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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 3, 2006
( ) 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: 1-4404
THE STRIDE RITE CORPORATION
(Exact name of registrant as specified in its charter)
Massachusetts 04-1399290
---------------------------- ----------
(State or other jurisdiction (I.R.S. Employer Identified No.)
of Incorporation or Organization)
191 Spring Street, Lexington, Massachusetts 02421
(Address of principal executive offices) (Zip Code)
(617)824-6000
------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required 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 by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and larger accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
One):
Large accelerated filer ( ) Accelerated filer (X) Non-accelerated filer ( )
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes( ) No (X)
As of April 7, 2006, 36,721,456 shares of the Registrant's common stock, $.25
par value, and the accompanying Preferred Stock Purchase Rights were
outstanding.
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
THE STRIDE RITE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
March 3, March 4,
2006 December 2, 2005
(Unaudited) 2005 (Unaudited)
--------------- -------------- ------------
Assets
Current Assets:
Cash and cash
equivalents $23,219 $33,094 $24,222
Marketable securities - - 20,400
Accounts and notes
receivable, net 121,098 63,368 90,257
Inventories 115,594 116,095 94,785
Deferred income taxes 14,262 14,211 12,816
Other current assets 18,074 25,918 13,368
-------- -------- --------
Total current assets 292,247 252,686 255,848
Property and equipment, net 51,625 51,367 52,708
Goodwill 56,732 56,729 908
Trademarks and other
intangibles 58,590 58,590 1,690
Other assets, net 19,301 19,482 11,197
-------- -------- --------
Total assets $478,495 $438,854 $322,351
======== ======== ========
The accompanying notes are an integral part of the
condensed consolidated financial statements.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands, except for share data)
March 3, March 4,
2006 December 2, 2005
(Unaudited) 2005 (Unaudited)
--------------- -------------- -------------
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $28,120 $24,186 $19,556
Income taxes payable 7,936 12,845 19,019
Accrued expenses and other
liabilities 31,709 35,991 19,355
------ ------ ------
Total current liabilities 67,765 73,022 57,930
Long term debt 95,000 60,000 -
Deferred income taxes 23,781 23,980 487
Pension obligation and other
long-term liabilities 15,153 15,174 11,160
Stockholders' Equity:
Preferred stock, $1 par value
Shares authorized - 1,000,000
Shares issued - None - - -
Common stock, $.25 par value
Share authorized - 135,000,000
Shares issued and
outstanding -
36,711,809 on
March 3,2006,
36,499,403 on
December 2, 2005 and
36,062,434 on March
4,2005 9,172 9,125 9,016
Capital in excess of par
value 22,634 18,434 9,605
Retained earnings 253,674 248,586 243,306
Accumulated other
comprehensive loss (8,684) (9,467) (9,153)
--------- --------- ---------
Total stockholders' equity 276,796 266,678 252,774
--------- --------- ---------
Total liabilities and
stockholders' equity $478,495 $438,854 $322,351
========= ======== ========
The accompanying notes are an integral part of the
condensed consolidated financial statements.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
For the three months ended March 3, 2006 and March 4, 2005
(In thousands, except for per share data)
2006 2005
-------------- ---------------
Net sales $183,416 $150,591
Cost of sales 110,184 90,059
--------- ---------
Gross profit 73,232 60,532
Selling and administrative expenses 58,910 47,451
--------- ---------
Operating income 14,322 13,081
Investment income 484 300
Interest expense (1,163) (81)
Other income (expense), net (144) (57)
---------- ----------
Income before income taxes 13,499 13,243
Provision for income taxes (5,214) (5,082)
Net income $ 8,285 $ 8,161
========= =========
Net income per common share:
Diluted $ .22 $ .22
========= =========
Basic $ .23 $ .23
========= =========
Dividends per common share $ .06 $ .05
========= =========
Average common shares used in
per share computations:
Diluted 37,703 36,963
========= =========
Basic 36,588 36,007
========= =========
The accompanying notes are an integral part of the
condensed consolidated financial statements.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the three months ended March 3, 2006 and March 4, 2005
(In thousands)
2006 2005
-------------- -------------
Cash flows from operating activities:
Net income $8,285 $8,161
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 3,898 3,145
Deferred income taxes (245) 307
Compensation expense related to stock plans 721 119
Gain related to long-term investments - (61)
Gain on disposals of property and
equipment (307) (35)
Changes in:
Accounts and notes receivable (57,565) (42,601)
Inventories 675 (7,014)
Other current assets 6,352 313
Other current liabilities (4,489) 135
Other long-term assets 296 (1,925)
Other long-term liabilities 1,341 (44)
Contribution to pension plan - (3,000)
--------- ---------
Net cash used by operating activities (41,038) (42,500)
---------- ---------
Cash flows from investing activities:
Additions to property and equipment (3,850) (1,573)
Investments in marketable securities
available for sale - (9,725)
Proceeds from sale of marketable securities
available for sale - 60,175
Distributions from long-term investments - 61
--------- ---------
Net cash (used in) provided from investing
activities (3,850) 48,938
---------- ---------
Cash flows from financing activities:
Borrowings under revolving credit facility 54,000 -
Payments under revolving credit facility (19,000) -
Proceeds from sale of stock under stock plans 2,489 4,984
Tax benefit in connection with exercise of
stock options 629 -
Cash dividends paid (2,189) (1,795)
Repurchase of common stock (1,587) (5,692)
--------- ---------
Net cash provided from (used in) financing
activities 34,342 (2,503)
--------- ---------
Effect of exchange rate changes on cash and
cash equivalents 671 282
--------- ---------
Net (decrease) increase in cash and cash (9,875) 4,217
equivalents
Cash and cash equivalents at beginning of the
period 33,094 20,005
--------- ---------
Cash and cash equivalents at end of the period $23,219 $24,222
========= =========
The accompanying notes are an integral part of the
condensed consolidated financial statements.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of Significant Accounting Policies
Basis of Presentation
The financial information included in this Form 10-Q of The Stride Rite
Corporation (the "Company") for the periods ended March 3, 2006 and March 4,
2005 is unaudited, however, such information includes all adjustments (including
all normal recurring adjustments) which, in the opinion of management, are
considered necessary for a fair presentation of the consolidated results for
those periods. The results of operations for the periods ended March 3, 2006 and
March 4, 2005 are not necessarily indicative of the results of operations that
may be expected for the complete fiscal year. The year-end condensed balance
sheet data was derived from audited financial statements, but does not include
all disclosures required by generally accepted accounting principles. The
Company filed with the Securities and Exchange Commission audited consolidated
financial statements for the year ended December 2, 2005 on Form 10-K, which
included all information and footnotes necessary for such presentation.
