1 of 49
pages
- --------------------------------------------------------------------------------
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 September 1, 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 date September 30, 2006, 36,095,427 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)
September 1, September 2,
2006 December 2, 2005
(Unaudited) 2005 (Unaudited)
------------- ------------- --------------
Assets
Current Assets:
Cash and cash
equivalents $24,346 $33,094 $92,281
Accounts and notes
receivable, net 91,967 63,368 70,440
Inventories 118,463 116,095 86,171
Deferred income taxes 13,748 14,211 16,363
Other current assets 7,462 25,918 7,067
------- ------- -------
Total current assets 255,986 252,686 272,322
Property and equipment, net 52,253 51,367 50,964
Goodwill 56,893 56,729 908
Trademarks and other
intangibles 58,590 58,590 1,690
Other assets, net 17,354 19,482 11,441
------- ------- -------
Total assets $441,076 $438,854 $337,325
======== ======== ========
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)
Sept. 1, Sept. 2,
2006 December 2, 2005
(Unaudited) 2005 (Unaudited)
--------------- -------------- ---------------
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $21,961 $24,186 $12,843
Income taxes payable 1,126 12,845 19,135
Accrued expenses and other
liabilities 30,802 35,991 23,553
------ ------ ---------
Total current liabilities 53,889 73,022 55,531
Long term debt 55,000 60,000 -
Deferred income taxes 23,156 23,980 303
Pension obligation and other
long-term liabilities 16,812 15,174 12,867
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 -
36,087,552 on
September 1, 2006,
36,499,403 on
December 2, 2005 and
36,247,259 on
September 2, 2005 9,022 9,125 9,062
Capital in excess of par
value 21,771 18,434 9,212
Retained earnings 268,924 248,586 259,372
Accumulated other
comprehensive loss (7,498) (9,467) (9,022)
------- ------- --------
Total stockholders' equity 292,219 266,678 268,624
------- ------- -------
Total liabilities and
stockholders' equity $441,076 $438,854 $337,325
======== ======== ========
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 periods ended September 1, 2006 and 2005September 2, 2005
(In thousands, except for per share data)
Three Months Ended Nine Months Ended
--------------------------- ---------------------------
Sept. 1, Sept. 2, Sept. 1, Sept. 2,
2006 2005 2006 2005
------------- ------------ ------------ -------------
Net sales $177,521 $146,237 $554,944 $456,469
Cost of sales 103,656 88,047 325,568 272,536
-------- -------- -------- --------
Gross profit 73,865 58,190 229,376 183,933
Selling and
administrative
expenses 58,901 47,136 178,102 141,615
-------- -------- -------- --------
Operating income 14,964 11,054 51,274 42,318
Investment income 474 441 1,294 1,120
Interest expense (1,077) (84) (3,628) (255)
Other (expense)
income (80) 338 (236) 200
--------- -------- --------- --------
(683) 695 (2,570) 1,065
Income before
income taxes 14,281 11,749 48,704 43,383
Provision for
income taxes 5,797 4,034 15,042 15,755
-------- -------- -------- --------
Net income $8,484 $7,715 $33,662 $27,628
======== ======== ======== ========
Net income per
common share:
Diluted $ .23 $ .21 $ .90 $ .74
======== ======== ======== ========
Basic $ .23 $ .21 $ .92 $ .76
======== ======== ======== ========
Dividends per
common share $ .06 $ .06 $ .18 $ .17
======== ======== ======== ========
Average common
shares used in
per share
computations:
Diluted 37,138 37,396 37,458 37,188
======== ======== ======== ========
Basic 36,261 36,292 36,504 36,158
======== ======== ======== ========
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 nine months ended September 1, 2006 and September 2, 2005
(In thousands)
2006 2005
-------------- -------------
Cash flows from operating activities:
Net income $33,662 $27,628
Adjustments to reconcile net income to net
cash used by operating activities:
Depreciation and amortization 11,411 9,481
Deferred income taxes (485) (3,425)
Compensation expense related to stock plans 2,199 568
Gain related to long-term investments - (61)
Loss on disposals of property and equipment 436 152
Changes in:
Accounts and notes receivable (28,206) (22,649)
Inventories (1,727) 1,633
Other current assets 10,344 8,307
Other current liabilities (16,605) (3,102)
Other long-term assets 1,939 (2,167)
Other long-term liabilities 1,579 (25)
Contribution to pension plan - (3,000)
--------- ---------
Net cash provided by operating activities 14,547 13,340
--------- ---------
Cash flows from investing activities:
Additions to property and equipment (12,692) (6,351)
Purchase of minority interest in Saucony
Canada, Inc. (853) -
Investments in marketable securities
available for sale - (29,325)
Proceeds from sale of asset held for sale 7,504 -
Proceeds from sale of marketable securities
available for sale - 100,175
Distributions from long-term investments - 61
--------- ---------
Net cash (used in) provided from
investing activities (6,041) 64,560
---------- ---------
Cash flows from financing activities:
Borrowings under revolving credit facility 107,300 -
Payments under revolving credit facility (112,300) -
Proceeds from sale of stock under stock plans 3,261 7,628
Tax benefit in connection with exercise of
stock options 740 -
Cash dividends paid (6,590) (5,772)
Repurchase of common stock (10,850) (7,771)
---------- ----------
Net cash used in financing activities (18,439) (5,915)
---------- ----------
Effect of exchange rate changes on cash and
cash equivalents 1,185 291
--------- ---------
Net (decrease) increase in cash and cash
equivalents (8,748) 72,276
Cash and cash equivalents at beginning of the
period 33,094 20,005
--------- ---------
Cash and cash equivalents at end of the period $24,346 $92,281
========= =========
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 September 1, 2006 and
September 2, 2005 is unaudited, however, such information includes all
adjustments (including only and 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 September 1, 2006 and September 2, 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
accounting principles generally accepted in the United States of America. The
Company previously 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.
Certain reclassifications have been made to the condensed consolidated
balance sheet at September 2, 2005 to conform with current period and 2005 year
end presentation.
