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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 1, 2007
() TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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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 June 29, 2007, 36,572,013 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)
June 1 June 2,
2007 December 1, 2006
(Unaudited) 2006 (Unaudited)
----------- ----------- ------------
Assets
Current Assets:
Cash and cash equivalents $21,340 $17,502 $23,349
Accounts and notes
receivable, net 109,953 75,263 96,102
Inventories 125,496 119,917 123,108
Deferred income taxes 14,290 14,293 13,620
Other current assets 8,422 16,676 15,741
----------- ----------- ----------
Total current assets 279,501 243,651 271,920
Property and equipment, net 53,621 53,472 52,373
Goodwill 70,277 70,575 56,794
Trademarks and other intangibles 71,890 71,890 58,590
Other assets, net 18,114 18,299 18,736
----------- ----------- ----------
Total assets $493,403 $457,887 $458,413
=========== =========== ==========
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)
June 1, June 2,
2007 December 1, 2006
(Unaudited) 2006 (Unaudited)
------------ ----------- -----------
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $42,515 $27,838 $32,041
Income taxes payable 2,785 8,204 -
Accrued expenses and other liabilities 31,712 30,836 29,195
--------- --------- ---------
Total current liabilities 77,012 66,878 61,236
Long term debt 54,200 54,200 68,000
Deferred income taxes 24,866 25,194 23,472
Pension obligation and other
long-term liabilities 15,310 14,886 16,202
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 -
36,560,818 on June 1, 2007
36,320,579 on December 1, 2006
and 36,420,263 on June 2, 2006 9,152 9,087 9,100
Capital in excess of par value 31,549 26,962 22,417
Retained earnings 286,656 266,508 265,395
Accumulated other
comprehensive loss (5,342) (5,828) (7,409)
--------- --------- ---------
Total stockholders' equity 322,015 296,729 289,503
--------- --------- ---------
Total liabilities and stockholders'
equity $493,403 $457,887 $458,413
========= ========= =========
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 June 1, 2007 and June 2, 2006
(In thousands, except for per share data)
Three Months Ended Six Months Ended
---------------------- --------------------------
June 1, June 2, June 1, June 2,
2007 2006 2007 2006
---------- ---------- ---------- ----------
Net sales $209,201 $194,007 $403,872 $377,423
Cost of sales 118,517 111,728 233,698 221,912
---------- ---------- ---------- ----------
Gross profit 90,684 82,279 170,174 155,511
Selling and administrative
expenses 68,022 60,291 128,821 119,201
---------- ---------- ---------- ----------
Operating income 22,662 21,988 41,353 36,310
Investment income 345 336 736 820
Interest expense (1,482) (1,347) (2,916) (2,551)
Other income (expense), net 173 (53) 166 (156)
---------- ---------- ---------- ----------
(964) (1,064) (2,014) (1,887)
Income before
income taxes 21,698 20,924 39,339 34,423
Provision for
income taxes 7,533 4,031 14,079 9,245
---------- ---------- ---------- ----------
Net income $14,165 $16,893 $25,260 $25,178
========== ========== ========== ==========
Net income per
common share:
Diluted $.38 $.45 $.67 $.67
========== ========== ========== ==========
Basic $.39 $.46 $.69 $.69
========== ========== ========== ==========
Dividends per
common share $.07 $.06 $.14 $.12
========== ========== ========== ==========
Average common
shares used in
per share
computations:
Diluted 37,602 37,623 37,567 37,619
========== ========== ========== ==========
Basic 36,684 36,650 36,620 36,625
========== ========== ========== ==========
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 six months ended June 1, 2007 and June 2, 2006
(In thousands)
2007 2006
--------- ---------
Cash flows from operating activities:
Net income $25,260 $25,178
Adjustments to reconcile net income to net
cash used by operating activities:
Depreciation and amortization 8,008 7,822
Deferred income taxes (632) 74
Compensation expense related to stock plans 1,691 1,628
Loss on disposals of property and equipment 224 592
Other non-cash items (144) -
Changes in:
Accounts and notes receivable (34,080) (32,181)
Inventories (4,981) (6,683)
Other current assets 8,795 9,660
Other current liabilities 7,668 (10,070)
Other long-term assets (236) 648
Other long-term liabilities 424 1,539
----------- ---------
Net cash provided from (used by)
operating activities 11,997 (1,793)
----------- ---------
Cash flows from investing activities:
Additions to property and equipment (7,604) (9,399)
Purchase of minority interest in Saucony
Canada, Inc. - (853)
----------- ---------
Net cash used by investing activities (7,604) (10,252)
----------- ---------
Cash flows from financing activities:
Borrowings under revolving credit facility 249,600 63,000
Payments under revolving credit facility (249,600) (55,000)
Proceeds from sale of stock under stock plans 2,126 2,943
Tax benefit in connection with exercise of
stock options 1,104 685
Cash dividends paid (4,786) (4,398)
Repurchase of common stock - (6,338)
----------- ---------
Net cash (used) provided from
financing activities (1,556) 892
----------- ---------
Effect of exchange rate changes on cash and
cash equivalents 1,001 1,408
----------- ---------
Net increase (decrease) in cash and cash equivalents 3,838 (9,745)
Cash and cash equivalents at beginning of the period 17,502 33,094
----------- ---------
Cash and cash equivalents at end of the period $21,340 $23,349
=========== =========
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 The Stride Rite
Corporation (the "Company") for the periods ended June 1, 2007 and June 2, 2006
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 June 1, 2007 and
June 2, 2006 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 filed with the Securities and Exchange
Commission audited consolidated financial statements for the year ended December
1, 2006 on Form 10-K, which included all information and footnotes necessary for
such presentation.
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 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 used to evaluate the carrying amount on property and
equipment. Actual results could differ materially from those estimates.