Effective July 1, 2004, new capitalization rules under Massachusetts
Business Corporation Act, Chapter 156D provided that shares reacquired by a
company become authorized but unissued shares; effectively eliminating the
concept of treasury stock. The Company has reflected this change in the
accompanying consolidated consolidated balance sheet for the quarter ended March
4, 2005.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company's preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
respective periods. The most significant estimates included in these financial
statements include valuation allowances and reserves for accounts receivable,
sales returns allowances, markdowns (which reduce revenues), inventory valuation
and income taxes; assumptions related to the defined benefit pension plan;
assumptions used in the calculation of share-based compensation costs;
assumptions and estimates used in valuing the assets and liabilities acquired
through business acquisitions; and estimates of future undiscounted cash flows
on property and equipment that may be impaired. Actual results could differ
materially from those estimates.
Stock Purchase and Option Plans
During 2002, the Company's stockholders approved The Stride Rite
Corporation Amended and Restated Employee Stock Purchase Plan. Amending the
Employee Stock Purchase Plan, among other things, increased the number of common
shares available for issuance thereunder by 500,000 shares to a total of
6,140,000 shares. Under the Plan, participating associates can authorize the
Company to withhold up to 10% of their earnings during consecutive six month
payment periods for the purchase of shares. At the conclusion of the period,
associates can purchase shares at the lesser of 85% of the market value of the
Company's common stock on either their entry date into the Plan or the last day
of the payment period. Effective at the commencement of the January 1, 2006
withholding period, the Employee Stock Purchase Plan ("ESPP") will shorten its
withholding periods to three months, increase the purchase price from 85% of the
market value to 95% of the market value and eliminate the look-back provision to
the start of the withholding period. For the payment period which ended in
December 2005, a total of 46,008 shares were issued under the Plan for an
aggregate amount of $530,288. At March 3, 2006, a total of 5,906,166 shares had
been purchased under the Plan since inception and 233,834 shares were available
for purchase by participating associates.
During 1998, the Company's stockholders approved The Stride Rite
Corporation 1998 Non-Employee Director Stock Ownership Plan. Under the 1998
Director's Plan, awards of common stock and options to purchase common stock are
granted to any director who is not an employee of the Company in accordance with
the provisions of the Plan. During April 2003, the Company's stockholders
approved an amendment to the 1998 Director's Plan increasing the number of
shares of common stock authorized for issuance from 300,000 to 600,000. Options
to purchase common stock are granted at a price equal to the closing price of
the Company's common stock on the date the option is granted. Directors receive
an annual grant of options to purchase 5,000 shares of common stock under the
Plan. Options have a term of ten years and are non-transferable. Under the Plan,
options become exercisable over a three-year period and must be paid for in full
at the time of exercise. In April 1999, the stockholders approved an amendment
to the Plan which allowed directors to receive their annual retainer either
entirely in shares of common stock or
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
one-half in shares of common stock and one-half in cash at the election of
each director. In addition, directors may defer receipt of the stock and/or cash
portion of their annual retainer by electing to participate in the Company's
Deferred Compensation Plan for Directors. At March 3, 2006, the issuance of
124,295 shares has been deferred by participating directors. At March 3, 2006,
173,762 options were available to grant under the 1998 Director's Plan.
During 2004, the Company's stockholders approved an amendment to the 2001
Stock Option and Incentive Plan. This amendment, among other things, increased
the number of common shares of stock reserved and available for issuance under
the 2001 plan to 6,000,000 shares, of which 3,000,000 shares represent an
increase over the previous number of shares reserved. The 2001 Stock Option and
Incentive Plan, which expires in April 2011, replaced a similar long-term
incentive plan which had been approved by the stockholders in 1998. Under the
Plan, as amended, options to purchase common stock and stock awards of up to an
aggregate of 6,000,000 shares of the Company's common stock may be granted to
officers and other key associates. At March 3, 2006, 1,812,095 options were
available to grant under the 2001 plan. The option price of the shares may not
be less than the fair market value of the Company's common stock at the date of
grant. Options issued under the Plan prior to fiscal 2005 generally vest over a
three-year period and the rights to purchase common shares expire ten years
following the date of grant. Options issued since the beginning of the 2005
fiscal year generally vest over a four-year period and expire seven years
following the date of grant. Beginning in fiscal 2005, certain executives were
granted restricted stock under the 2001 Plan. These restricted shares are
subject to certain pre-established performance criteria, which may affect the
number of restricted shares received. If issued, these restricted shares will
vest over four years in equal annual installments. Stock awards, which are
limited to 1,000,000 shares in the Plan, generally vest over a four-year period.
A summary of the activity in share based compensation with respect to all
plans for the three months ended March 3, 2006 are as follows:
Number of
Options and
Restricted Weighted Average
Shares Exercise Price
- --------------------------------------------------------------------------------
Outstanding at December 2, 2005 3,697,847 $8.98
Granted 905,596 11.39
Exercised (288,730) 6.78
Canceled (44,254) 11.95
--------------- -----
Outstanding at March 3, 2006 4,270,459 $9.60
================= =====
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about stock options
outstanding at March 3, 2006:
Weighted
Average Weighted
Remaining Average Aggregate
Range of Number Contractual Exercise Intrinsic
Exercise Prices Outstanding Life Price Value
- --------------- ----------- ----------- -------- ---------
$5.00-$6.88 1,188,020 4.7 years $5.93 $ 9,397,238
$7.38-$11.00 1,113,492 6.4 years 8.54 5,901,508
$11.01-$12.06 1,132,947 6.6 years 11.58 2,560,460
$12.13-$14.95 836,000 6.7 years 13.57 231,535
--------- --------- ----- -----------
4,270,459 6.0 years $9.60 $18,090,741
========= ========= ===== ===========
The following table summarizes information about stock options exercisable
at March 3, 2006:
Weighted
Average Weighted
Remaining Average Aggregate
Range of Number Contractual Exercise Intrinsic
Exercise Prices Exercisable Life Price Value
- --------------- ----------- ----------- -------- ---------
$5.00-$6.88 1,076,327 4.6 years $6.55 $7,846,424
$7.38-$11.00 992,445 6.2 years 8.33 5,468,372
$11.01-$12.06 520,170 6.7 years 11.38 1,279,618
$12.13-$14.95 55,000 2.4 years 12.26 86,900
--------- --------- ----- -----------
2,643,942 5.6 years $8.29 $14,681,314
========= ========= ===== ===========
In December 2004, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123R, "Share-Based Payment" ("SFAS 123R"),
which requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the financial statements based on
their fair values. SFAS 123R revises SFAS No. 123 and supersedes APB Opinion No.
25, "Accounting for Stock Issued to Employees". Effective December 3, 2005, the
Company adopted the provisions of SFAS 123R using the modified prospective
application transition method. Under this transition method, the compensation
cost related to all equity instruments granted prior to, but not yet vested as
of adoption recognized is based on the grant-date fair value which is estimated
in accordance with the original provisions of SFAS 123. The grant-date fair
value of the awards generally vest over the service period. Under the provisions
of SFAS 123R, the Company is required to include an estimate of the number of
the awards that will be forfeited. Previously, the Company had recognized the
impact of forfeitures as they occurred.