Effective July 1, 2004, new capitalization rules under the 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 balance sheet as of September 2, 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
accounting principles generally accepted in the United States 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 reporting periods. The Company's significant
estimates included in these financial statements include valuation allowances
and reserves for accounts receivable; sales returns allowances; markdowns (which
reduce revenues); inventory valuation; 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 (the "ESPP").
Amending the ESPP, 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 are able to authorize the
Company to withhold up to 10% of their earnings during consecutive six month
payment periods for the purchase of shares. Effective at the commencement of the
January 1, 2006 withholding period, the 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. Prior to the January 1, 2006 withholding period,
associates could 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. During the first nine months ended September 1, 2006, a
total of 76,054 shares were issued under the Plan for an aggregate amount of
$935,911. At September 1, 2006, a total of 5,936,212 shares had been purchased
under the Plan since inception and 203,788 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 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 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 September 1, 2006, the issuance of
130,742 shares has been deferred by participating directors. At September 1,
2006, 132,283 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 June 2, 2006, 1,710,068 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. 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 nine months ended September 1, 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 974,228 11.51
Exercised (341,389) 7.04
Canceled (87,520) 12.23
---------- ------
Outstanding at September 1, 2006 4,243,166 $ 9.64
========= ======
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 September 1, 2006:
Weighted
Average Weighted
Range of Remaining Average Aggregate
Exercise Number Contractual Exercise Intrinsic
Prices Outstanding Life Price Value
-------- ----------- ----------- -------- ---------
$5.00-$6.88 1,180,854 4.2 years $ 5.93 $ 9,408,807
$7.38-$11.00 1,080,395 5.9 years 8.53 5,804,247
$11.01-$12.06 1,122,417 6.1 years 11.58 2,604,388
$12.13-$14.95 859,500 6.4 years 13.62 240,660
--------- --------- ------ -----------
4,243,166 5.6 years $ 9.64 $18,058,102
========= ========= ====== ===========
The following table summarizes information about stock options exercisable
at September 1, 2006:
Weighted
Average Weighted
Range of Remaining Average Aggregate
Exercise Number Contractual Exercise Intrinsic
Prices Exercisable Life Price Value
-------- ----------- ----------- -------- ---------
$5.00-$6.88 1,069,161 4.1 years $ 6.55 $ 7,856,274
$7.38-$11.00 1,040,229 5.8 years 8.45 5,671,731
$11.01-$12.06 511,140 6.2 years 11.39 1,284,947
$12.13-$14.95 54,600 3.1 years 12.27 88,840
--------- --------- ------ -----------
2,675,130 5.2 years $ 8.33 $14,901,792
========= ========= ====== ===========
In December 2004, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123(R), "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 is recognized 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 are generally recognized to expense 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 (described earlier in this footnote) resulted in
the plan becoming non-compensatory under SFAS No. 123R.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Share-based compensation costs were $639 thousand and $2.2 million for the
three and nine months ended September 1, 2006, respectively. The portion of
share-based compensation costs included in cost of sales in the accompanying
condensed consolidated statements of income for the three months and nine months
ended September 1, 2006 was $111 thousand and $339 thousand, respectively. The
portion of share-based compensation costs included in selling and administrative
expenses in the accompanying condensed consolidated statements of income for the
three and nine months ended September 1, 2006 was $528 thousand and $1.9
million, respectively. 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 and nine months ended September 1, 2006 was $278
thousand and $928 thousand, respectively.
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 and nine
months ended September 2, 2005:
Three Nine
Months Months
Ended Ended
Sept. 2, Sept. 2,
2005 2005
----------- -----------
Net income, as reported $7,715 $27,628
Add: Stock-based employee
compensation expense included
in net income, net of related
tax effects 146 393
Deduct: Total stock-based
employee compensation expense
determined under fair value
based method for all awards,
net of related tax effects
(671) (1,813)
Pro forma net income $7,190 $26,208
======= =======
Earnings per share:
Basic - as reported $ .21 $ .76
======= =======
Basic - pro forma $ .20 $ .72
======= =======
Diluted - as reported $ .21 $ .74
======= =======
Diluted - pro forma $ .19 $ .70
======= =======
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 nine months ended September 1, 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 and the resulting weighted average fair value:
Nine Months Ended
-----------------
Sept. 1, Sept. 2,
2006 2005
---- ----
Risk-free interest rate 4.36% 3.47%
Dividend yield 1.8% 1.7%
Volatility factor 30.6% 35.0%
Weighted average
expected life of options (years) 4.8 4.9
Weighted average grant date fair
value of options $3.88 $3.35
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 both 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 the term of the expected life of the option 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.
Total unrecognized share-based compensation costs related to non-vested
stock options was approximately $5.4 million as of September 1, 2006 which
related to approximately 1.9 million shares with a per share weighted value of
$2.85. This unrecognized cost is expected to be recognized over a weighted
average period of approximately 3.0 years. The intrinsic value of options
exercised during the three and nine months ended September 1, 2006 was
approximately $78 thousand and $1.8 million, respectively.
