............................................. 448 483
Provision for bad debts and discounts...................................... 1,551 1,877
Deferred income tax expense (benefit)...................................... 140 (630)
Other...................................................................... 68 41
Changes in operating assets and liabilities, net of effect of acquisitions,
dispositions and foreign currency adjustments:
Decrease (increase) in assets:
Accounts receivable.................................................... (12,274) (11,977)
Inventories............................................................ 3,359 6,655
Prepaid expenses and other current assets.............................. (85) 333
Increase (decrease) in liabilities:
Accounts payable....................................................... (1,706) (2,042)
Accrued expenses....................................................... (120) (1,883)
--------- ----------
Total adjustments............................................................ (8,619) (7,143)
--------- ----------
Net cash used by operating activities........................................... (7,318) (5,797)
--------- ----------
Cash flows from investing activities:
Purchases of property, plant and equipment................................... (61) (408)
Change in deferred charges, deposits and other............................... (11) 13
Marketable securities - realized and unrealized (gains) losses............... (1) 35
--------- ---------
Net cash used by investing activities........................................... (73) (360)
--------- ----------
Cash flows from financing activities:
Net short-term borrowings.................................................... -- 3,800
Repayment of long-term debt and capital lease obligations.................... (16) (99)
Common stock repurchased..................................................... -- (133)
Receipt of payment on notes receivable....................................... 312 --
Issuances of common stock, including options................................. 65 11
-------- ---------
Net cash provided by financing activities....................................... 361 3,579
Effect of exchange rate changes on cash and cash equivalents.................... 74 168
-------- ---------
Net decrease in cash and cash equivalents....................................... (6,956) (2,410)
Cash and equivalents at beginning of period..................................... 22,227 4,738
-------- ---------
Cash and equivalents at end of period...........................................$ 15,271 $ 2,328
======== =========
Supplemental disclosure of cash flow information: Cash paid during the period
for:
Income taxes, net of refunds...............................................$ (473) $ 482
========= =========
Interest...................................................................$ 2 $ 85
======== =========
Non-cash investing and financing activities:
Property purchased under capital leases......................................$ -- $ 102
======== =========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
SAUCONY, INC. AND SUBSIDIARIES
(the "Company")
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
APRIL 5, 2002
(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 4, 2002. Operating results for the thirteen weeks ended April 5,
2002, are not necessarily indicative of the results for the entire year.
NOTE 2 - INVENTORIES
Inventories at April 5, 2002 and January 4, 2002 consisted of the following:
April 5, January 4,
2002 2002
---- ----
Finished goods......................$ 23,154 $ 25,466
Work in progress.................... 189 1,501
Raw materials....................... 1,644 1,437
----------- -----------
$ 24,987 $ 28,404
=========== ===========
NOTE 3 - EARNINGS PER COMMON SHARE
Earnings per Common Share
---------------------------------------------------------
Thirteen Weeks Ended Thirteen Weeks Ended
April 5, 2002 April 6, 2001
--------------------------- --------------------------
Basic Diluted Basic Diluted
----- ------- ----- -------
Consolidated income
Net income available for common
shares and assumed conversions.....................$ 1,301 $ 1,301 $ 1,346 $ 1,346
======== ======= ======== ========
Weighted-average common shares and equivalents
outstanding:
Weighted-average shares outstanding................ 6,085 6,085 6,081 6,081
Effect of dilutive securities:
Employee stock options........................... -- 35 -- 107
-------- ------- -------- --------
6,085 6,120 6,081 6,188
======== ======= ======== ========
Earnings per share:
Net income.........................................$ 0.21 $ 0.21 $ 0.22 $ 0.22
======== ======= ======= ========
Options to purchase 650,000 and 396,000 shares of common stock, outstanding at
April 5, 2002 and April 6, 2001, respectively, were not included in the
computations of diluted earnings per share, for the respective periods, since
the options were anti-dilutive.