Stock Purchase and Option Plans
During 2002, the Company's stockholders approved The Stride Rite
Corporation Amended and Restated Employee Stock Purchase Plan. Amending the
Employee Stock Purchase Plan, among other things, increased the number of common
shares available for issuance thereunder by 500,000 shares to a total of
6,140,000 shares. Under the Plan, participating associates can authorize the
Company to withhold up to 10% of their earnings during consecutive six month
payment periods for the purchase of shares. At the conclusion of the period,
associates can purchase shares at the lesser of 95% 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 six months ended June 1, 2007, a total
of 23,844 shares were issued under the Plan for an aggregate amount of
approximately $346 thousand. At June 2, 2007, a total of 5,973,224 shares had
been purchased under the Plan since inception and 166,776 shares were available
for purchase by participating associates. Upon completion of the withholding
period ended June 30, 2007, withholdings under the Employee Stock Purchase Plan
were stopped due to the pending merger with Payless ShoeSource, Inc.; see Note 2
for further information.
During 1998, the Company's stockholders approved The Stride Rite
Corporation 1998 Non-Employee Director Stock Ownership Plan. Under the 1998
Director's Plan, awards of common stock and options to purchase common stock are
granted to any director who is not an employee of the Company in accordance with
the provisions of the Plan. During April 2003, the Company's stockholders
approved an amendment to the 1998 Director's Plan increasing the number of
shares of common stock authorized for issuance from 300,000 to 600,000. Options
to
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
purchase common stock are granted at a price equal to the closing price of
the Company's common stock on the date the option is granted. Directors receive
an annual grant of options to purchase 5,000 shares of common stock under the
Plan. Options have a term of ten years and are non-transferable. Under the Plan,
options become exercisable over a three-year period and must be paid for in full
at the time of exercise. In April 1999, the stockholders approved an amendment
to the Plan which allowed directors to receive their annual retainer either
entirely in shares of common stock or 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 June 1, 2007, the issuance of 131,020 shares has been deferred by
participating directors. At June 1, 2007, 77,257 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 1, 2007, 989,615 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. During the first quarter of fiscal 2007 certain key
executives and employees were granted awards of restricted stock representing
135,050 shares of common stock under the 2001 plan. Certain of these restricted
shares are subject to pre-established performance criteria, which may affect the
number of restricted shares received. If issued, these performance-based
restricted shares will vest over four years in equal annual installments. The
restricted shares which were issued without performance criteria will vest three
years after the grant date.
A summary of the activity in share based compensation with respect to all
plans for the six months ended June 1, 2007 are as follows:
Number of
Options and Weighted
Restricted Average
Shares Exercise Price
-------------------- ------------------
Outstanding at December 1, 2006 3,812,420 $9.98
Granted 693,525 16.82
Exercised (162,500) 9.73
Canceled (72,981) 9.29
-------------------- ------------------
Outstanding at March 2, 2007 4,270,464 $11.08
Granted 40,000 15.07
Exercised (22,711) 8.72
Canceled (31,395) 13.38
-------------------- ------------------
Outstanding at June 1, 2007 4,256,358 $11.11
==================== ==================
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 June 1, 2007:
Weighted
Average Weighted
Remaining Average Aggregate
Range of Exercise Number Contractual Exercise Intrinsic
Prices Outstanding Life Price Value
- ------------------ ------------ ------------- ---------- --------------
$5.00-$6.88 921,530 3.3 years $ 6.61 $ 12,484,781
$7.38-$10.63 805,965 5.3 years 8.24 9,604,652
$10.64-$12.25 1,082,339 5.6 years 11.56 9,309,670
$12.95-$16.82 1,446,524 6.3 years 15.24 7,114,637
------------ -------------- ---------- ---------------
4,256,358 5.3 years $ 11.11 $ 38,513,740
============ ============== ========== ===============
The following table summarizes information about stock options exercisable
at June 1, 2007:
Weighted
Average Weighted
Remaining Average Aggregate
Range of Exercise Number Contractual Exercise Intrinsic
Prices Exercisable Life Price Value
- ----------------- -------------- ------------- ------------ --------------
$5.00-$6.88 921,530 3.3 years $ 6.61 $ 12,484,781
$7.38-$10.63 805,965 5.3 years 8.24 9,604,652
$10.64-$12.25 787,391 5.9 years 11.41 6,888,141
$12.95-$16.82 177,175 5.9 years 13.76 1,134,128
------------ ------------ ----------- ---------------
2,692,061 4.8 years $ 8.97 $ 30,111,702
============ ============ =========== ===============
In December 2004, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123R, "Share-Based Payment" ("SFAS 123R"),
which requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the financial statements based on
their fair values. SFAS 123R revises SFAS No. 123 and supersedes APB Opinion No.
25, "Accounting for Stock Issued to Employees". Effective December 3, 2005, the
Company adopted the provisions of SFAS 123R using the modified prospective
application transition method. Under this transition method, the compensation
cost related to all equity instruments granted prior to, but not yet vested as
of adoption 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.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Share-based compensation costs were $960 thousand and $1.7 million for the
three and six months ended June 1, 2007, 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 six months ended June 1, 2007 was $842 thousand and $1.5 million,
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 six months ended June 1, 2007 was $118 thousand and $198
thousand, respectively. Share-based compensation costs were $908 thousand and
$1.6 million for the three and six months ended June 2, 2006, 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 six months ended June 2, 2006 was $785 thousand and $1.4 million,
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 six months ended June 2, 2006 was $123 thousand and $228
thousand, 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 six months ended June 1, 2007 and June 2, 2006 was $1.1
million and $685 thousand, respectively.