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 basic and diluted earnings per
share computations based on the number of shares used in the calculations:
Three Months Nine Months
Ended Ended
----------------------- --------------------
Sept.1, Sept.2, Sept.1, Sept.2,
2006 2005 2006 2005
----------- ---------- --------- ---------
(In thousands, except for per share data)
Net income $8,484 $7,715 $33,662 $27,628
Weighted average common shares
outstanding (basic) 36,261 36,292 36,504 36,158
Dilutive effect of stock options 877 1,104 954 1,030
------ ------ ------ ------
Weighted average common shares
outstanding (diluted) 37,138 37,396 37,458 37,188
====== ====== ====== ======
Earnings per common share:
Basic $.23 $.21 $.92 $.76
====== ====== ====== ======
Diluted $.23 $.21 $.90 $.74
====== ====== ====== ======
The following weighted shares have been excluded in the computation of
diluted earnings per share because the weighted shares are anti-dilutive:
First Nine
Third Quarter Months
------------------- ------------------
2006 2005 2006 2005
-------- --------- -------- --------
(In thousands)
Options to purchase shares of common
stock 1,399 - 1,238 4
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 Nine Months
Ended Ended
----------------------- --------------------
Sept. 2, Sept. 1, Sept. 2, Sept. 1,
2005 2006 2005 2006
---------- ----------- ---------- --------
(In thousands)
Net income $7,715 $8,484 $27,628 $33,662
Other comprehensive income:
Foreign currency translation
adjustments 201 89 376 1,969
------- ------- --- --- -------
Total comprehensive income $7,916 $8,573 $28,004 $35,631
======= ======= ======= =======
Components of accumulated other comprehensive loss consist of the
following:
Sept. 1, December 2, Sept. 2,
2006 2005 2005
--------------- ---------------- ------------
(In thousands)
Foreign currency translation
adjustments $ 1,916 $ (53) $ 211
Minimum pension liability
adjustments, net of taxes (9,414) (9,414) (9,233)
--------- -------- ---------
Accumulated other
comprehensive loss $(7,498) $(9,467) $(9,022)
========= ======== =========
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 recorded accruals
related to 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.
Adjustments to the estimates and assumptions used in the preliminary
purchase price result in an offsetting adjustment to acquired goodwill in the
year following the acquisition. The adjustment to the acquisition-related
severance accrual results from reductions based on fewer involuntary
terminations and modifications to the original estimates based on
actual-severance payments.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Details of the acquisition related accruals are as follows:
Acquisition Acquisition
Related Related
(In thousands) Severance Exit Costs
- ------------------------------------------- ------------- -------------
Balance at June 2, 2006 $ 189 $361
Utilization (182) (192)
Adjustments (7) -
Foreign currency translation impact - -
------ ----
Balance at September 1, 2006 $ - $169
====== ====
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 the future financial condition or operating results of the
Company.
Pro forma Pro forma
--------- ---------
Three Months Ended Nine Months Ended
Sept. 2, 3005 Sept. 2, 2005
In thousands (Unaudited) (Unaudited)
----------------------------------------------------------------
Revenue $186,403 $571,667
Operating Income 13,865 49,925
Net income $ 8,796 $ 27,336
======== ========
Earnings per
common share:
Basic $ 0.24 $ 0.76
======== ========
Diluted $ 0.24 $ 0.74
======== ========
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The pro forma information was prepared by combining Saucony, Inc.'s
unaudited condensed consolidated statements of income for the thirteen and
thirty-nine weeks ended July 1, 2005 and the Company's unaudited condensed
consolidated statements of income for the three and nine months ended September
2, 2005. For the purposes of presenting comparable pro forma results, the
unaudited condensed consolidated statement of income for the thirty-nine weeks
ended July 1, 2005 was created by combining the unaudited statement of income
for the twenty-six weeks ending July 1, 2005 to the unaudited statement of
income for the thirteen weeks ended December 31, 2004. Included in the unaudited
statement of income for the thirteen weeks ending December 31, 2004 were net
sales of $33.1 million, gross profit of $13.5 million, and a net loss of $316
thousand. 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 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 three and nine months ended September 1, 2006, borrowings under
this Credit Agreement averaged $64.2 million and $76.8 million, respectively,
with a maximum amount outstanding of $101.0 million. The weighted average
interest rate on these borrowings during the three and nine months ended
September 1, 2006 was 6.6% and 6.1%, respectively. On September 1, 2006, $55
million was outstanding under the revolver. Cash interest payments were $1.1
million and $3.5 million, respectively, in the three months and nine months
ended September 1, 2006. There were no borrowings outstanding at any time during
the third quarter of the prior fiscal year. The Company was in compliance with
its covenants as of September 1, 2006.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 6 - Benefit Plans
The following table summarizes the components of net periodic benefit cost
for the Company:
Three Months Ended Six Months Ended
--------------------- ---------------------
Sept.1, Sept.2, Sept.1, Sept.2,
2006 2005 2006 2005
---------- --------- --------- ----------
(In thousands)
Service cost $570 $506 $1,710 $1,566
Interest cost 1,029 943 3,087 2,853
Expected return on assets (1,143) (1,117) (3,429) (3,357)
Net loss recognized 510 476 1,530 1,486
Amortization of prior services cost 3 4 8 14
------- ------- ------- ------
Net periodic benefit cost $969 $812 $2,906 $2,562
======= ======= ======= ======
During the first nine months of fiscal 2006, no contributions were made to
the Company's defined benefit pension plan. At this time, the Company does not
plan on making 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 the
Company's business. The Tommy Hilfiger footwear sales are contingent on the
Company's licensing agreement with Tommy Hilfiger Licensing, Inc. In July 2006,
the Company amended the terms of the current license agreement, which extended
the term of the agreement to expire in March 2008. Whether the Company's license
with Tommy Hilfiger will remain in effect depends in part on the Company
achieving certain minimum sales levels for the licensed products. The Company
continues to expect to meet the minimum sales levels required by the Tommy
Hilfiger license agreement. The Company believes that no provision is currently
required for costs related to the potential loss of this license. If the Tommy
Hilfiger license is lost, the Company's business would be materially and
adversely affected. Revenues derived from our Tommy Hilfiger licenses were
approximately $21 million and $73 million for the three and nine months ended
September 1, 2006. This revenue is included in the Tommy Hilfiger Footwear
segment, the Other Wholesale Footwear segment (specifically the Stride Rite
International division), Stride Rite Children's Group - Retail Division, and the
Stride Rite Children's Group - Wholesale Division.
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 2005. The liability as of September 1, 2006 is
$1,868,000 and is included as in accrued expenses and other liabilities 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
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
upon available information after consultation with environmental engineers,
consultants and attorneys assisting the Company in addressing these
environmental issues. Actual costs 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 third quarter of the fiscal
2006, there were $39 thousand of expenses charged against the reserve.