NOTE 4 - STATEMENT OF COMPREHENSIVE INCOME
Thirteen Weeks Thirteen Weeks
Ended Ended
April 5, 2002 April 6, 2001
------------- -------------
Net income.......................................................................$ 1,301 $ 1,346
Other comprehensive income:
Foreign currency translation adjustments, net of tax.......................... 23 (229)
Cash flow hedges
Cumulative effect of change in accounting principles,
net of tax.................................................................. -- 10
Reclassification adjustments, net of tax...................................... -- (7)
Net losses during period, net of tax.......................................... -- (34)
------- --------
Total other comprehensive income, net of tax..................................... 23 (260)
------- --------
Comprehensive income.............................................................$ 1,324 $ 1,086
======= =======
NOTE 5 - 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 weeks ended April 5, 2002 and April
6, 2001, 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 4, 2002.
Thirteen Weeks Thirteen Weeks
Ended Ended
April 5, 2002 April 6, 2001
------------- -------------
Revenues:
Saucony....................................................$ 28,955 $ 39,054
Other Products............................................. 5,896 4,742
---------- ---------
Total revenue.........................................$ 34,851 $ 43,796
========== =========
Income (loss) before income taxes and minority interest:
Saucony....................................................$ 2,235 $ 2,550
Other Products............................................. 97 (150)
---------- ----------
Total.................................................$ 2,332 $ 2,400
========== =========
NOTE 6 - RECENT ACCOUNTING PRONOUNCEMENTS
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" (APB
17). The Company adopted SFAS 142 on January 5, 2002. In applying SFAS 142 the
Company performed the transitional reassessment and impairment test required as
of January 4, 2002 and determined the goodwill to have indefinite lives and that
there was no impairment of these assets. The Company discontinued amortizing
goodwill on January 4, 2002. At January 4, 2002, the net book value of goodwill
was $912.
The transitional disclosure of reported net earnings for the thirteen weeks
ended April 6, 2001, as adjusted, is presented below:
Thirteen Weeks Thirteen Weeks
Ended Ended
April 5, 2002 April 6, 2001
------------- -------------
Reported net income.......................................... $ 1,301 $ 1,346
Addback amortization of goodwill,
net of tax benefit........................................ -- 22
---------- --------
Adjusted net income.......................................... $ 1,301 $ 1,368
========== ========
Basic earnings per share:
As reported.................................................. $ 0.21 $ 0.22
Addback goodwill............................................. -- --
---------- --------
Adjusted net income.......................................... $ 0.21 $ 0.22
========== ========
Diluted earnings per share:
As reported.................................................. $ 0.21 $ 0.22
Addback goodwill............................................. -- --
---------- --------
Adjusted net income.......................................... $ 0.21 $ 0.22
========== ========
SFAS 143
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations", (SFAS 143). SFAS 143 addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement cost. SFAS 143 applies to all companies that
incur legal obligations to retire tangible long-lived assets that result from
the acquisition, construction, development or normal operation of a long-lived
asset. SFAS 143 is effective for fiscal years beginning after June 15, 2002. The
Company has not determined the impact of adopting SFAS 143 on its results of
operations or financial position.
SFAS 144
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, "Accounting for Impairment or Disposal
of Long-Lived Assets", (SFAS 144). SFAS 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets, and supersedes
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of',
(SFAS 121), and the accounting and reporting provisions of Accounting Principles
Board Opinion No. 30, "Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions", (APB 30) for the disposal of a
segment of a business as previously defined in APB 30. SFAS 144 also amends
Accounting Research Bulletin No. 51, "Consolidated Financial Statements", (ARB
51) to eliminate the exception to consolidation for a subsidiary for which
control is likely to be temporary. The provisions of SFAS 144 are to be applied
to all long-lived assets, with the exception of goodwill. SFAS 144 retains the
requirements of SFAS 121 to recognize an impairment loss only if the carry
amount of the long-lived asset is not recoverable from its undiscounted cash
flows and measure an impairment loss as the difference the carrying amount and
the fair value of the asset. SFAS 144 expands upon the criteria, beyond that
previously specified in SFAS 121 to determine when a long-lived asset is held
for sale and provides guidance on the accounting for long-lived assets
classified as held for sale if the asset is being reclassified as held and used.
The provisions of SFAS 144 are effective for fiscal years beginning after
December 15, 2001, and interim periods within those fiscal years, with early
adoption permitted. The provisions of SFAS 144 generally are to be applied
prospectively. The Company adopted SFAS 144 in the first quarter of fiscal 2002
and the adoption did not have a material impact on the Company's earnings or
financial position.