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 three and six months ended June 1, 2007 and June 2,
2006 has been calculated using the Black-Scholes option pricing model with the
following weighted average assumptions and the resulting weighted average fair
value:
Three Months Ended Six Months Ended
---------------------------------------------------
June 1, June 2, June 1, June 2,
2007 2006 2007 2006
---------- -------- ------- -------
Employee Stock Options
Risk-free interest rate 4.67% 4.85% 4.76% 4.36%
Dividend yield 1.8% 1.8% 1.8% 1.8%
Volatility factor 32.2% 30.6% 29.7% 30.6%
Weighted average
expected life of
options (years) 6.0 5.5 4.8 4.8
Weighted average grant
date fair value of options $4.95 $4.71 $4.72 $3.98
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 $8.1 million as of June 1, 2007 which related to
approximately 1.9 million shares with a per share weighted value of $4.35. This
unrecognized cost is expected to be recognized over a weighted average period of
approximately 3 years. The intrinsic value of options exercised during the three
and six months ended June 1, 2007 was approximately $177 thousand and $2.5
million, respectively.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 2 - Proposed Merger
On May 22, 2007, the Company entered into an Agreement and Plan of Merger
("Merger Agreement") between Payless ShoeSource, Inc. ("Payless"), a Delaware
corporation, and San Jose Acquisition Corp., a wholly owned indirect subsidiary
of Payless (the "Merger Subsidiary"). For the Merger to occur, holders of at
least two-thirds of the outstanding shares of the Company's common stock must
approve the Merger Agreement.
Subject to the terms and conditions of the Merger Agreement, the Merger
Subsidiary will merge with and into the Company, with the Company continuing as
the surviving corporation. As a result of the merger, the Company will cease to
be a publicly traded company and will become a wholly-owned subsidiary of
Payless (the "Merger"). The Merger will be effective at the time articles of
merger are duly filed with the office of the Secretary of State of the
Commonwealth of Massachusetts. Upon completion of the Merger, each issued and
outstanding share of the Company's common stock, other than those owned by any
of the Company's wholly-owned subsidiaries or owned by Payless' Merger
Subsidiary or any other direct or indirect wholly-owned subsidiary of Payless,
will be converted into the right to receive $20.50 in cash per share, without
interest (the "Merger Consideration").
At the effective time of the merger, shares of the Company's common stock
will cease to be outstanding and shall be cancelled and cease to exist and each
certificate formerly representing any of the shares shall represent only the
right to receive the Merger Consideration. Additionally, each outstanding stock
option, whether or not exercisable, will be accelerated and become exercisable
in full immediately prior to the completion of the Merger. Upon consummation of
the Merger, each such outstanding stock option and restricted stock awards for
which the performance criteria has not been met will be cancelled in
consideration for a cash payment without interest and less any applicable
withholding taxes, equal to the product of (1) the excess, if any, of $20.50
over the per share exercise price for the option multiplied by (2) the number of
shares of the Company's common stock that the option holder could have purchased
(assuming full vesting) upon full exercise of that option immediately prior to
completion of the Merger. In the event that the Merger Agreement is terminated,
under certain circumstances the Company would be required to pay a termination
fee of $23 million to Payless. Refer to the Form 8-K filed with the Securities
and Exchange Commission on May 23, 2007 for further information.
Neither the Company nor Payless is required to complete the Merger unless a
number of conditions are satisfied or waived. The consummation of the Merger is
subject to specified customary closing conditions, including conditions that:
(i) the Merger Agreement shall have been approved by the Company's shareholders;
(ii) the waiting period applicable to the consummation of the merger under the
Hart-Scott-Rodino Antitrust Improvement Act of 1976 shall have expired or been
earlier terminated; (iii) no court or other governmental entity of competent
jurisdiction shall have enacted, issued, promulgated, enforced or entered any
law (whether temporary, preliminary or permanent) that is in effect and
restrains, enjoins or otherwise prohibits consummation of the Merger or the
transactions contemplated by the Merger Agreement; and absence of any law or
legal ruling that would prohibit the consummation of the Merger, and (iv)
subject to certain exceptions, there has been no change, event or effect that
has a material adverse effect on the business, operations, assets, liabilities,
properties, results of operations, or financial condition of the Company and the
Company's subsidiaries, taken as a whole since the date of the Merger Agreement.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 3 - 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 Ended Six Months Ended
--------------------- -------------------
June 1, June 2, June 1, June 2,
2007 2006 2007 2006
-------- --------- --------- --------
(In thousands, except for per share data)
Net income $14,165 $16,893 $25,260 $25,178
Weighted average common shares
outstanding (basic) 36,684 36,650 36,620 36,625
Dilutive effect of stock options 918 973 947 994
---------- --------- ---------- --------
Weighted average common shares
outstanding (diluted) 37,602 37,623 37,567 37,619
========== ========= ========== ========
Earnings per common share:
Basic $.39 $.46 $.69 $.69
========== ========= ========== ========
Diluted $.38 $.45 $.67 $.67
========== ========= ========== ========
The following weighted shares have been excluded in the computation of
diluted earnings per share because the weighted shares are anti-dilutive:
Second Quarter First Six Months
------------------ -------------------
2007 2006 2007 2006
-------- -------- ------- ------
(In thousands)
Options to purchase shares of common
stock and restricted stock 1,439 1,358 1,361 1,162
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Comprehensive Income
Comprehensive income is as follows:
Three Months Six Months
Ended Ended
----------------------- -----------------------
June 1, June 2, June 1, June 2,
2007 2006 2007 2006
--------- --------- --------- ---------
(In thousands)
Net income $14,165 $16,893 $25,260 $25,178
Other comprehensive
income(loss):
Foreign currency translation
adjustments 1,366 1,275 486 2,058
--------- --------- --------- ---------
Total comprehensive income $15,531 $18,168 $25,746 $27,236
--------- --------- --------- ---------
Components of accumulated other comprehensive loss consist of the
following:
June 1, December 1, June 2,
2007 2006 2006
----------- ---------- -----------
(In thousands)
Foreign currency
translation adjustments $2,871 $2,385 $2,005
Minimum pension liability
adjustments, net of taxes (8,213) (8,213) (9,414)
---------- --------- --------
Accumulated other comprehensive
loss $(5,342) $(5,828) $(7,409)
========== ========= ========
Note 5 - Robeez Acquisition
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 $28.7 million, net of cash acquired. As a result, Robeez became a
wholly-owned subsidiary of the company. Robeez was purchased using cash from
operations in addition to approximately $17 million borrowed under our existing
revolving credit facility.