Note 8 - Income Taxes
During the second quarter of fiscal 2006, a state tax audit was concluded
for which the Company had established reserves in prior periods. The outcome of
the tax audit was favorable and resulted in a net tax benefit of $4.2 million of
prior period tax reserve reversals. The reversals positively impacted the
effective income tax rate for the nine months ended September 1, 2006 by 8.5%.
Note 9 - Operating Segments and Related Information
In September 2005 the Company acquired Saucony, Inc. During the first
quarter of fiscal 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, which occurred 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 (15 stores as of
September 1, 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.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As a result of the adoption of SFAS No. 123R at the beginning of fiscal
2006, stock-based compensation costs of $0.6 million and $2.2 million are
included in the operating loss of the Unallocated Corporate and Other segment
for the three and nine months ended September 1, 2006, respectively. See Note 1
for further information.
The following table summarizes the results of the Company's reportable
segments for the three months ended September 1, 2006 and September 2, 2005 and
identifiable assets as of September 1, 2006 and September 2, 2005:
Stride Stride
Rite Rite
Three months Children's Children's Tommy Other Unallocated
ended Sept. Group - Group - Hilfiger Wholesale Corporate
1, 2006 Retail Wholesale Footwear Footwear & Other Consolidated
-------------------------------------------------------------
Sales $56,545 $27,311 $11,565 $86,465 - $181,886
Intercompany
sales - (43) (818) (3,504) - (4,365)
Net sales to
external
customers $56,545 $27,268 $10,747 $82,961 - $177,521
==============================================================
Operating
income
(loss) $6,097 $5,654 $(599) $6,380 $(2,568) $14,964
Interest and
other,
net - - - - (683) (683)
---------------------------------------------------------------
Income
(loss)before
income
taxes $6,097 $5,654 $(599) $6,380 $(3,251) $14,281
==============================================================
Total assets $46,574 $59,550 $14,530 $269,920 $50,502 $441,076
==============================================================
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Stride Stride
Rite Rite
Three months Children's Children's Tommy Other Unallocated
ended Sept. Group - Group - Hilfiger Wholesale Corporate
2, 2005 Retail Wholesale Footwear Footwear & Other Consolidated
-------------------------------------------------------------
Sales $48,193 $29,169 $18,186 $53,511 - $149,059
Intercompany
sales - (26) (1,207) (1,589) - (2,822)
--------------------------------------------------------------
Net sales to
external
customers $48,193 $29,143 $16,979 $51,922 - $146,237
==============================================================
Operating
income
(loss) $4,883 $5,560 $(478) $3,873 $(2,784) $11,054
Interest and
other,
net - - - - 695 695
--------------------------------------------------------------
Income
(loss)
before
income
taxes $4,883 $5,560 $(478) $3,873 $(2,089) $11,749
==============================================================
Total assets $41,802 $139,881 $19,607 $79,993 $59,359 $340,642
==============================================================
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the results of the company's reportable
segments for the nine months ended September 1, 2006 and September 2, 2005:
Stride Stride
Rite Rite
Children's Children's Tommy Other Unallocated
Nine months Group - Group - Hilfiger Wholesale Corporate
ended Sept. Retail Wholesale Footwear Footwear & Other Consolidated
1, 2006
- ------- ------------------------------------------------------------------
Sales $150,258 $66,758 $41,081 $307,666 - $565,763
Intercompany
sales - (97) (2,220) (8,502) - (10,819)
----------------------------------------------------------------
Net sales to
external
customers $150,258 $66,661 $38,861 $299,164 - $554,944
===============================================================
Operating
income
(loss) $12,255 $9,906 $(1,697) $40,521 $(9,711) $51,274
Interest and
other,
net - - - - (2,570) (2,570)
----------------------------------------------------------------
Income
(loss)
before
income
taxes $12,255 $9,906 $(1,697) $40,521 $(12,281) $48,704
===============================================================
Stride Stride
Rite Rite
Nine months Children's Children's Tommy Other Unallocated
ended Sept. Group - Group - Hilfiger Wholesale Corporate
2, 2005 Retail Wholesale Footwear Footwear & Other Consolidated
- ----------- ---------------------------------------------------------------
Sales $129,615 $74,247 $60,864 $200,246 - $464,972
Intercompany
sales - (77) (3,001) (5,425) - (8,503)
---------------------------------------------------------------
Net sales to
external
customers $129,615 $74,170 $57,863 $194,821 - $456,469
===============================================================
Operating
income
(loss) $9,985 $11,379 $(1,149) $29,500 $(7,397) $42,318
Interest and
other,
net - - - - 1,065 1,065
---------------------------------------------------------------
Income
(loss)
before
income
taxes $9,985 $11,379 $(1,149) $29,500 $(6,332) $43,383
===============================================================
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 10 - Recent Accounting Pronouncements
In March 2005, FASB issued FASB Interpretation No. 47("FIN 47"),
"Accounting for Conditional Asset Retirement Obligations", an interpretation of
SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS No. 143").
FIN 47 clarifies that a "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 flows.
In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 108 which provides interpretations regarding the
process of quantifying prior year financial statement misstatements for the
purposes of a materiality assessment. SAB No. 108 provides guidance that the
following two methodologies should be used to quantify prior year income
statement misstatements: i) the error is quantified as the amount by which the
income statement is misstated and ii) the error is quantified as the cumulative
amount by which the current year balance sheet is misstated. SAB No. 108
concludes that a Company should evaluate whether a misstatement is material
using both of these methodologies. The interpretation is effective for
evaluations made on or after November 15, 2006.
Note 11 - Subsequent Event
On September 5, 2006, the Company purchased all of the outstanding shares
of three holding companies that, together with their direct and indirect
subsidiaries, constitute the Robeez Group ("Robeez") for a purchase price of
approximately $27.5 million. The Company financed the acquisition with a
combination of cash on hand and existing credit facilities. The results of
Robeez' operations will be included in the Company's consolidated financial
statements from the date of acquisition. Robeez is based in Burnaby, British
Columbia, Canada and is the world's leading manufacturer of soft-soled footwear
for newborns to children age four.