Effective at the commencement of the January 1, 2006 withholding period,
the changes made to the ESPP resulted in the plan's qualification as
non-compensatory under SFAS No. 123R.
Share-based compensation costs were $721 thousand for the three months
ended March 3, 2006, of which $105 thousand are included in cost of sales and
$616 thousand are included in selling and administrative expenses in the
accompanying condensed consolidated statements of income. The Company did not
capitalize any share-based compensation costs as the costs that qualified for
capitalization were not material. The related tax benefit of the share-based
compensation costs recognized in the three months ended March 3, 2006 was $295
thousand.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Prior to December 3, 2005, the Company had accounted for share-based
compensation costs in accordance with APB Opinion No. 25, as permitted by SFAS
No. 123. The following table provides the effect on net income and earnings per
share if the Company had applied the fair value recognition provisions of SFAS
No. 123 as amended by SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure", through disclosure only for the three months ended
March 4, 2005:
Three Months
Ended
March 4,
(In thousands, except for per share data) 2005
- --------------------------------------------- ----------------
Net income, as reported 8,161
Add: Stock-based employee compensation
expense included in net income, net of
related tax effects 83
Deduct: Total stock-based
employee compensation expense determined
under fair value based method for all
awards, net of related tax effects
(497)
Pro forma net income $ 7,747
=======
Earnings per share:
Basic - as reported $ .23
=======
Basic - pro forma $ .22
=======
Diluted - as reported $ .22
=======
Diluted - pro forma $ .21
=======
The weighted average grant date fair value used in the calculation of
share-based compensation costs in the accompanying condensed consolidated
statements of income for the three months ended March 3, 2006 and the pro forma
net income and earnings per share information presented above has been
calculated using the Black-Scholes option pricing model with the following
weighted average assumptions:
Employee Stock Options 2006 2005
- -----------------------------------------------------------------------
Risk-free interest rate 4.32% 3.44%
Dividend yield 1.8% 1.7%
Volatility factor 26.6% 35.0%
Weighted average
expected life of options (years) 4.75 4.00
The weighted average expected life of options was calculated using the
simplified method as prescribed by the Securities and Exchange Commission's
Staff Accounting Bulletin No. 107. This decision was based on the lack of
relevant historical data due to decreasing the option's contractual term from 10
years to 7 years and increasing the vesting period from 3 years to 4 years for
options that were granted starting in fiscal year 2005. The risk-free
interest rate assumption was based on the United States Treasury's constant
maturity's rate for a 4.75 year term on the date the option was granted. The
volatility assumption was based on weekly historical volatility during the time
period that corresponds to the expected weighted average life of the option. The
assumed dividend yield was based on the Company's expectation of future dividend
payouts. The post-vesting forfeiture rate is based on the four year historical
average turnover rate for two groups of option eligible employees. These
assumptions are evaluated, and revised as necessary, based on changes in market
conditions and historical experience.
The weighted average grant date fair values of stock options granted during
the three months ended March 3, 2006 and March 4, 2005 were estimated at $3.46
and $3.35, respectively.
Total unrecognized share-based compensation costs related to non-vested
stock options was approximately $6.8 million as of March 3, 2006 which related
to approximately 1.7 million shares with a per share weighted value of $3.92.
This unrecognized cost is expected to be recognized over a weighted average
period of approximately 3 years. The intrinsic value of options exercised during
the three months ended March 3, 2006 was approximately $1.5 million.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Earnings Per Share
Basic earnings per common share excludes dilution and is computed by
dividing net income available to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted earnings per common
share reflects the potential dilution that could occur if stock options and
other types of stock-based compensation that issue common stock are exercised.
The following is a reconciliation of the number of shares used in the basic
and diluted earnings per share computations:
Three Months Ended
----------------------------------------
March 3, March 4,
2006 2005
--------------------- --------------
(In thousands, except for per share data)
Net income $ 8,285 $ 8,161
======= =======
Weighted average common shares
outstanding (basic) 36,588 36,007
Dilutive effect of share-based
compensation 1,115 956
------- -------
Weighted average common shares
outstanding (diluted) 37,703 36,963
======= =======
Earnings per common share:
Basic $ .23 $ .23
======= =======
Diluted $ .22 $ .22
======= =======
The following weighted shares have been excluded in the computation of
diluted earnings per share because the weighted shares are anti-dilutive:
First Quarter
----------------------------
2006 2005
------------ ------------
(In thousands)
Anti-dilutive weighted shares 944 399
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - Comprehensive Income
Comprehensive income is as follows:
Three Months Ended
--------------------------------
March 3, March 4,
2006 2005
------------------ ------------
(In thousands)
Net income $8,285 $8,161
Other comprehensive income:
Foreign currency translation adjustments 783 245
------ ------
Total comprehensive income $9,068 $8,406
====== ======
Components of accumulated other comprehensive loss consist of the
following:
March 3, December 2, March 4,
2006 2005 2005
--------------- ---------------- ------------
(In thousands)
Foreign currency translation
adjustments $730 $(53) $80
Minimum pension liability
adjustments, net of taxes (9,414) (9,414) (9,233)
-------- -------- --------
Accumulated other
comprehensive loss $(8,684) $(9,467) $(9,153)
======== ======== ========
Note 4 - Saucony Acquisition
In September 2005, the Company completed its acquisition of Saucony, Inc.
("Saucony") pursuant to an Agreement and Plan of Merger. As part of the
acquisition and in the fourth quarter of 2005, the Company entered into a plan
to exit several owned and leased Saucony facilities, to combine the operations
of these facilities within the existing Stride Rite infrastructure, and to
terminate the employment of approximately 110 Saucony employees worldwide due to
identified synergies.
Details of the acquisition related accruals are as follows:
Acquisition Acquisition
Related Related
(In thousands) Severance Exit Costs
- ------------------------------------------- ------------- -------------
Beginning balance at December 2, 2005 $2,113 $932
Additions charged to cost and expenses - -
Utilization (555) -
Foreign currency translation impact 4 1
------ -----
Balance at March 3, 2006 $1,562 $933
====== ====
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following pro forma information presents the results of operations of
the Company as if the Saucony acquisition had taken place on December 4, 2004.
The pro forma results are not necessarily indicative of the financial position
or results of operations of the Company had the merger been consummated on the
date indicated. In addition, the pro forma results are not necessarily
indicative of future financial condition or operating results of the Company.