As part of the acquisition and in the fourth quarter of 2006, the Company
terminated certain executives at a cost of approximately $1.3 million.
Additionally, approximately $313 thousand of other acquisition liabilities were
incurred relating to lease termination costs on equipment and other
miscellaneous expenses.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Details of the Robeez acquisition related reserves at June 1, 2007 are as
follows:
Acquisition Related Acquisition Related
Severance Exit Costs
- --------------------------------------------------------------------------------
Balance at December 1, 2006 $ 1,191 $304
Deductions from reserve (1,017) (3)
Foreign currency translation impact 15 19
----------- --------------
$189 $320
----------- --------------
Note 6 - 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
collateralized 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 swingline 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.
During the first six months of fiscal 2007, borrowings under this Credit
Agreement averaged $73.3 million, with a maximum amount outstanding of $104.4
million. For the same period in the prior fiscal year, borrowings averaged $82.7
million with a maximum borrowing of $101.0 million. The weighted average
interest rate on these borrowings during the first six months of fiscal year
2007 was 8.09% versus 5.90% in the same period in the prior fiscal year. On June
1, 2007 and June 2, 2006, $54.2 million and $68.0 million, respectively, were
outstanding under the revolver. Cash interest payments were $2.7 million and
$2.6 million in the first six months of fiscal year 2007 and 2006, respectively.
Note 7 - Benefit Plans
The following table summarizes the components of net periodic benefit cost
for the Company:
------------------------- ----------------------
Three Months Ended Six Months Ended
------------------------- ----------------------
June 1, June 2, June 1, June 2,
2007 2006 2007 2006
---------- --------- --------- ---------
(In thousands)
Service cost $ - $570 $ - $1,140
Interest cost 1,108 1,029 2,216 2,058
Expected return on assets (1,173) (1,143) (2,346) (2,286)
Net loss recognized 190 510 380 1,020
Amortization of prior
services cost - 3 - 6
---------- --------- --------- ---------
Net periodic benefit cost $ 125 $969 $ 250 $1,938
========== ========= ========= =========
During the first six months of fiscal 2007, no contributions were made to
the Company's defined benefit pension plan. At this time, the Company expects to
make an $802,000 contribution to its defined benefit pension plan during the
fourth quarter of the 2007 fiscal year.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 8 - Contingencies
The revenue 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. During the first quarter of
fiscal 2007, the Company entered into an additional extension of the term of the
agreement through December 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. 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 $20 million and $41 million in the second quarter
and first six months of fiscal 2007, respectively. 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 June 1, 2007 is $1,815,000
and is included as an accrued expense in the accompanying condensed consolidated
balance sheet. The estimated costs ranged from $1,242,000 to $4,621,000. The
Company's management determined that the liability was fairly stated upon
acquisition. The assessment of the liability and the associated costs are an
estimate based upon available information after consultation with environmental
engineers, consultants and attorneys assisting the Company in addressing these
environmental issues. Actual costs to address the environmental conditions may
change based upon further investigations, the conclusions of regulatory
authorities about information gathered in those investigations and due to the
inherent uncertainties involved in estimating conditions in the environment and
the costs of addressing such conditions. During the first six months of the
fiscal 2007, there were $50 thousand of expenses deducted from the reserve.
Note 9 - Income Taxes
During the second quarter of 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 second
quarter effective income tax rate by 19.9%.
Note 10 - Operating Segments and Related Information
In September 2005 the Company acquired Saucony, Inc. During the 2006 fiscal
year, 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 (11 stores as
of June 1, 2007); 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 also aggregated into the Other Wholesale Footwear reportable
segment.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In September 2006, the Company completed its acquisition of three holding
companies that, together with their direct and indirect subsidiaries, constitute
the Robeez Group ("Robeez") pursuant to a Share Purchase Agreement. At that
time, Robeez became our wholly-owned subsidiary. Robeez results of operations
have been included in our results since the date of acquisition. Robeez has been
reported as a separate segment since the date of acquisition, based on
management's evaluation of the business for the purposes of assessing
performance and allocating resources.