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
Section 27A of the Securities Act of 1933, as amended, 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 identify forward-looking statements. Investors are
cautioned that forward-looking 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 possible failure to retain the Tommy Hilfiger footwear
license; increased leverage from the financing of our recent acquisitions;
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
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
to secure and 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; the Company's reliance on independent manufacturers in China and
potential disruptions in such manufacturing caused by difficulties associated
with political instability in China, the occurrence of a natural disaster or
outbreak of a pandemic disease in China or labor shortages or work stoppages;
the ability to secure raw materials; delays and increased costs of freight and
transportation to meet delivery deadlines; 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 set forth above 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 refer to our annual reports on Form 10-K and our quarterly
reports on Form 10-Q for future periods and current reports on Form 8-K as the
Company files them with the SEC, and to other materials the Company may furnish
to the public from time to time through Forms 8-K or otherwise.
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 has previously 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.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States of
America 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.
At the beginning of the 2006 fiscal year the Company adopted SFAS No.
123(R), Share-Based Payment, ("SFAS 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
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 both 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 assumptions were based on the United States Treasury's constant
maturity's rate for the term of the expected life of the option 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 weighing each of the inputs. These
assumptions are evaluated and revised, as necessary, based on changes in market
conditions and historical experience.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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.
Contingencies
The sale of Tommy Hilfiger branded footwear is a significant portion of the
Company's business. The Tommy Hilfiger footwear sales are contingent on the
Company's licensing agreement with Tommy Hilfiger Licensing, Inc. In July 2006,
the Company amended the terms of the current license agreement, which extended
the term of the agreement to expire in March 2008. Whether the Company's license
with Tommy Hilfiger will remain in effect depends in part on the Company
achieving certain minimum sales levels for the licensed products. The Company
continues to expect to meet the minimum sales levels required by the Tommy
Hilfiger license agreement. The Company believes that no provision is currently
required for costs related to the potential loss of this license. If the Tommy
Hilfiger license is lost, the Company's business would be materially and
adversely affected. Revenues derived from our Tommy Hilfiger licenses were
approximately $21 million and $73 million for the three and nine months ended
September 1, 2006. This revenue is included in the Tommy Hilfiger Footwear
segment, the Other Wholesale Footwear segment (specifically the Stride Rite
International division), Stride Rite Children's Group - Retail Division, and the
Stride Rite Children's Group - Wholesale Division.
Results of Operations
The following table summarizes the Company's performance for the third
quarter of fiscal 2006 as compared to the results for the same period in fiscal
2005:
Percentage Increase
-------------------
Third Quarter Nine Months
------------- -----------
Net sales 21.4% 21.6%
Gross profit 26.9% 24.7%
Selling and administrative expenses 25.0% 25.8%
Operating income 35.4% 21.2%
Income before income taxes 21.6% 12.3%
Net income 10.0% 21.8%
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Percentage of Net Sales
-----------------------
Third Quarter Nine Months
--------------------------------------
2006 2005 2006 2005
--------- ------- ---------- --------
Gross profit 41.6% 39.8% 41.3% 40.3%
Selling and administrative expenses 33.2% 32.2% 32.1% 31.0%
Operating income 8.4% 7.6% 9.2% 9.3%
Income before income taxes 8.0% 8.0% 8.8% 9.5%
Net income 4.8% 5.3% 6.1% 6.1%
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Third Quarter of 2006 Compared to the Third Quarter of 2005
- -----------------------------------------------------------
Net Sales
- ---------
The third 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 $27.3 $29.2 (6.5)%
Stride Rite Children's Group - Retail 56.6 48.2 17.4%
------------ ------------ ---------
Stride Rite Children's Group 83.9 77.4 8.4%
Keds 22.1 25.1 (12.0)%
Sperry Top-Sider 20.9 18.0 16.1%
Stride Rite International 22.3 10.2 118.6%
Saucony 21.2 - N/A
------------ ------------ ---------
Other Wholesale Footwear 86.5 53.3 61.5%
Tommy Hilfiger Footwear 11.6 18.3 36.6%
Elimination of intercompany sales (4.5) (2.8) N/A
------------ ------------ ---------
Total net sales $177.5 $146.2 21.4%
============ ============ =========
During the third quarter of fiscal 2006, consolidated net sales increased
$31.3 million to $177.5 million, or 21.4% above the sales level achieved in the
third quarter of fiscal 2005. Wholesale net sales increased $21.9 million or
22.5% for the third quarter of 2006, and overall retail sales, including the
e-commerce sites, increased $9.4 million or 19.1% when compared to the same
period in the prior year. Unit shipments of first quality footwear for the
wholesale brands during the second quarter were 8.6% higher than the comparable
period in 2005. The Company's average first quality wholesale selling price
increased 17.5% from the third quarter of 2005 which was primarily due to the
addition of Saucony.
First quality wholesale net sales increased by $27.5 million, or 32.3%
above the wholesale net sales level achieved in the third quarter of fiscal
2005. This includes the negative impact of a $0.8 million increase in combined
discounts, returns and allowances. Sales of closeout products decreased $4.7
million from the comparable period in the 2005 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
Gross Profit
During the third quarter of fiscal 2006, the Company's gross profit of
$73.9 million increased $15.7 million or 26.9% above the amount recorded during
fiscal 2005's third quarter. The gross profit percentage rate for the fiscal
2006 third quarter increased 1.8 percentage points to 41.6%, versus the 39.8%
rate achieved in the prior year's third quarter. The higher gross profit
percentage was largely attributable to the significant increase in first quality
sales and lower closeout sales in the third quarter of fiscal 2006 as compared
to the third quarter of fiscal 2005.
Operating Costs
During the third quarter of fiscal 2006, selling and administrative
expenses were $58.9 million, an increase of $11.8 million or 25.0% as compared
to the third quarter of fiscal 2005. This increase was principally the result of
the inclusion of Saucony which added $10.5 million in expenses. Also
contributing to the higher expense levels in the third quarter of fiscal 2006
was $2.5 million in added costs associated with the increased number of Stride
Rite Children's Group retail stores including Saucony's factory outlet stores.