Pro forma
---------
Three Months Ended
March 4, 2005
(In thousands) (Unaudited)
------------------------------------------
Revenue $192,538
Operating Income 18,093
Net income $ 10,698
========
Earnings per
share:
Basic $0.30
=====
Diluted $0.29
=====
The pro forma information was prepared by combining Saucony, Inc.'s
unaudited condensed consolidated statements of income for the thirteen weeks
ended April 1, 2005 and the Company's unaudited condensed consolidated
statements of income for the three months ended March 4, 2005. Pro forma
adjustments have been made to reflect the amortization expense relating to the
finite life intangible assets, the changes in depreciation and amortization
expense resulting from the fair value adjustments to the net tangible assets,
and interest expense relating to acquisition related debt. No portion of the
purchase accounting write up of inventory to fair value has been included in the
this pro forma information because of the difficulty in estimating such an
adjustment under the LIFO inventory costing method.
Note 5 - Debt
In connection with the acquisition of Saucony, the Company entered into a
five-year revolving credit facility pursuant to a Credit Agreement dated
September 16, 2005 (the "Credit Agreement'). The Credit Agreement provides for
secured revolving loans in an aggregate amount up to $275 million (the
"revolver"), including a $75 million sublimit for the issuance of letters of
credit and a $15 million sublimit for swing line loans, with $200 million
currently committed. Borrowings under the Credit Agreement are scheduled to
mature on September 16, 2010 and are collateralized by substantially all of the
assets of the Company. Refer to Note No. 7 in the Company's consolidated
financial statements for the fiscal year ended December 2, 2005 as contained on
Form 10-K filed by the Company with the Securities and Exchange Commission
("SEC") on February 13, 2006 and the Form 8-K filed by the Company with the SEC
on September 22, 2005 for additional information.
During the first quarter of fiscal 2006 borrowings under this Credit
Agreement averaged $78.1 million, with a maximum amount outstanding of $101.0
million. The weighted average interest rate on these borrowings during the
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
first quarter of fiscal year 2006 was 5.80%. On March 3, 2006, $95 million
was outstanding under the revolver. Cash interest payments were $1.1 million in
the first quarter of fiscal year 2006. There were no borrowings outstanding at
any time during the first quarter of the prior fiscal year. The Company was in
compliance with its covenants as of March 3, 2006.
Note 6 - Benefit Plans
The following table summarizes the components of net periodic benefit cost
for the Company:
Three Months Ended
----------------------------------
2006 2005
---------------- ---------------
(In thousands)
Service cost $570 $530
Interest cost 1,029 955
Expected return on assets (1,143) (1,120)
Net loss recognized 510 505
Amortization of prior service cost 3 5
------ ------
Net periodic benefit cost $969 $875
====== ======
During the first quarter of fiscal 2006, no contributions were made to the
Company's defined benefit pension plan. At this time, the Company does not plan
to make any contributions to its defined benefit pension plan during the 2006
fiscal year.
Note 7 - Contingencies
The sale of Tommy Hilfiger branded footwear is a significant portion of our
business. The Tommy Hilfiger footwear sales are contingent on our licensing
agreement with Tommy Hilfiger Licensing, Inc. In January, 2004, we finalized the
terms of the current license agreement, which will expire in March, 2007.
Whether our license with Tommy Hilfiger will remain in effect depends on our
achieving certain minimum sales levels for the licensed products. We expect to
continue to meet the minimum sales levels required by the Tommy Hilfiger license
agreement. We believe that no provision is currently required for costs related
to the potential loss of this license. Additionally, Tommy Hilfiger Corp. is
under agreement to be acquired by an unrelated third party. If we lose the Tommy
Hilfiger license, our business would be materially and adversely affected.
In December of 2004, Saucony, Inc. recorded a charge to address
environmental conditions at a Saucony owned distribution facility. The facility
and the related liability were acquired by the Company as part of the Saucony
acquisition in September of 2005. The liability as of March 3, 2006 is
$1,931,000 and is included as an accrued expense in the accompanying condensed
consolidated balance sheet. The original estimated costs ranged from $1,242,000
to $4,621,000. The Company's management determined that the liability was fairly
stated upon acquisition. The assessment of the liability and the associated
costs are an estimate based upon available information after consultation with
environmental engineers, consultants and attorneys assisting the Company in
addressing these environmental issues. Actual costs
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
to address the environmental conditions may change based upon further
investigations, the conclusions of regulatory authorities about information
gathered in those investigations and due to the inherent uncertainties involved
in estimating conditions in the environment and the costs of addressing such
conditions. During the first quarter of the fiscal 2006, there were no changes
to the reserve.
Note 8 - Operating Segments and Related Information
In September 2005 the Company acquired Saucony, Inc. During the first
quarter of 2006, a portion of Saucony's operations were integrated into existing
operating segments of the Company. As a result, the Company re-assessed its
reportable segments under SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information".
The changes during the first quarter of fiscal 2006 to the Company's
reportable segments are as follows: the Stride Rite Children's Group - Retail
Division includes the Saucony factory outlet stores (16 stores as of March 3,
2006); Saucony's international operations are now included in the Stride Rite
International division which is aggregated in the Other Wholesale Footwear
reportable segment; Saucony's domestic footwear division, which includes the
Hind unit, is now aggregated in the Other Wholesale Footwear reportable segment.
As a result of the adoption of SFAS No. 123R at the beginning of fiscal
2006, stock-based compensation costs of $721 thousand are included in the
operating loss of the Unallocated Corporate and Other segment for the three
months ended March 3, 2006. See Note 1 for further information.
For the three months ended March 3, 2006 and March 4, 2005:
Stride Stride
Rite Rite
Children'sChildren'sTommy Other Unallocated
First Group - Group - Hilfiger Wholesale Corporate
Quarter 2006 Retail Wholesale Footwear Footwear & Other Consolidated
-------------------------------------------------------------
Sales $37,924 $21,156 $14,933 $112,960 - $186,973
Intercompany
sales - (27) (865) (2,665) - (3,557)
-------------------------------------------------------------
Net sales to
external
customers $37,924 $21,129 $14,068 $110,295 - $183,416
=============================================================
Operating
(loss)
income $(2,906) $ 2,802 $ (338) $ 17,726 $(2,962) $ 14,322
Interest and
other,
net - - - - (823) (823)
-------------------------------------------------------------
Income
(loss)before
income
taxes $(2,906) $ 2,802 $ (338) $ 17,726 $(3,785) $ 13,499
=============================================================
Total assets $44,457 $48,610 $14,615 $304,958 $65,855 $478,495
=============================================================
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Stride Stride
Rite Rite
Children'sChildren'sTommy Other Unallocated
First Group - Group - Hilfiger Wholesale Corporate
Quarter 2005 Retail Wholesale Footwear Footwear & Other Consolidated
-------------------------------------------------------------
Sales $35,445 $25,586 $18,121 $74,053 - $153,205
Intercompany
sales - (25) (841) (1,748) - (2,614)
-------------------------------------------------------------
Net sales to
external
customers $35,445 $25,561 $17,280 $72,305 - $150,591
=============================================================
Operating
(loss)
income $(534) $4,037 $(1,227) $13,432 $(2,627) $13,081
Interest and
other,
net - - - - 162 162
-------------------------------------------------------------
Income
(loss)
before
income
taxes $(534) $4,037 $(1,227) $13,432 $(2,465) $13,243
=============================================================
Total assets $37,843 $64,002 $26,393 $103,405 $90,708 $322,351
=============================================================
Note 9 - Recent Accounting Pronouncements
In March 2005, FASB issued FASB Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations" ("FIN 47"), an interpretation of SFAS
No. 143, "Accounting for Asset Retirement Obligations". FIN 47 clarifies that
"conditional asset retirement obligation", as used in SFAS No. 143, refers to a
legal obligation to perform an asset retirement activity in which the timing and
(or) the method of settlement are conditional on a future event that may or may
not be within control of an entity. The interpretation also clarifies that an
entity should record the fair value of such a liability when it can be
reasonably estimated. The entity shall recognize such a liability as a
cumulative change in accounting principle. The provisions of FIN 47 are
effective no later than the end of fiscal years ending after December 15, 2005;
therefore effective at the Company's 2006 fiscal year end. The Company is
currently evaluating the provisions of FIN 47 to determine the impact on our
financial position, results of operations, and cash flow.