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 three months ended June 1, 2007 and June 2, 2006 and
identifiable assets as of June 1, 2007 and June 2, 2006:
Three Stride Stride
Months Rite Rite Un-
ended Children's Children's Other Tommy allocated
June 1, Group - Group - Whlsle Hilfiger Corporate Consoli
2007 Retail Whlsle Footwear Footwear Robeez & Other -dated
- --------------------------------------------------------------------------------
Sales $57,988 $15,408 $117,197 $15,170 $ 5,941 - $211,704
Inter-
company
sales - (50) (2,055) (215) (183) - (2,033)
------- -------- -------- -------- -------- ------ ---------
Net
sales
to
external
customers $57,988 $15,358 $115,142 $14,955 $ 5,758 - $209,201
======= ======= ======== ======= ======= ====== =========
Operating
income
(loss) $8,151 $1,487 $19,414 $ 688 $ 77 $(7,155) $ 222,662
Interest
and other,
net - - - - - (964) (964)
------- ------- ------- ------- -------- -------- ---------
Income (loss)
before
income
taxes $8,151 $1,487 $19,414 $ 688 $ 77 $ (8,119) $21,698
====== ====== ======= ====== ====== ========= =======
Total
assets $49,462 $54,229 $306,538 $11,559 $39,150 $32,365 $493,403
======= ======= ======== ======= ======= ======= ========
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Stride Stride
Months Rite Rite Un-
ended Children's Children's Other Tommy allocated
June 2, Group - Group - Whlsle Hilfiger Corporate Consoli
2006 Retail Whlsle Footwear Footwear Robeez & Other -dated
- --------------------------------------------------------------------------------
Sales $55,789 $18,292 $108,239 $14,583 - - $196,903
Inter-
company
sales - (28) (2,331) (537) - - (2,896)
------- -------- -------- -------- -------- ------ ---------
Net
sales
to
external
customers $55,789 $18,264 $105,908 $14,046 - - $194,007
======= ======= ======== ======= ======= ====== =========
Operating
income
(loss) $9,604 $1,451 $16,181 $(761) - $(3,947) $ 21,988
Interest
and other,
net - - - - - (1,064) (1,064)
------- ------- ------- ------- -------- -------- ---------
Income (loss)
before
income
taxes $9,064 $1,451 $16,181 $ (761) - $ (5,011) $20,924
====== ====== ======= ====== ====== ========= =======
Total
assets $42,532 $53,768 $290,896 $13,889 - $57,328 $458,413
======= ======= ======== ======= ======= ======= ========
The following table summarizes the results of the Company's reportable segments
for the six months ended June 1, 2007 and June 2, 2006:
Six Stride Stride
Months Rite Rite Un-
ended Children's Children's Other Tommy allocated
June 1, Group - Group - Whlsle Hilfiger Corporate Consoli
2007 Retail Whlsle Footwear Footwear Robeez & Other -dated
- --------------------------------------------------------------------------------
Sales $101,117 $36,388 $229,432 $30,642 $13,025 - $410,604
Inter-
company
sales - (98) (5,328) (986) (320) - (6,732)
------- -------- -------- -------- -------- ------ ---------
Net
sales
to
external
customers $101,117 $36,290 $224,104 $29,656 $12,705 - $403,872
======= ======= ======== ======= ======= ====== =========
Operating
income
(loss) $5,649 $4,002 $38,075 $ 1,516 $ 475 $(8,364) $ 41,353
Interest
and other,
net - - - - - (2,014) (2,014)
------- ------- ------- ------- -------- -------- ---------
Income (loss)
before
income
taxes $5,649 $4,002 $38,075 $1,516 $ 475 $(10,378) $39,339
====== ====== ======= ====== ====== ========= =======
Six Stride Stride
Months Rite Rite Un-
ended Children's Children's Other Tommy allocated
June 2, Group - Group - Whlsle Hilfiger Corporate Consoli
2006 Retail Whlsle Footwear Footwear Robeez & Other -dated
- --------------------------------------------------------------------------------
Sales $93,713 $39,448 $221,199 $29,516 - - $383,876
Inter-
company
sales - (55) (4,996) (1,402) - - (6,453)
------- -------- -------- -------- -------- ------ ---------
Net
sales
to
external
customers $93,713 $39,393 $216,203 $28,114 - - $377,423
======= ======= ======== ======= ======= ====== =========
Operating
income
(loss) $6,158 $4,253 $34,110 $(1,098) - $(7,113) $ 36,310
Interest
and other,
net - - - - - (1,887) (1,887)
------- ------- ------- ------- -------- -------- ---------
Income (loss)
before
income
taxes $6,158 $4,253 $34,110 $(1,098) - $ (9,000) $34,423
====== ====== ======= ======= ====== ========= =======
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 11 - Recent Accounting Pronouncements
In September 2006, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 158 ("SFAS 158"), Employers' Accounting for Defined
Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements
No. 87, 88, 106 and 132 (R). This Statement requires an employer that is a
business entity and sponsors one or more single-employer defined benefit pension
plans to recognize the funded status of a benefit plan - measured as the
difference between plan assets at fair value (with limited exceptions) and the
benefit obligation - in its statement of financial position. It also requires
companies to recognize as a component of other comprehensive income, net of tax,
the gains and losses and prior service costs or credits that arise during the
period but are not recognized as components of net periodic benefit cost
pursuant to FASB Statement No. 87; to measure defined benefit plan assets and
obligations as of the date of the employer's fiscal year-end statement of
financial position; and to disclose in the notes to the financial statements
certain other information. The provisions of this statement are effective as of
the end of fiscal years ending after December 15, 2006. The Company does not
expect the provisions of SFAS 158 to have a material impact on its financial
position, results of operations and cash flows.
In June 2006, the FASB issued FASB interpretation No. 48 ("FIN48")
"Accounting for Uncertainty in Income Taxes", an interpretation of SFAS No. 109,
"Accounting for Income Taxes" ("SFAS 109"). This interpretation clarifies the
accounting for uncertainty in income taxes recognized in an enterprise's
financial statements in accordance with SFAS No. 109. FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. FIN 48 also provides guidance on de-recognition, classification,
interest and penalties, accounting in interim periods, disclosure and
transition. This interpretation is effective for fiscal years beginning after
December 15, 2006; the Company's first quarter of fiscal 2008. The Company is
currently evaluating the provisions of FIN 48 to determine the impact on our
financial position, results of operations and cash flows.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS No. 157"). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value and requires enhanced disclosures about fair value
measurements. SFAS No. 157 requires companies to disclose the fair value of
their financial instruments according to a fair value hierarchy as defined in
the standard. Additionally, it requires companies to provide enhanced disclosure
regarding financial instruments in Level 3 of the fair value hierarchy. SFAS No.
157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal years. We
believe the adoption of SFAS No. 157 will not have a material impact on our
financial position, results of operations and cash flows.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
The following discusses The Stride Rite Corporation's results of operations
and liquidity and capital resources. The discussion, including known trends and
uncertainties identified by management, should be read in conjunction with the
condensed consolidated financial statements and related notes.
This Form 10-Q contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995 and Section 21E of the
Securities Exchange Act of 1934. We caution investors that any forward-looking
statements presented in this report and presented elsewhere by management from
time to time are based on management's beliefs and assumptions made by, and
information currently available to, management. When used, the words
"anticipate", "believe", "expect", "intend", "may", "plan", "estimate",
"project", "should", "will be" and similar expressions which do not relate
solely to historical matters are intended to identify forward-looking
statements. Such statements are subject to risks, uncertainties and assumptions
and are not guarantees of future performance, which may be affected by known and
unknown risks, trends, uncertainties and factors that are beyond our control.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those anticipated, estimated or projected. We expressly disclaim any
responsibility to update forward-looking statements. Accordingly, past results
and trends should not be used by investors to anticipate future results or
trends.