NOTE 7 - PLANT CLOSING AND OTHER NON-RECURRING CHARGE ACCRUALS
Included in accrued expenses at April 5, 2002 are $653 of costs associated with
the Bangor, Maine plant closing and other non-recurring charges recorded in the
fourth quarter of fiscal 2001. The Company expects that a majority of these
costs will be paid by the end of the second quarter of fiscal 2002.
NOTE 8 - ASSETS HELD FOR SALE
The Company has commenced marketing its Bangor, Maine real property, which had
been previously used for the assembly of our domestic Saucony footwear, in
February 2002. The property is available for immediate sale in its current
condition and the Company expects that the property will be sold during fiscal
2002. The property is being actively marketed for sale at a price that is
reasonable in relation to its current fair value. As of April 5, 2002, the fair
value of the property, based upon an independent appraisal, exceeds the net book
value of the property, which was $357 as of April 5, 2002. As a result of the
Company's decision to sell the property, the Bangor, Maine real property has
been reclassified to current assets as "Held For Sale" and is included on the
balance sheet at April 5, 2002 under the caption "Prepaid Expenses and Other
Current Assets".
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 for the
fiscal year ended January 4, 2002 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 3, 2002, which Certain Factors
discussion is filed as Exhibit 99.1 to this Quarterly Report on Form 10-Q and
incorporated herein by this reference. The forward-looking statements provided
by us in this Quarterly Report on Form 10-Q 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.
Our discussion and analysis of our financial condition and results of operations
are based upon our condensed consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amount of assets and
liabilities at the date of the financial statements and revenues and expenses
during the reporting period. Areas where significant judgments are made include,
but are not limited to: revenue recognition - defective products returns and
other allowances, accounts receivable - allowances for doubtful accounts,
inventories and income taxes. Actual results could differ materially from these
estimates. For a more detailed explanation of the judgments made in these areas,
refer to our Annual Report on Form 10-K for the year ended January 4, 2002, as
filed with the Securities and Exchange Commission on April 3, 2002.
Dollar amounts throughout this Item 2 are in thousands, except per share
amounts.
Highlights
Increase (Decrease)
Thirteen Weeks Ended
April 5, 2002 vs. April 6, 2001
-------------------------------
Net sales.................................... ($8,906) (20.4%)
Gross profit................................. (1,800) (13.1%)
Selling, general and administrative
expenses................................... (1,702) (14.9%)
$ Change
Thirteen Weeks Ended
April 5, 2002 vs. April 6, 2001
-------------------------------
Operating income................................. ($137)
Income before income taxes....................... (68)
Net income....................................... (45)
Percent of Net Sales
Thirteen Weeks Ended
April 5, 2002 vs. April 6, 2001
-------------------------------
Gross profit................................... 34.2% 31.4%
Selling, general and administrative expenses... 27.9 26.1
Operating income............................... 6.5 5.5
Income before income taxes..................... 6.7 5.5
Net income..................................... 3.7 3.1
The following table sets forth the approximate contribution to net sales (in
dollars and as a percentage of consolidated net sales) attributable to our
Saucony segment and our Other Products segment for the thirteen weeks ended
April 5, 2002 and April 6, 2001:
Thirteen Weeks Ended
April 5, 2002 April 6, 2001
-------------------------- -------------------------
Saucony.............$ 28,907 83.1% $ 38,952 89.1%
Other Products...... 5,880 16.9% 4,741 10.9%
----------- --------- ----------- --------
Total...............$ 34,787 100.0% $ 43,693 100.0%
=========== ========= =========== ========
Thirteen Weeks Ended April 5, 2002 Compared to Thirteen Weeks Ended April 6,
2001
Consolidated Net Sales
Net sales decreased $8,906, or 20%, to $34,787 in the thirteen weeks ended April
5, 2002 from $43,693 in the thirteen weeks ended April 6, 2001.
On a geographic basis, domestic sales decreased $9,898, or 27%, to $26,240 in
the thirteen weeks ended April 5, 2002 from $36,138 in the thirteen weeks ended
April 6, 2001. International sales increased $992, or 13%, to $8,547 in the
thirteen weeks ended April 5, 2002 from $7,555 in the thirteen weeks ended April
6, 2001.