In addition, the third quarter of 2006 included $0.7 million of Saucony
integration expenses and $0.5 million of expenses relating to share-based
compensation from the adoption of SFAS No. 123(R). As a percent of sales,
operating costs were 33.2% in the third quarter of fiscal 2006 compared to 32.2%
in the third quarter of fiscal 2005.
Other Income and Taxes
Interest expense, which relates to borrowings under the revolving credit
agreement, increased by $1.0 million in the third quarter of fiscal 2006 as
compared to the third quarter of fiscal 2005 as no borrowings were made during
the third quarter of fiscal 2005.
The provision for income taxes increased $1.8 million in the third quarter
of fiscal 2006 as compared to the similar period in fiscal 2005. This increase
was primarily attributable to higher pre-tax income and a higher effective tax
rate as the result of a decrease in the amount of prior period reserves reversed
in the third quarter of fiscal 2006 when compared to the same period in the
prior year.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Net Income
Net income for the third quarter of fiscal 2006 was $8.5 million, an
increase of $0.8 million, or 10.0%, as compared to the same period in the prior
year. The higher net sales and resulting gross profit, due to the addition of
Saucony and increased net sales of Stride Rite Children's Group-Retail and
Sperry Top-Sider, 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 were
as follows: the Stride Rite Children's Group - Retail Division now includes the
Saucony factory outlet stores (15 stores as of September 1, 2006); Saucony's
international operations are now included in the Stride Rite International
division, which is aggregated in the Other Wholesale Footwear reportable
segment, and the Saucony domestic footwear division, which includes the Hind
unit, is also 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 segment
increased $8.4 million or 17.4% in the third 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) increased 4.1% for the third
fiscal quarter of 2006. At the end of the third quarter of fiscal 2006, the
Stride Rite Children's Group - Retail operated 296 Stride Rite children's shoe
stores and outlets. This is a net increase of 25 stores, or 9.2% from the end of
the prior fiscal year. In addition Stride Rite Children's Group-Retail operated
15 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 third
quarter of 2006 the Company opened 8 new stores.
The Stride Rite Children's Group - Retail operating income increased versus
last year primarily due to increased sales as a result of the success of certain
back-to-school promotional events.
Stride Rite Children's Group - Wholesale
Sales decreased $1.9 million or 6.5% during the third quarter of 2006 as
compared to the same quarter last year. This decrease in sales was attributable
to the decline in Children's Tommy Hilfiger sales in the department store
channel including the effect of the consolidation of May and Federated
department stores.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Operating income for the Stride Rite Children's Group - Wholesale remained
flat versus the comparable period in the prior year. The lower sales level was
positively impacted by a more profitable product mix.
Tommy Hilfiger Footwear, Inc.
The decrease in sales of Tommy Hilfiger footwear products during the third
quarter of fiscal 2006 versus the comparable period in the prior year was based
on declines in all retail channels. The fourth quarter should see a less
significant decline than the first nine months.
The increase of the Tommy Hilfiger operating loss versus the comparable
period in the prior year was attributable to the decrease in net sales.
Operating expenses were significantly reduced which lessened the operating
income impact from the net sales decline in the third quarter as compared to the
same period last year.
Other Wholesale Footwear
The overall increase in net sales versus last year 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.
Saucony's domestic sales added $21.2 million of net sales in the third
quarter of 2006. The strength of Saucony's net sales continues to be in
technical products in the specialty run retail channel.
The Sperry Top-Sider net sales increase was largely attributable to
continued strong sales of their men's and women's product lines. The significant
growth in the Sperry Top-Sider product sales in 2006 resulted from continued
increases in the premier family and outdoor shoe retail channels. This trend is
expected to continue in the fourth quarter of fiscal 2006.
The Stride Rite International division's net sales growth in the third
quarter of fiscal 2006 was primarily the result of Saucony product sales in the
United Kingdom, Netherlands, Canada, Australia, and Korea. In addition, Stride
Rite sales increased in the Middle East, Sperry Top-Sider's sales increased in
Latin America, and Keds sales increased in Canada.
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 the third quarter of fiscal 2006 versus the same
period last year was partially due to weak performance from certain core basic
product. The stronger sell-in to the specialty premier retail channel based on
the more youthful silhouette strategy was not able to offset these sales
declines. The consolidation of May Company into Federated Department Stores 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 the comparable period in the 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 which offset
the profit impact of weaker Keds sales.
First Nine Months of 2006 Compared to the First Nine Months of 2005
Net Sales
The first nine months breakdown of net sales is as follows:
Percent
Change
2006 vs.
2006 2005 2005
------------ ------------ ---------
(In millions, except percentages)
Stride Rite Children's Group - Wholesale $66.8 $74.3 (10.0)%
Stride Rite Children's Group - Retail 150.3 129.6 16.0%
------------ ------------ ---------
Stride Rite Children's Group 217.1 203.9 6.5%
Keds 99.0 112.8 (12.2)%
Sperry Top-Sider 73.0 60.6 20.5%
Stride Rite International 64.3 26.9 139.0%
Saucony 71.3 - N/A
------------ ------------ ---------
Other Wholesale Footwear 307.6 200.3 53.6%
Tommy Hilfiger Footwear 41.1 60.9 (32.5)%
Elimination of intercompany sales (10.9) (8.6) N/A
------------ ------------ ---------
Total net sales $554.9 $456.5 21.6%
============ ============ =========
During the first nine months of fiscal 2006, consolidated net sales
increased $98.4 million to $554.9 million, or 21.6% above the sales level
achieved in the first nine months of fiscal 2005. Wholesale net sales increased
$76.2 million or 23.9% for the first nine months of 2006, and overall retail
sales, including the e-commerce sites, increased $22.3 million or 16.8% when
compared to the same period in the prior year. Unit shipments of first quality
merchandise for the wholesale brands during the first nine months were 4.0%
higher than the comparable period in 2005 and the Company's average first
quality wholesale selling price increased 19.0% from the first nine months of
2005. The addition of Saucony was largely responsible for these increases.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
First quality wholesale net sales increased by $80.7 million, or 27.3%
above the wholesale net sales level achieved in the first nine months of fiscal
2005. This includes the negative impact of a $3.5 million increase in combined
discounts, returns and allowances. The increases in 2006 were primarily the
result of Saucony. Sales of closeout products decreased $2.9 million from the
comparable period in the 2005 fiscal year.