Note 10 - Subsequent Events
In the second quarter of fiscal 2006, a tax audit was concluded for which
the Company had established reserves in prior years. The outcome of the tax
audit was favorable and is expected to result in the reversal of prior year tax
reserves which may be significant.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
The following discusses The Stride Rite Corporation's results of operations
and liquidity and capital resources. The discussion, including known trends and
uncertainties identified by management, should be read in conjunction with the
condensed consolidated financial statements and related notes.
This Form 10-Q contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995 and Section 21E of the
Securities Exchange Act of 1934. We caution investors that any forward-looking
statements presented in this report and presented elsewhere by management from
time to time are based on management's beliefs and assumptions made by, and
information currently available to, management. When used, the words
"anticipate", "believe", "expect", "intend", "may", "plan", "estimate",
"project", "should", "will be" and similar expressions which do not relate
solely to historical matters are intended to identify forward-looking
statements. Such statements are subject to risks, uncertainties and assumptions
and are not guarantees of future performance, which may be affected by known and
unknown risks, trends, uncertainties and factors that are beyond our control.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those anticipated, estimated or projected. We expressly disclaim any
responsibility to update forward-looking statements. Accordingly, past results
and trends should not be used by investors to anticipate future results or
trends.
Risks and uncertainties that may affect future performance are detailed
from time to time in reports filed by the Company with the Securities and
Exchange Commission, including Forms 10-Q and 10-K, and include, among others,
the following: the inability to fully realize the anticipated benefits from the
acquisition of Saucony, the challenges of achieving the expected synergies with
Saucony, the possibility of incurring costs or difficulties related to the
integration of the businesses of Stride Rite and Saucony; the possible failure
to retain the Tommy Hilfiger footwear license; international, national and local
general economic and market conditions; the size and growth of the overall
footwear and general retail market; intense competition among designers,
marketers, distributors and sellers of footwear; demographic changes; changes in
consumer fashion trends that may shift to footwear styling not currently
included in our product lines; popularity of particular designs and categories
of products; seasonal and geographic demand for the Company's products;
difficulties in anticipating or forecasting changes in consumer preferences;
delays in the opening of new stores; unseasonable weather; difficulties in
implementing, operating and maintaining the Company's complex information
systems and controls, including, without limitation, the systems related to the
Company's retail stores, systems related to demand and supply planning, and
inventory control; interruptions in data and communications systems;
fluctuations and difficulty in forecasting operating results; the ability of the
Company to sustain, manage or forecast its growth and inventories; the size,
timing and mix of purchases of the Company's products; the underperformance or
delay of new products; the ability to secure and
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
protect trademarks, patents and other intellectual property; performance
and reliability of products; customer service; adverse publicity; the loss of
significant suppliers or customers, such as department stores and specialty
retailers, the consolidation or restructuring of such customers, including large
chain and department stores, which may result in unexpected store closings;
dependence on China manufacturing; the ability to secure raw materials; delays
and increased costs of freight and transportation to meet delivery deadlines;
the impact on product development or manufacturing as a result of health risks;
changes in business strategy or development plans; general risks associated with
doing business outside the United States, including, without limitation, import
duties, tariffs, quotas and political and economic instability; acts of war or
terrorism; changes in government regulations; liability and other claims
asserted against the Company; the ability to attract and retain qualified
personnel; and other factors referenced or incorporated by reference in this
report and other reports.
The risks included here are not exhaustive. Other sections of this report
may include additional factors which could adversely affect the Company's
business and financial performance. Moreover, the Company operates in a very
competitive and rapidly changing environment. New risk factors emerge from time
to time and it is not possible for management to predict all such risk factors,
nor can it assess the impact of all such risk factors on the Company's business
or the extent to which any factor, or combination of factors, may cause actual
results to differ materially from those contained in any forward-looking
statements. Given these risks and uncertainties, investors should not place
undue reliance on forward-looking statements as a prediction of actual results.
Investors should also be aware that while the Company does communicate with
securities analysts from time to time, it is against our policy to disclose to
them any material non-public information or other confidential information.
Accordingly, investors should not assume that we agree with any statement or
report issued by any analyst irrespective of the content of the statement or
report. Furthermore, the Company has a policy against issuing or confirming
financial forecasts or projections issued by others. Therefore, to the extent
that reports issued by securities analysts contain any projections, forecasts or
opinions, such reports are not the responsibility of the Company.
The Company discussed a number of significant trends and specific factors
affecting the footwear industry in general and our business in particular in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", Item 7 of our Annual Report on Form 10-K for the fiscal year 2005.
Those trends and factors continue to be relevant to the Company's performance
and financial condition.
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in
conformity with generally accepted accounting principles in the United States
requires management to make judgments, assumptions and estimates that affect the
amounts reported. Please refer to the discussion of critical accounting policies
and estimates in the Company's Annual Report on Form 10--K for the fiscal year
ended December 2, 2005 for additional information.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
At the beginning of the 2006 fiscal year the Company adopted SFAS No. 123R
using the modified prospective application transition method which requires the
Company to develop assumptions that are used to estimate the fair value of
share-based compensation.
The Company has elected to use the Black Scholes option-pricing model to
calculate these fair values. The Black Scholes model requires the development of
assumptions for the six variables that are input into the model. These variables
are the price of the underlying stock; the exercise price of the option; the
expected term of the option; the annual risk-free interest rate over the
option's expected term; the expected stock price volatility over the option's
expected term; and the expected annual dividend yield on the underlying stock.