On May 22, 2007, the Company entered into an Agreement and Plan of Merger
("Merger Agreement") between Payless ShoeSource, Inc. ("Payless"), a Delaware
corporation, and San Jose Acquisition Corp., a wholly owned indirect subsidiary
of Payless (the "Merger Subsidiary"). For the Merger to occur, holders of at
least two-thirds of the outstanding shares of the Company's common stock must
approve the Merger Agreement. See Note 2 to the accompanying condensed
consolidated financial statements for further information.
Risks and uncertainties that may affect future performance are detailed
from time to time in reports filed by the Company with the SEC, including Forms
10-Q and 10-K, and include, among others, the following: the inability to fully
realize the anticipated benefits from the acquisitions of Robeez Footwear, the
challenges of achieving the expected synergies with Robeez Footwear, and the
possibility of incurring costs or difficulties related to the integration of the
business of Stride Rite and Robeez Footwear and Saucony; increased leverage from
the financing of our recent acquisitions; the possible failure to retain the
Tommy Hilfiger footwear license; international, national and local general
economic and market conditions; the size and growth of the overall footwear and
general retail market; intense competition among designers, marketers,
distributors and sellers of footwear; demographic changes; changes in consumer
fashion trends that may shift to footwear styling not currently included in our
product lines; popularity of particular designs and categories of products;
seasonal and geographic demand for the Company's products; difficulties in
anticipating or forecasting changes in consumer preferences; delays in the
opening of new stores; difficulties in implementing, operating and maintaining
the Company's complex information systems and controls, including, without
limitation, the systems related to the Company's retail stores, systems related
to demand and supply planning, and inventory control; interruptions in data and
communications systems; fluctuations and difficulty in forecasting operating
results; the ability of the Company to sustain, manage or forecast its growth
and inventories; the size, timing and mix of purchases of the Company's
products; the underperformance or delay of new products; the ability to secure
and protect trademarks, patents and other intellectual property; performance and
reliability of our 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
department stores, which may result in unexpected store closings; our reliance
on independent manufacturers in
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
China and potential disruptions in such manufacturing caused by political
instability, the occurrence of a natural disaster or other disruptions in
China's social or economic structure; the impact of changes in the value of
foreign currencies, including the Chinese Yuan and the currencies of countries
where Stride Rite markets its various brands; the ability to secure raw
materials; delays and increased costs of freight and transportation to meet
delivery deadlines; the impact on product development or manufacturing as a
result of health risks; acts of terrorism; 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; changes in government regulations; liability
and other claims asserted against the Company; the ability to attract and retain
qualified key personnel; and other factors referenced or incorporated by
reference in this report and other reports.
The risks included here are not exhaustive. Other sections, including
without limitation the section entitled "Risk Factors", of our annual report on
Form 10-K may include additional factors which could adversely affect the
Company's business and financial performance. Moreover, the Company operates in
a very competitive and rapidly changing environment. New risk factors emerge
from time to time and it is not possible for management to predict all such risk
factors, nor can it assess the impact of all such risk factors on the Company's
business or the extent to which any factor, or combination of factors, may cause
actual results to differ materially from those contained in any forward-looking
statements. Given these risks and uncertainties, investors should not place
undue reliance on forward-looking statements as a prediction of actual results.
Investors should also be aware that while the Company does communicate with
securities analysts from time to time, it is against our policy to disclose to
them any non-public or 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.
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 1, 2006 for additional information. There
have been no changes to the Company's critical accounting policies in the
quarter ended June 1, 2007.
Contingencies
The sale of Tommy Hilfiger branded footwear is a significant portion of our
business. The Tommy Hilfiger footwear sales are contingent on our licensing
agreement with Tommy Hilfiger Licensing, Inc. During fiscal 2006, we renewed the
agreement for an additional one-year term, to March 2008. During the first
quarter of fiscal 2007, we subsequently entered into an additional extension of
the term of the agreement to December 2008. Whether our license with Tommy
Hilfiger will remain in effect depends, in part, on our achieving certain
minimum sales levels for the licensed products. We expect to continue to meet
the minimum sales levels required by the Tommy Hilfiger license agreement.
During 2006, the parent company of Tommy Hilfiger Licensing, Inc., Tommy
Hilfiger Corp. was sold to Apax Partners. If we lose the Tommy Hilfiger license,
our business would be materially and adversely affected. Revenues derived from
our Tommy Hilfiger licenses are 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.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
- ---------------------
The following table summarizes the Company's performance for the second
quarter of fiscal 2007 as compared to the results for the same period in fiscal
2006:
Percentage Increase (Decrease)
--------------------------------------
Second Quarter Six Months
------------------- ------------------
Net sales 7.8% 7.0%
Gross profit 10.2% 9.4%
Selling and administrative expenses 12.8% 8.1%
Operating income 3.1% 13.9%
Income before income taxes 3.7% 14.3%
Net income (16.2)% 0.3%
Percentage of Net Sales
-------------------------------------------
Second Quarter Six Months
-------------------- --------------------
2007 2006 2007 2006
--------- -------- ---------- --------
Gross profit 43.3% 42.4% 42.1% 41.2%
Selling and administrative expenses 32.5% 31.1% 31.9% 31.6%
Operating income 10.8% 11.3% 10.2% 9.6%
Income before income taxes 10.4% 10.8% 9.7% 9.1%
Net income 6.8% 8.7% 6.3% 6.7%
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Second Quarter of 2007 Compared to the Second Quarter of 2006
- -------------------------------------------------------------
Net Sales
- ---------
The second quarter breakdown of net sales is as follows:
Percentage
Change
2007 vs.