Saucony Brand Segment
Worldwide net sales of Saucony branded footwear and apparel decreased $10,045,
or 26%, to $28,907 in the thirteen weeks ended April 5, 2002 from $38,952 in the
thirteen weeks ended April 6, 2001, due primarily to a decrease in domestic
footwear unit volume, partially offset by higher international footwear unit
volumes and higher average domestic wholesale per pair selling prices. The
overall average domestic wholesale selling prices per pair of domestic footwear
increased 24% in the thirteen weeks ended April 5, 2002 versus thirteen weeks
ended April 6, 2001, due to an increase in first quality technical unit volumes
and decreased Originals, closeout footwear and special makeup footwear unit
volumes, all of which are sold at prices below our first quality technical
footwear.
Domestic net sales decreased $10,959, or 34%, to $20,958 in the thirteen weeks
ended April 5, 2002 from $31,917 in the thirteen weeks ended April 6, 2001, due
primarily to a 47% decrease in footwear unit volumes, partially offset by higher
average wholesale per pair selling prices. The footwear unit volume decrease in
the thirteen weeks ended April 5, 2002 was due primarily to a 77% decrease in
Original footwear unit volumes and, to a lesser extent, a 59% decrease in
closeout footwear unit volumes and a 46% decrease in special makeup footwear
unit volumes. These decreases were partially offset by a 30% increase in first
quality technical footwear unit volumes. The average wholesale per pair selling
prices for domestic footwear increased due to a change in the product mix to
increased technical footwear unit volumes and decreased Originals, closeout
footwear and special makeup footwear unit volumes. Sales of closeout footwear
accounted for approximately 9% of domestic Saucony net sales in the thirteen
weeks ended April 5, 2002 compared to 14% in the thirteen weeks ended April 6,
2001. The Originals footwear accounted for 19% of domestic footwear unit volume
in the thirteen weeks ended April 5, 2002 versus 51% in the thirteen weeks ended
April 6, 2001. The unit volume decrease in Originals footwear was primarily due
to a shift in consumer preference to other product categories, primarily
basketball footwear, which we do not sell.
International net sales increased $914, or 13%, to $7,949 in the thirteen weeks
ended April 5, 2002 from $7,035 in the thirteen weeks ended April 6, 2001, due
primarily to an 11% increase in footwear unit volumes, partially offset by lower
average wholesale per pair sell 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 a change in product mix for technical
footwear sold at our international subsidiaries, offset partially by higher
international distributor average wholesale per pair selling prices, due to a
change in the product mix for Originals footwear to higher priced product.
Footwear unit volumes at our European and Canadian subsidiaries, increased 26%
in the thirteen weeks ended April 5, 2002 versus the thirteen weeks ended April
6, 2001. International distributor footwear unit volumes decreased 13%, due to
decreased European distributor unit volumes and an 18% decrease in Originals
footwear unit volumes sold in Japan. Distributor sales into the Japanese
footwear market accounted for 10% of international sales in the thirteen weeks
ended April 5, 2002, compared to 13% in the thirteen weeks ended April 6, 2001.
Other Products Segment
Worldwide sales of Other Products increased $1,139, or 24%, to $5,880 in the
thirteen weeks ended April 5, 2002 from $4,741 in the thirteen weeks ended April
6, 2001 due primarily to a 26% increase in sales of our Hind brand apparel and a
23% increase in sales at our factory outlet stores.
Domestic net sales of Other Products increased $1,061, or 25%, to $5,282 in the
thirteen weeks ended April 5, 2002 from $4,221 in the thirteen weeks ended April
6, 2001, due primarily to a 24% increase in Hind apparel unit volume and a 3%
increase in the average wholesale unit selling prices for our Hind apparel brand
and increased sales at our factory outlet division stores due to increased sales
at stores open for more than one year and the net addition of one factory outlet
store.
International net sales of Other Products increased $78, or 15%, to $598 in the
thirteen weeks ended April 5, 2002 from $520 in the thirteen weeks ended April
6, 2001, due primarily to increased Hind apparel sales in Canada.