The weighted average expected life of options was calculated using the safe
harbor method as prescribed by the Securities and Exchange Commission's Staff
Accounting Bulletin No. 107. This decision was based on the lack of relevant
historical data due to decreasing the option's contractual term from 10 years to
7 years and increasing the vesting period from 3 years to 4 years for options
that were granted starting in fiscal year 2005. The risk-free interest rate
assumption was based on the United States Treasury's constant maturity's rate
for a 4.75 year term on the date the option was granted. The volatility
assumption was based on weekly historical volatility during the time period that
corresponds to the expected weighted average life of the option. The assumed
dividend yield was based on the Company's expectation of future dividend
payouts. The post-vesting forfeiture rate was based on the four year historical
average turnover rate for two groups of option eligible employees.
Developing these assumptions requires significant judgment on the part of
the Company and, generally, may involve analyzing all available historical data,
considering whether historical data is relevant to predicting future behavior,
making appropriate adjustments to historical data for future expectations,
supplementing or replacing company- specific historical data with data from
other supportable sources and appropriately weighting each of the inputs. These
assumptions are evaluated, and revised as necessary, based on changes in market
conditions and historical experience.
Effective at the commencement of the January 1, 2006 withholding period,
the Employee Stock Purchase Plan ("ESPP") shortened its withholding periods to
three months, increased the purchase price from 85% of the market value to 95%
of the market value and eliminated the look-back provision to the start of the
withholding period. The changes made to the ESPP resulted in the plan's
qualification as non-compensatory under SFAS No. 123R.
The Company does not currently expect to change the level of options
granted.
Please refer to Footnote number one in Item I, Part I of this Form 10-Q for
further information.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Contingencies
The sales of Tommy Hilfiger branded footwear are a significant portion of
our business. The Tommy Hilfiger footwear sales are contingent on our licensing
agreement with Tommy Hilfiger Licensing, Inc. In January, 2004, we finalized the
terms of the license agreement, which will expire in March 2007. Whether our
license with Tommy Hilfiger will remain in effect depends on our achieving
certain minimum sales levels for the licensed products. We expect to continue to
meet the minimum sales levels required by the Tommy Hilfiger license agreement.
We believe that no provision is currently required for costs related to the
potential loss of this license. Additionally, Tommy Hilfiger Corp. is under
agreement to be acquired by an unrelated third party. If we lose the Tommy
Hilfiger license, our business would be materially and adversely affected.
Results of Operations
The following table summarizes the Company's performance for the first
quarter of fiscal 2006 as compared to the results for the same period in fiscal
2005:
Increase Percent vs. 2005 Results:
First Quarter
Net sales 21.8%
Gross profit 21.0%
Selling and administrative expenses 24.1%
Operating income 9.5%
Income before income taxes 1.9%
Net income 1.5%
Operating Ratios as a Percent of Net Sales:
First Quarter
--------------------------------
2006 2005
-------------- --------------
Gross profit 39.9% 40.2%
Selling and administrative expenses 32.1% 31.5%
Operating income 7.8% 8.7%
Income before income taxes 7.4% 8.8%
Net income 4.5% 5.4%
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Net Sales
The first quarter breakdown of net sales is as follows:
Percent
Change
2006 vs.
2006 2005 2005
-------- --------- -----------
(In millions, except percentages)
Stride Rite Children's Group - Wholesale $21.2 $25.6 (17.3%)
Stride Rite Children's Group - Retail 37.9 35.4 7.0%
-------- --------- -----------
Stride Rite Children's Group 59.1 61.0 (3.1%)
Keds 42.0 45.8 (8.3%)
Sperry Top-Sider 23.6 19.4 21.6%
Stride Rite International 22.8 8.8 159.1%
Saucony 24.6 - 100.0%
-------- --------- -----------
Other Wholesale Footwear 113.0 74.0 52.5%
Tommy Hilfiger Footwear 14.9 18.1 (17.6%)
Elimination of intercompany sales (3.6) (2.5) n/a
-------- --------- -----------
Total net sales $183.4 $150.6 21.8%
======== ========= ===========
During the first quarter of fiscal 2006, consolidated net sales increased
$32.8 million to $183.4 million, or 21.8% above the sales level achieved in the
first quarter of fiscal 2005. Wholesale net sales increased $30.3 million or
26.5% for the first quarter of 2006, and overall retail sales, including the
e-commerce sites, increased $2.5 million or 7.1% when compared to the same
period in the prior year. Unit shipments of first quality merchandise for the
wholesale brands during the first quarter were 4.5% higher than the comparable
period in 2005. The Company's average first quality wholesale selling price
increased 17.8% from the first quarter of 2005 which was primarily due to the
addition of Saucony.
First quality wholesale net sales increased by $27.8 million, or 26.1%
above the wholesale net sales level achieved in the first quarter of fiscal
2005. This includes the negative impact of a $1.4 million increase in combined
discounts, returns and allowances. Sales of closeout products increased $2.3
million from the comparable period in the 2005 fiscal year.
Gross Profit
During the first quarter of fiscal 2006, the Company's gross profit of
$73.2 million increased $12.7 million or 21.0% above the amount recorded during
fiscal 2005's first quarter. The gross profit percentage rate for the fiscal
2005 first quarter decreased 0.3 percentage points to 39.9%, versus the 40.2%
rate achieved in the prior year's first quarter. The lower gross profit
percentage was largely attributable to the additional pre-tax expense of $2.6
million relating to the flow through of the remaining purchase accounting
inventory write-up to fair value that was recorded as part of the Saucony
acquisition. The effect that this decrease had on the gross profit percentage
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
was partially offset by significantly higher first quality sales in the first
quarter of fiscal 2006.
Operating Costs
During the first quarter of fiscal 2006, selling and administrative
expenses were $58.9 million, an increase of $11.5 million or 24.1% as compared
to the first quarter of fiscal 2005. This increase was principally the result of
the inclusion of Saucony which added $8.8 million in expenses. Also contributing
to the higher expense levels in the first quarter fiscal 2006 was the $2.4
million in added costs associated with the increased number of Stride Rite
Children's Group retail stores which includes Saucony's factory outlet stores.
In addition, the first quarter of 2006 included $1.2 million of Saucony
integration expenses and $0.6 million of expenses relating to share-based
compensation upon adoption of SFAS No. 123(R). As a percent of sales, operating
costs were 32.1% in the first quarter of fiscal 2006 compared to 31.5% in the
first quarter of fiscal 2005.
Other Income and Taxes
Investment income related to the Company's cash equivalents and marketable
securities was $0.5 million in the first quarter of fiscal 2006, which was
increased $0.2 million versus the similar period in fiscal 2005. Interest
expense, which relates to borrowings under the revolving credit agreement,
increased by $1.1 million in the first quarter of fiscal 2006 as compared to the
first quarter of fiscal 2005 as no borrowings were made during the first quarter
of fiscal 2005.