2007 2006 2006
--------- --------- --------
(In millions, except percentages)
Stride Rite Children's Group - Wholesale $15.4 $ 18.3 (15.8)%
Stride Rite Children's Group - Retail 58.0 55.8 3.9%
--------- --------- --------
Stride Rite Children's Group 73.4 74.1 (0.9)%
Keds 34.4 34.9 (1.5)%
Sperry Top-Sider 35.0 28.5 22.8%
Stride Rite International 22.6 19.2 17.6%
Saucony 22.7 22.2 2.2%
Hind 2.5 3.4 (26.1)%
--------- --------- --------
Other Wholesale Footwear 117.2 108.2 8.3%
Tommy Hilfiger Footwear 15.2 14.6 4.0%
Robeez 5.9 - n/a
Elimination of intercompany sales (2.5) (2.9) n/a
--------- --------- --------
Total net sales $209.2 $194.0 7.8%
========= ========= ========
During the second quarter of fiscal 2007, consolidated net sales increased
$15.2 million to $209.2 million, or 7.8% above the sales level achieved in the
second quarter of fiscal 2006. The increase in sales is primarily related to the
inclusion of Robeez sales as well as the increase in Sperry Top-Sider and Stride
Rite International sales. Wholesale net sales increased $11.9 million or 8.7%
for the second quarter of 2007, and overall retail sales, including the
e-commerce sites, increased $3.3 million or 5.8% when compared to the same
period in the prior year. Unit shipments of first quality merchandise for the
wholesale brands during the second quarter were 6.9% higher than the comparable
period in 2006.
First quality wholesale gross sales increased by $10.6 million, or 7.9%
above the wholesale net sales level achieved in the second quarter of fiscal
2006. The combined negative impact of increased discounts, returns and
allowances was $0.3 million. Sales of closeout products increased $0.8 million
from the comparable period in the 2006 fiscal year. Additionally, royalty income
increased $0.4 million versus the comparable period in 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 OPERATION
Gross Profit
- ------------
During the second quarter of fiscal 2007, the Company's gross profit of
$90.7 million increased $8.4 million or 10.2% above the amount recorded during
fiscal 2006's second quarter. The gross profit percentage rate for the fiscal
2007 second quarter increased 0.9 percentage points to 43.3%, versus the 42.4%
rate achieved in the prior year's second quarter. Contributing to the improved
gross profit dollars was the impact of Robeez gross sales in 2007 and increased
sales of higher priced Sperry Top-Sider products in premier department stores,
moderate and independent retail channels. Offsetting a portion of these
increases were the lower gross profit dollars caused by the declines in Keds
sales, an increase in promotional event sales in the Stride Rite Children's
Group retail stores, and a shift in product mix. The higher gross profit
percentage was largely attributable to the significant increase in first quality
sales in the second quarter of fiscal 2007 as compared to the second quarter of
fiscal 2006.
Operating Costs
- ---------------
During the second quarter of fiscal 2007, selling and administrative
expenses were $68.0 million, an increase of $7.7 million or 12.8% as compared to
the second quarter of fiscal 2006. This increase was principally the result of
the inclusion of Robeez which added $2.9 million in operating expenses. Also
contributing to the higher expense levels in the second quarter of fiscal 2007
were $1.7 million in incremental costs associated with the increased number of
Stride Rite Children's Group retail stores, which includes Saucony's factory
outlet stores, in addition to increased investment in European operations which
added $1.0 million in expenses during the quarter. Offsetting a portion of these
expense increases were $0.8 million in reduced pension expense due to the
previously announced changes in our defined benefit plan that included stopping
the accrual of future retirement benefits and preserving earned benefits as of
December 31, 2006. In addition, second quarter acquisition related integration
costs of $0.3 million for Robeez in fiscal 2007 were $0.7 million lower than the
integration expenses in the prior year's comparable period related to the
acquisition of Saucony. The second quarter of fiscal 2007 results also included
$0.5 million of expenses related to the pending merger with Payless ShoesSource,
Inc. As a percentage of sales, operating costs were 32.5% in the second quarter
of fiscal 2007 compared to 31.1% in the second quarter of fiscal 2006.
Other Income and Taxes
- ----------------------
Investment income related to the Company's cash equivalents and marketable
securities was $0.3 million in the second quarter of fiscal 2007, which was up
slightly as compared to the similar period in fiscal 2006. Interest expense,
which relates to borrowings under the revolving credit agreement, increased by
$0.2 million in the second quarter of fiscal 2007, as compared to the second
quarter of fiscal 2006.
The provision for income taxes increased $3.5 million in the second quarter
of fiscal 2007 as compared to the similar period in fiscal 2006. This increase
was due to the higher pre-tax income amount coupled with a higher tax rate.
Affecting the tax rate comparisons was 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. Our effective tax rate was 34.7% in the second quarter of
fiscal 2007 as compared to 19.3% in the second quarter of fiscal 2006.
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 second quarter of fiscal 2007 was $14.2 million, a
decrease of $2.7 million, or 16.2% as compared to the same period in the prior
year. The higher net sales and resulting gross profit, due, in part, to the
addition of Robeez, were not able to offset corresponding increases in operating
expenses and a larger provision for income taxes.
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 2006, the Company completed its acquisition of three holding
companies that, together with their direct and indirect subsidiaries, constitute
the Robeez Group ("Robeez") pursuant to a Share Purchase Agreement. At that
time, Robeez became our wholly-owned subsidiary. Robeez' results of operations
have been included in our results since the date of acquisition. Robeez has been
reported as a separate segment based on management's evaluation of the business
for the purposes of assessing performance and allocating resources.