Costs and Expenses
Our gross margin in the thirteen weeks ended April 5, 2002 increased 2.8% to
34.2% from 31.4% in the thirteen weeks ended April 6, 2001, due primarily to
increased Saucony domestic sales of first quality footwear products at full
margin. Other factors contributing to the margin increase were proportionately
lower sales of closeout footwear, reduced expenses resulting from the closure of
our Bangor, Maine production facility, decreased sales of special makeup
footwear, which carry lower gross margins, offset in part by increased
international sales which carry lower gross margins.
The SG&A ratio increased 1.8% to 27.9% of net sales in the thirteen weeks ended
April 5, 2002 from 26.1% in the thirteen weeks ended April 6, 2001. In absolute
dollars, selling, general and administrative expenses decreased $1,702, or 15%,
to $9,693 in the thirteen weeks ended April 5, 2002 from $11,395 in the thirteen
weeks ended April 6, 2001. Decreased spending in the thirteen weeks ended April
5, 2002 was due primarily to decreased print advertising, decreased
account-specific advertising, decreased spending on events and promotions,
reduced variable selling expenses and decreased administrative spending.
Net interest expense decreased $84, to interest income of $24 in the thirteen
weeks ended April 5, 2002 from interest expense of $60 in the thirteen weeks
ended April 5, 2001, due primarily to the absence of borrowings against our
domestic and foreign credit facilities and, to a lesser extent, increased
interest income.
Income Before Tax and Minority Interest
Thirteen Weeks Ended
--------------------
April 5, April 6,
2002 2001
---- ----
Segment
Saucony.....................$ 2,235 $ 2,550
Other Products.............. 97 (150)
--------- ---------
Total.......................$ 2,332 $ 2,400
========= ========
Income before tax decreased by $68 in the thirteen weeks ended April 5, 2002 to
$2,332 compared to $2,400 in the thirteen weeks ended April 6, 2001, due
primarily to lower pre-tax income realized by the domestic Saucony segment due
to lower sales, partially offset by improved profitability in our Saucony
international business. The improvement in our Other Products segment income
before tax is due primarily to improved profitability at our factory outlets due
to increased sales and the closing of an underperforming retail store.
Income Taxes
The provision for income taxes decreased to $967 in the thirteen weeks ended
April 5, 2002 from $1,015 in the thirteen weeks ended April 6, 2001, due
primarily to lower pre-tax income realized by the domestic Saucony segment. The
effective tax rate decreased .8% to 41.5% in the thirteen weeks ended April 5,
2002 from 42.3% in the thirteen weeks ended April 6, 2001 due to a shift in the
composition of domestic and foreign pre-tax earnings.
Net Income
Net income for thirteen weeks ended April 5, 2002 decreased to $1,301, or $0.21
per diluted share, compared to $1,346 or $0.22 per diluted share, in the
thirteen weeks ended April 5, 2001. Weighted average common shares and
equivalent shares used to calculate diluted earnings per share were 6,120 and
6,188, respectively, in the thirteen weeks ended April 5, 2002 and April 6,
2001.
Liquidity and Capital Resources
As of April 5, 2002, our cash and cash equivalents totaled $15,271, a decrease
of $6,956 from January 4, 2002. The decrease is due primarily to a use of cash
from operations of $7,318, cash outlays for capital assets of $61 and the
repayment of long-term debt of $16. This decrease in cash was offset partially
by the receipt of payment on notes receivable of $312 and the receipt of $65
from the issuance of shares of our common stock.
Our accounts receivable increased $10,723, net of the provision for bad debts
and discounts, due to increased sales of our Saucony footwear products in the
thirteen weeks ended April 5, 2002, compared to our sales for the thirteen weeks
ended January 4, 2002. Our days sales outstanding for accounts receivable
improved to 67 days in the thirteen weeks ended April 5, 2002 from 76 days in
the thirteen weeks ended April 6, 2001 due to a shift in the domestic sales mix
to products and programs which offer less dating and the impact of
proportionately higher sales at our factory outlet division. Inventories
decreased $3,359 in the thirteen weeks ended April 5, 2002 from January 4, 2002,
due to seasonal inventory requirements. The number of day's sales in inventory
increased to 99 days in the thirteen weeks ended April 5, 2002 from 95 days in
the thirteen weeks ended April 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
thirteen weeks ended April 5, 2002 included a decrease of $1,706 in accounts
payable (due to lower inventory levels), a decrease of $120 in accrued expenses
(due primarily to the payment of plant closing severance and other costs accrued
in fiscal 2001, offset by the receipt of $653 in income tax refunds) and an
increase in prepaid expenses of $85 (due to increased advertising prepayments).