The provision for income taxes increased $0.1 million in the first quarter
of fiscal 2006 as compared to the similar period in fiscal 2005. This increase
was due to the higher pre-tax income amount and a slightly higher tax rate. Our
effective tax rate was 38.6% in the first quarter of fiscal 2006 as compared to
38.4% in the first quarter of fiscal 2005.
In the second quarter of fiscal 2006, a tax audit was concluded for which
the Company had established reserves in prior years. The outcome of the tax
audit was favorable and is expected to result in the reversal of prior year tax
reserves which may be significant.
Net Income
Net income for the first quarter of fiscal 2006 was $8.3 million, an
increase of $0.1 million, or 1.5% as compared to the same period in the prior
year. The higher net sales and resulting gross profit, due to the addition of
Saucony, were able to offset the corresponding increases in operating expenses
and interest expense.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Segments Review
In September 2005 the Company acquired Saucony, Inc. During the first
quarter of 2006 Saucony's operations were integrated into the existing
operations of the Company. As a result, the Company re-assessed its operating
and reportable segments under SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". The changes to the Company's segments are
as follows: the Stride Rite Children's Group - Retail Division now includes the
Saucony factory outlet stores (16 stores as of March 3, 2006); Saucony's
international operations are now included in the Stride Rite International
division, which is aggregated in the Other Wholesale Footwear reportable
segment, the Saucony domestic footwear division, which includes the Hind unit,
is aggregated into the Other Wholesale Footwear reportable segment.
Stride Rite Children's Group - Retail
The net sales of the Stride Rite Children's Group - Retail increased $2.5
million or 7.0% in the first quarter as compared to the same quarter in the
prior year. Sales at comparable Children's Group retail stores (stores open for
52 weeks in each fiscal year) decreased 3.4% for the first fiscal quarter of
2006. The decrease in the comparable stores category was principally
attributable to the shift of the annual pre-Easter holiday promotional event
into the second quarter of fiscal 2006, as compared to the first quarter of
fiscal 2005. At the end of the first quarter of fiscal 2006, the Stride Rite
Children's Group - Retail operated 280 Stride Rite children's shoe stores and
outlets. This is a net increase of 26 stores, or 10% from the end of the same
period in the prior year. In addition Stride Rite Children's Group-Retail
operated 18 Saucony outlet stores. Current plans for fiscal 2006 call for the
opening of approximately 33 retail stores and the closing of 4 underperforming
Saucony outlet stores and 2 underperforming children's shoe stores. During the
first quarter of 2006 the Company opened 9 new stores and closed 3
underperforming Saucony outlet store locations.
The Stride Rite Children's Group - Retail operating income decreased
primarily due to the lower sales brought about by the shift in the pre-Easter
sales event out of the first quarter of fiscal 2006 and into the second quarter
and certain increased indirect store costs.
Stride Rite Children's Group - Wholesale
Sales decreased $4.4 million or 17.3% during the first quarter of 2006 as
compared to the same quarter last year. This decrease in sales was partially
related to the later Easter holiday. In addition first quarter fiscal 2006 sales
were affected by a change in certain department store buying patterns, a value
channel strategy change and a decline in the number of smaller independent
accounts.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Stride Rite Children's Group - Wholesale operating income decline
versus the prior year was primarily related to the impact of the lower sales in
fiscal 2006 compared to 2005. A higher gross profit rate in the first quarter of
fiscal 2006 was due to an improved mix and offset a portion of the lower sales
volume.
Tommy Hilfiger Footwear, Inc.
The decrease in sales of Tommy Hilfiger footwear products during the first
quarter of fiscal 2006 was primarily attributable to a significant reduction in
sales to department stores, a decrease in close-out sales, and the
discontinuation of the "H" line. This decrease was partially offset by an
increase in certain product sales in the women's business and lower returns and
allowances.
The reduction of the Tommy Hilfiger operating loss versus prior year was
primarily related to an improved gross profit due to the impact of product sales
mix due mostly to reduction in the sales of closeout products. Operating
expenses were lower in the first quarter of fiscal 2006 as compared to the same
period in the prior year, which also contributed to the improved operating
profit versus the prior year.
Other Wholesale Footwear
The overall increase in net sales of the Other Wholesale Footwear segment
was primarily attributable to the addition of Saucony as well as increased sales
of Sperry Top-Sider and Stride Rite International which now includes the foreign
distribution of Saucony products. This overall increase was partially offset by
a decrease in Keds sales.
The first quarter of fiscal 2006 was the first complete quarter in which
Saucony's results of operations were included in the Company's results.
Saucony's domestic sales added $24.6 million of net sales. Saucony's net sales
met the Company's expectations on the strength of the technical running
products.
The Sperry Top-Sider increase was largely attributable to strong sales of
the men's and women's product lines. The significant growth in the Sperry
Top-Sider product sales in 2006 resulted from increases in the marine, family
and independent retail channels.
The Stride Rite International division's net sales growth in the first
quarter of fiscal 2006 was primarily the result of strong sales of Saucony
products in Europe and Canada. In addition Keds sales increased in Canada,
Australia and Asia, and Sperry Top-Sider's sales also increased in Europe and
South Africa.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Keds sales decline in first quarter fiscal 2006 versus the same period
last year was partially in the value sales channel and was planned. In addition,
the strong prior year sell-in to the premium retail channel resulted in lower
sales comparisons to last year. The consolidation of May Company into Federated
also negatively impacted Keds sales in the quarter and is expected to continue
to do so for the remainder of the fiscal year.
The increased operating income versus prior year in this segment was
primarily the result of the addition of Saucony and the increase in sales of
Stride Rite International and Sperry Top-Sider. The increase was somewhat offset
by a lower gross profit performance of Saucony resulting from the flow through
of the remaining purchase accounting write-up of acquired inventory to fair
value.
Liquidity and Capital Resources
At the end of the first fiscal quarter of 2006, our balance sheet reflected
a current ratio of 4.3 to 1.0 with $95.0 million in long term debt. Our cash,
cash equivalents and marketable securities totaled $23.2 million at March 3,
2006, a decrease of $21.4 million from the total cash, cash equivalents and
marketable securities of $44.6 million at the end of the first quarter of fiscal
2005. The decrease in our cash balance, versus the comparable quarter last year,
is primarily attributable to funding a portion of the Saucony acquisition which
was completed in September 2005.