Gross Profit
During the first nine months of fiscal 2006, the Company's gross profit of
$229.4 million increased $45.5 million or 24.7% above the amount recorded during
the first nine months of fiscal 2005. The gross profit percentage rate for the
first nine months of fiscal 2006 improved 1.0 percentage point to 41.3%, versus
the 40.3% rate achieved in the same period in the prior fiscal year. The gross
profit percentage was adversely affected by the additional first quarter 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 of this item on the gross profit percentage was
offset by significantly higher first quality wholesale sales in the first nine
months of fiscal 2006.
Operating Costs
During the first nine months of fiscal 2006, selling and administrative
expenses were $178.1 million, an increase of $36.5 million or 25.8% as compared
to the first nine months of fiscal 2005. This increase was principally the
result of the inclusion of Saucony which added $31.5 million in expenses. Also
contributing to the higher expense levels in the first nine months of fiscal
2006 was the $7.4 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 nine months of fiscal 2006 included $2.8
million of Saucony integration expenses and $2.2 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 nine months of fiscal 2006
compared to 31.0% in the first nine months of fiscal 2005.
Other Income and Taxes
Investment income related to the Company's cash equivalents and marketable
securities was $1.3 million in the first nine months of fiscal 2006, which
increased $0.2 million versus the same period in fiscal 2005. Interest expense,
which relates to borrowings under the revolving credit agreement, increased by
$3.4 million in the first nine months of fiscal 2006 as compared to the first
nine months of fiscal 2005 as no borrowings were made during the first nine
months of fiscal 2005.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The provision for income taxes decreased $0.7 million in the first nine
months of fiscal 2006 as compared to the same period in fiscal 2005. This
decrease was primarily attributable to the favorable outcome of a state tax
audit in the second quarter of fiscal 2006 which resulted in a net tax benefit
of $4.2 million. The reversals positively impacted the effective income tax rate
for the nine months ending September 1, 2006 by 8.5%. Our effective tax rate was
30.9% in the first nine months of fiscal 2006 as compared to 36.3% in the first
nine months of fiscal 2005.
Net Income
Net income for the first nine months of fiscal 2006 was $33.7 million, an
increase of $6.0 million, or 21.8% as compared to the same period in the prior
fiscal year. The higher net sales and resulting gross profit, due to the
addition of Saucony and higher net sales of Stride Rite Children's Group -
Retail and Sperry Top-Sider, were able to offset the corresponding increases in
operating expenses and interest expense. Also contributing to the increase was a
lower tax provision resulting from the third quarter reversal of certain prior
period reserves for income tax exposures that are no longer required based on
the favorable outcome of a state tax audit.
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, during the first quarter of fiscal 2006,
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 were as follows: the Stride Rite Children's
Group - Retail Division includes the Saucony factory outlet stores (15 stores as
of September 1, 2006); Saucony's international operations are included in the
Stride Rite International division, which is aggregated in the Other Wholesale
Footwear reportable segment and 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 division
increased $20.7 million or 16.0% in the first nine months as compared to the
same period in the prior fiscal year. Sales at comparable Children's Group
retail stores (stores open for 52 weeks in each fiscal year) increased 3.7% for
the first nine months of fiscal 2006. At the end of the first nine months of
fiscal 2006, the Stride Rite Children's Group - Retail operated 296 Stride Rite
children's shoe stores and outlets. This is a net increase of 25 stores, or 9.2%
from the end of the prior fiscal year. In addition Stride Rite Children's Group
- - Retail operated 15 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 nine months of 2006 the Company opened 25 new stores
and closed 3 underperforming Saucony outlet store locations.
The Stride Rite Children's Group - Retail operating income increased
primarily due to increased net sales and a slightly improved gross profit margin
generating more profits which offset higher operating expenses due to the
increased number of stores.
Stride Rite Children's Group - Wholesale
Sales decreased $7.5 million or 10.0% during the first nine months of 2006
as compared to the same period last year. The decrease in the net sales for the
first nine months of fiscal 2006 were affected by the merger of May Company and
Federated Department Stores, changes in the product flow of certain department
stores, value channel buying patterns and a decline in certain 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
the first nine months of fiscal 2006 compared to the same period in fiscal 2005.
Tommy Hilfiger Footwear, Inc.
The decrease in sales of Tommy Hilfiger footwear products during the first
nine months of fiscal 2006 was across all retail channels.
The increase of the Tommy Hilfiger operating loss versus prior year was
primarily attributable to the decrease in net sales. The majority of the impact
of the operating loss was offset by significant decreases in operating expenses
and an improved gross profit rate in the first nine months of fiscal 2006 as
compared to the same period in the prior fiscal 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.
Saucony's domestic sales added $71.3 million to net sales on the continued
strength of the technical running products in the specialty run retail channel.
The Sperry Top-Sider increase was largely attributable to strong sales of
the men's and women's product lines, particularly in the premier family and
outdoor shoe channels.
The Stride Rite International division's net sales growth in the first nine
months of fiscal 2006 was primarily the result of strong sales of Saucony
products in Canada and Europe. In addition, Tommy Hilfiger sales increased in
Canada and Latin America, Keds sales increased in Canada, and Sperry Top-Sider's
sales also increased in Europe.
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 during the first nine months of fiscal 2006 versus
the same period last year was partially attributable to a decrease in the
department store and value sales channels. The consolidation of May Company into
Federated Department Stores has negatively impacted Keds sales in the first nine
months and is expected to continue to do so for the remainder of the fiscal
year. These decreases were partially offset by stronger sell-in to the specialty
premium retail channel.