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. During the thirteen weeks ended April 5, 2002, we
used $7,318 in cash to fund operations, due primarily to an increase in accounts
receivable. In the thirteen weeks ended April 6, 2001, we used $5,797 in cash to
fund operations also due to an increase in accounts receivable. At April 5,
2002, we had no borrowings outstanding under our credit facilities, compared to
$6,271 at April 6, 2001. 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.
RECENT ACCOUNTING PRONOUNCEMENTS
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" (APB
17). We adopted SFAS 142 on January 5, 2002. In applying SFAS 142 we performed
the transitional reassessment and impairment test required as of January 4, 2002
and determined the goodwill to have indefinite lives and that there was no
impairment of these assets. We discontinued amortizing goodwill on January 4,
2002. At January 4, 2002, the net book value of goodwill was $912.
SFAS 143
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations", (SFAS 143). SFAS 143 addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement cost. SFAS 143 applies to all companies that
incur legal obligations to retire tangible long-lived assets that result from
the acquisition, construction, development or normal operation of a long-lived
asset. SFAS 143 is effective for fiscal years beginning after June 15, 2002. We
have not determined the impact on our results of operations or financial
position on the initial adoption of SFAS 143.
SFAS 144
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, "Accounting for Impairment or Disposal
of Long-Lived Assets", (SFAS 144). SFAS 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets, and supersedes
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of',
(SFAS 121), and the accounting and reporting provisions of Accounting Principles
Board Opinion No. 30, "Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions", (APB 30) for the disposal of a
segment of a business as previously defined in APB 30. SFAS 144 also amends
Accounting Research Bulletin No. 51, "Consolidated Financial Statements", (ARB
51) to eliminate the exception to consolidation for a subsidiary for which
control is likely to be temporary. The provisions of SFAS 144 are to be applied
to all long-lived assets, with the exception of goodwill. SFAS 144 retains the
requirements of SFAS 121 to recognize an impairment loss only if the carry
amount of the long-lived asset is not recoverable from its undiscounted cash
flows and measure an impairment loss as the difference between the carrying
amount and the fair value of the asset. SFAS 144 expands upon the criteria,
beyond that previously specified in SFAS 121 to determine when a long-lived
asset is held for sale and provides guidance on the accounting for long-lived
assets classified as held for sale if the asset is being reclassified as held
and used. The provisions of SFAS 144 are effective for fiscal years beginning
after December 15, 2001, and interim periods within those fiscal years, with
early adoption permitted. The provisions of SFAS 144 generally are to be applied
prospectively. We adopted SFAS 144 in the first quarter of fiscal 2002 and the
adoption did not have a material impact on our earnings or on our financial
position.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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 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
The Company did not file any Current Reports on Form 8-K during
the quarter ended April 5, 2002.
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: May 17, 2002 By: /s/ Michael Umana
------------------------------------
Michael Umana
Senior Vice President, Finance
Chief Financial Officer
(Duly authorized officer and
principal financial officer)
EXHIBIT INDEX
Exhibit No. Description
10.1 Letter Amendment dated February 22, 2002 to the Credit Agreement,
dated August 31, 1998, between Saucony, Inc. and State Street Bank
and Trust Company.
10.2 Letter Amendment dated March 7, 2002 to the Credit Agreement,
dated August 31, 1998, between Saucony, Inc. and State Street Bank
and Trust Company.
99.1 "Certain Factors That May Affect Future Results", as set
forth within "Item 7 - Management's Discussion and Analysis
of Financial Condition and Results of Operation" of the
Registrant's Annual Report on Form 10-K for the fiscal year
ended January 4, 2002 filed with the Securities and Exchange
Commission on April 3, 2002.