The Company's seasonal cash flow patterns typically require the use of cash
during the first quarter of a fiscal year. During the first quarter of fiscal
2006, the Company used $41.0 million of cash to fund operations which was
consistent with the $42.5 million used to fund operations in the first quarter
of fiscal 2005. Inventory levels at the end of the first quarter of fiscal 2005
increased $20.8 million, or 22.0% from the levels recorded at the end of the
prior year's first quarter. The increase in inventory related primarily to the
addition of Saucony product. Accounts receivable at March 3, 2006 were $30.8
million or 34.2% higher than the amount at the end of last year's first quarter
which was primarily due to the addition of Saucony and higher sales in the last
month of the fiscal quarter. Days sales outstanding ("DSO"), which measures the
length of the collection period for accounts receivable, was 56 days at the end
of the first fiscal quarter of 2006 which was unfavorable when compared to the
DSO of 52 days at the end of the same period last year. The increase in DSO from
the same period last year was primarily attributable to the addition of Saucony
which generally offers longer credit terms to its customers. Accounts payable,
at the end of the first quarter of fiscal 2006, increased $8.6 million from the
level recorded at the end of the prior year's first quarter. The increase was
primarily due to the addition of Saucony. During the first fiscal quarter of
2006, the Company did not contribute to its defined benefit pension plan and, at
this time, the Company does not plan to make any contributions to its defined
benefit pension plan during the remainder of the 2006 fiscal year.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Additions to property and equipment totaled $3.9 million in the first
fiscal quarter of 2006, an increase compared to the $1.6 million in the first
fiscal quarter of 2005. The increase in capital purchases compared to the same
period in fiscal 2005 related primarily to the continued retail expansion
efforts during the first fiscal quarter of 2006 and the renovation of our
corporate headquarters. Funding of our capital expenditures was provided by
operations and our revolving credit facility.
At the end of the first quarter of fiscal 2006, there was $95.0 million
outstanding under the Company's $275.0 million revolving credit facility of
which $200.0 million is currently committed. The increase in the first quarter
of fiscal 2006, as compared to the fiscal year ending December 2, 2005, was the
result of increased seasonal working capital requirements that are typical of
the first quarter of a fiscal year. The facility was entered into in September
2005 as part of the Saucony acquisition and to provide funds for working capital
and general corporate purposes. As of March 3, 2006, letters of credit totaling
$40.8 million were outstanding for the purchase of inventories. The issuance of
letters of credit for inventory purchases does not impact the Company's
borrowing capacity under the revolving line of credit because these letters of
credit are supported by other uncommitted lines of credit. All letters of credit
generally expire within one year.
During the first quarter of fiscal 2006 we returned $3.8 million to
shareholders through share repurchases and cash dividends. We spent $1.6 million
to repurchase 108,500 common shares under our share repurchase program. As of
March 3, 2006 we have approximately 3.8 million shares remaining on our share
repurchase authorization.
We do not have any relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured finance or
special purpose entities, which would have been established for the purpose of
facilitating off-balance-sheet arrangements or other contractually narrow or
limited purposes. As such, we are not exposed to any financing, liquidity,
market or credit risk that could arise if we had engaged in such relationships.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes from the information previously
reported under Item 7A of the Company's Annual Report on Form 10-K for the
fiscal year ended December 2, 2005.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Within the 90 days prior to the date of this report, the Company carried
out an evaluation under the supervision of and with the participation of the
Company's management, including the participation of its Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of
the Company's disclosure controls and procedures pursuant to Rule 13a-15 of the
Securities Exchange Act of 1934, as amended. Based upon that evaluation, as of
the end of the period covered by this report, our Chief Executive Officer and
Chief Financial Officer have concluded that our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934, as amended) are effective to ensure that information
required to be disclosed by the Company in reports that it files or submits
under the Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms. We continue to review and document our
disclosure controls and procedures and may from time to time make changes aimed
at enhancing their effectiveness and ensuring that our systems evolve with our
business.
(b) Changes in internal controls over financial reporting.
There was no change in the Company's internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Securities
Exchange Act of 1934, as amended) during our first quarter that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting. As disclosed in our Annual Report on Form 10-K filed
with the Securities and Exchange Commission, we have included Saucony, Inc. in
our review and evaluation of internal controls and procedures as of the
beginning of fiscal 2006.
PART II - OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Our repurchases of equity securities for the first quarter of fiscal 2006
were as follows:
Total
Number of Maximum
Shares Number
Purchased of Shares
Total Average As Part that May
Number Price of Yet Be
Of Paid Publicly Purchased
Period Shares Per Announced Under the
Purchased Share Plan Plan
- --------------------------------------------------------------------------------
December 3, 2005 - December 30, 2005 - - - 3,906,994
December 31, 2005 - February 3,2006 - - - 3,906,994
February 4, 2006 - March 3, 2006 108,500 $14.63 108,500 3,798,494
In June 2004, the Board of Directors increased the authorization under an
existing stock repurchase program by five million shares. Under the
authorization, the Company can repurchase shares in the open market or through
privately negotiated transactions. The repurchase program does not have an
expiration date. All shares repurchased during the period covered by this report
were purchased under a publicly announced plan.
PART II - OTHER INFORMATION (continued)
THE STRIDE RITE CORPORATION
ITEM 6. EXHIBITS
Exhibit No. Description of Exhibit
2 Agreement and Plan of Merger among the Registrant, OC, Inc.
and Saucony, Inc. dated as of June 1, 2005. This document
was filed as Exhibit 2.1 to the Registrant's Form 8-K on June
3, 2005 and is incorporated herein by reference.
3 (i) Restated Articles of Organization of the Registrant with
amendments thereto through November 28, 1986, incorporated by
reference from Exhibit 4(i) to the Registrant's Form S-8 filed
on October 25, 1996.
3 (ii) Articles of Amendment dated April 7, 1987 to Restated
Articles of Organization, incorporated by reference from
Exhibit 4(i) to the Registrant's Form S-8 filed on October 25,
1996.
3 (iii) Articles of Amendment dated December 16, 1987 to
Restated Articles of Organization of the Registrant,
incorporated by reference from Exhibit 4(i) to the
Registrant's Form S-8 filed on October 25, 1996.
3 (iv) Articles of Amendment dated December 3, 1991 to the
Restated Articles of Organization of the Registrant,
incorporated by reference from Exhibit 4(i) to the
Registrant's Form S-8 filed on October 25, 1996.
3 (v) Certificate of Vote of Directors establishing a series of
a Class of Stock dated as of June 18, 1997.
3 (vi) By-laws of the Registrant, as amended. This document was
filed as Exhibit 3 of the Registrant's Form 10-Q for the
fiscal period ended June 1, 1990 and is incorporated herein by
reference.
4 (i) Reference is made to Exhibits 3(i), (ii), (iii) and (iv)
referred to above, which are expressly incorporated herein by
reference.
31.1* Certification of the Company's Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2* Certification of the Company's Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1* Certification of the Company's Chief Executive Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2* Certification of the Company's Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
*Filed herewith
THE STRIDE RITE CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned duly authorized.
THE STRIDE RITE CORPORATION
(Registrant)
Date: April 12, 2006 By: /s/ Frank A. Caruso
--------------------------
Frank A. Caruso
Chief Financial Officer