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 in the first quarter of 2006
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 third fiscal quarter of 2006, our balance sheet reflected
a current ratio of 4.8 to 1.0 with $55.0 million in long term debt. Our cash and
cash equivalents totaled $24.3 million at September 1, 2006, a decrease of $67.9
million from the total cash and cash equivalents at the end of the third 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 and second quarters of our fiscal year. During the first nine
months of fiscal 2006, the Company provided $14.5 million of cash from
operations as compared to $13.3 million provided by operations in the first nine
months of fiscal 2005. Inventory levels at the end of the first nine months of
fiscal 2005 increased $32.3 million, or 37.5% from the levels recorded at the
end of the prior year's third quarter. The increase in inventory related
primarily to the addition of Saucony product. Accounts receivable at September
1, 2006 were $21.5 million or 30.6% higher than the amount at the end of last
year's third 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 43 days at the end of the third fiscal quarter of 2006 and is an
increase when compared to the DSO of 40 days at the end of the same period last
year. The increase in DSO from the same period in the prior year is related to
the addition of Saucony, which generally offers somewhat longer credit terms to
their customers. Accounts payable, at the end of the third quarter of fiscal
2006, increased $9.1 million from the level recorded at the end of the prior
year's third quarter. The increase was primarily due to the addition of Saucony.
During the third 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 $12.7 million in the first nine
months of fiscal 2006, an increase compared to the $6.3 million in the first
nine months of fiscal 2005. The increase in capital purchases compared to the
same period in fiscal 2005 related primarily to the continued retail expansion
efforts during the third 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.
On June 16, 2006, the Company sold the former Saucony, Inc. headquarters
facility located in Peabody, Massachusetts for $7.5 million, net of costs to
sell.
At the end of the third quarter of fiscal 2006, there was $55.0 million
outstanding under the Company's $275.0 million revolving credit facility of
which $200.0 million is currently committed. The facility was entered into in
September 2005 as part of the Saucony acquisition and to also provide funds for
working capital and general corporate purposes. As of September 1, 2006, letters
of credit totaling $29.8 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 nine months of fiscal 2006 we returned $17.4 million to
shareholders through share repurchases and cash dividends. We spent $10.9
million to repurchase 814,300 common shares under our share repurchase program.
As of September 1, 2006 we have approximately 3.1 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.
On September 5, 2006, the Company purchased all of the outstanding shares
of three holding companies that, together with their direct and indirect
subsidiaries, constitute the Robeez Group ("Robeez") for a purchase price of
approximately $27.5 million. The Company financed the acquisition with a
combination of cash on hand and existing credit facilities.
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.
(i) 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 third 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 1A. RISK FACTORS
In addition to the other information set forth in this report, you should
carefully consider the factors discussed in Part I, "Item 1A. Risk Factors" in
our Annual Report on Form 10-K for the year ended December 2, 2005, which could
materially affect our business, financial condition or future results. The risks
described in our Annual Report on Form 10-K are not the only risks facing our
Company. Additional risks and uncertainties not currently known to us or that we
currently deem to be immaterial also may materially adversely affect our
business, financial condition and/or operating results.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Our repurchases of equity securities for the third 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
Shares Per Announced Under the
Period Purchased Share Plan Plan
- --------------------------------------------------------------------------------
June 4, 2006 - June 30, 2006 - - - 3,458,694
July 1, 2006 - August 4, 2006 332,600 $12.31 332,600 3,126,094
August 5, 2006 - September 1, 2006 33,400 $12.48 33,400 3,092,694
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
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.
10.1 Fifth Amendment to the Amended and Restated License
Agreement dated July 28, 2006 between Tommy Hilfiger
Licensing, Inc. and the Company.
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: October 10, 2006 /s/ Frank A. Caruso
------------------------
Frank A. Caruso
Chief Financial Officer
Exhibit 31.1
I, David M. Chamberlain, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q for the period ending
September 1, 2006 of The Stride Rite Corporation;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in
this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d - 15(f)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles;
(c) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such
evaluation; and
(d) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing
the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design
or operation of internal controls over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: October 10, 2006 /s/ David M. Chamberlain
------------------ ---------------------------------------
David M. Chamberlain,
Chairman and CEO
Exhibit 31.2
I, Frank A. Caruso, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q for the period ending
September 1, 2006 of The Stride Rite Corporation;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in
this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d - 15(f)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles;
(c) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such
evaluation; and
(d) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing
the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design
or operation of internal controls over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: October 10, 2006 /s/ Frank A. Caruso
------------------- --------------------------------------
Frank A. Caruso,
Chief Financial Officer
Exhibit 32.1
The undersigned officer of The Stride Rite Corporation (the "Company")
hereby certifies that the Company's quarterly report on Form 10-Q for the
quarterly period ended September 1, 2006 (the "Report"), as filed with the
Securities and Exchange Commission of the date hereof, fully complies with the
requirements of Section 13(a) or 15(d), as applicable, of the Securities
Exchange Act of 1934, as amended, and that the information contained in the
Report fairly presents, in all material respects, the financial condition and
results of operations of the Company. This certification is provided solely
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, and shall not be deemed to be a part of the Report
or "filed" for any purpose whatsoever.
Date: October 10, 2006 Name: /s/ David M. Chamberlain
---------------- -----------------------
Title: Chairman and CEO
Exhibit 32.2
The undersigned officer of The Stride Rite Corporation (the "Company")
hereby certifies that the Company's quarterly report on Form 10-Q for the
quarterly period ended September 1, 2006 (the "Report"), as filed with the
Securities and Exchange Commission of the date hereof, fully complies with the
requirements of Section 13(a) or 15(d), as applicable, of the Securities
Exchange Act of 1934, as amended, and that the information contained in the
Report fairly presents, in all material respects, the financial condition and
results of operations of the Company. This certification is provided solely
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, and shall not be deemed to be a part of the Report
or "filed" for any purpose whatsoever.
Date: October 10, 2006 Name: /s/ Frank A. Caruso
------------------ -------------------
Title: Chief Financial Officer