Stride Rite Children's Group - Retail
- -------------------------------------
The net sales of the Stride Rite Children's Group - Retail segment
increased $2.2 million or 3.9% in the second quarter as compared to the same
quarter in the prior year. Sales at comparable Children's Group retail stores
(stores open for 52 weeks in each fiscal year) decreased 2.5% for the second
fiscal quarter of 2007. The comparable stores category were partially impacted
by the shift of the annual pre-Easter holiday promotional event into the first
quarter of fiscal 2007, as compared to the later timing of the event during the
first quarter of fiscal 2006. At the end of the second quarter of fiscal 2007,
the Stride Rite Children's Group - Retail operated 315 Stride Rite children's
shoe stores and outlets. This is a net increase of 27 stores, or 9.4% from the
end of the same period in the prior year. In addition Stride Rite Children's
Group-Retail operated 11 Saucony outlet stores. Current plans for fiscal 2007
include the opening of 32 Children's Group retail stores and the closing of 15
underperforming retail locations.
The Stride Rite Children's Group - Retail operating income decreased due to
higher operating expenses which offset the income impact of higher sales and
corresponding gross profit impact versus the prior year. The gross profit margin
improvement was primarily the result of fewer promotional events in our retail
stores and a higher gross profit dollar product mix. The operating expense
increase is primarily related to the additional number of stores and certain
increased indirect store costs.
Stride Rite Children's Group - Wholesale
- ----------------------------------------
Net sales decreased $2.9 million or 15.8% during the second quarter of 2007
as compared to the same quarter last year. This decrease was attributable to
lower sales of first quality products to all retail channels, mainly in the
Stride Rite, Tommy Hilfiger and B0rn product lines, as well as a decrease in
closeout products sales. Offsetting a portion of these declines were higher
sales of Sperry Top-Sider and Saucony children's products.
The Stride Rite Children's Group - Wholesale operating income was flat to
the prior year. The lower sales and the corresponding gross profit dollars were
offset by lower operating expenses.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Other Wholesale Footwear
- ------------------------
The increase in net sales of the Other Wholesale Footwear segment was
primarily attributable to increases in Sperry Top-Sider, Saucony and Stride Rite
International. These increases were partially offset by sales decreases in Keds
and Hind.
During the second quarter of fiscal 2007, the increase in Saucony domestic
sales was driven by strong sales of several new technical and athletic product
introductions. Offsetting a portion of this was a decrease in promotional
product sales.
The Sperry Top-Sider sales increase was attributable to strong sales of
both men's and women's product lines. The growth in the Sperry Top-Sider product
sales in the second quarter resulted from increases in most retail channels
including the premier department store, moderate and independent stores.
Offsetting a portion of this sales growth was a decrease in promotional product
sales.
The Stride Rite International division's net sales growth in the second
quarter of fiscal 2007 was primarily the result of strong sales of Saucony
products in Europe, Keds sales increases in Canada and Europe and Tommy Hilfiger
sales in Latin America.
The Keds sales decline during the second quarter of fiscal 2007 versus the
same period last year was partially attributable to a decrease in core product
sales in the mid-tier channel, as well as lower children's sales offset by sales
increases in the women's product in the premium department stores as well as in
the Grasshoppers product line. We have continued to add new distribution in the
younger-oriented specialty stores and premier department stores. These updated
product offerings have generally performed well in these channels.
The Hind sales decline was primarily related to sales declines in the
outdoor channel. We expect this trend to continue through the remainder of
fiscal 2007 as we reposition the technical apparel strategy.
The increased operating income versus the prior year in this segment was
primarily related to the impact of higher net sales in Saucony, Sperry Top-Sider
and International and the corresponding increases in gross profit dollars
partially offsetting these increases were the impact of lower net sales in Keds
and Hind and the corresponding decreases in gross profit dollars.
Tommy Hilfiger Footwear, Inc.
- -----------------------------
Net sales of Tommy Hilfiger footwear adult products increased by $0.6
million, or 4.0% above sales in the second quarter of fiscal 2006. This was
primarily attributable to positive trends in both women's and men's product
lines sales to family shoe store accounts. In fiscal 2007, under this license,
we are projecting an improved sales trend as compared to last year although
still an overall sales decline for the second half.
The Tommy Hilfiger operating income increase versus prior year was
primarily related to the impact of higher net sales and the corresponding
increase in gross profit dollars coupled with decreases in operating expenses.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Robeez
- ------
Robeez sales for the second quarter of fiscal 2007 were $5.9 million. Net
sales of Robeez products met the Company's financial expectations on strong
European sales with offsetting softness in the United States.
Robeez' operating income of $77 thousand for the quarter related to gross
profit dollars generated from sales less operating expenses.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
First Six Months of 2007 Compared to the First Six Months of 2006
- -----------------------------------------------------------------
Net Sales
- ---------
The first six months breakdown of net sales is as follows:
Percentage
Change
2007 vs.
2007 2006 2006
---------- ---------- ---------
(In millions, except percentages)
Stride Rite Children's Group - Wholesale $ 36.4 $ 39.5 (7.8)%
Stride Rite Children's Group - Retail 101.1 93.7 7.9%
---------- ---------- ---------
Stride Rite Children's Group 137.5 133.2 3.3%
Keds 72.5 76.9 (5.7)%
Sperry Top-Sider 61.0 52.1 17.1%
Stride Rite International 45.9 42.0 9.2%
Saucony 45.1 43.3 4.2%
Hind 4.9 6.9 (28.5)%
---------- ---------- ---------
---------- ---------- ---------
Other Wholesale Footwear 229.4 221.2 3.7%
Tommy Hilfiger Footwear 30.6 29.5 3.8%
Robeez 13.0 - n/a
Elimination of intercompany sales (6.6) (6.5) n/a
---------- ---------- ---------
---------- ---------- ---------
Total net sales $403.9 $ 377.4 7.0%
========== ========== =========
During the first six months of fiscal 2007, consolidated net sales
increased $26.5 million to $403.9 million, or 7% above the sales level achieved
in the first six months of fiscal 2006. The increase in sales is primarily
related to the inclusion of Robeez sales as well as the increase in Sperry
Top-Sider, Stride Rite International, and Stride Rite Children's Group -
Retail's sales. Wholesale net sales increased $17.1 million or 6.1% for the
first six months of 2007, and overall retail sales, including the e-commerce
sites, increased $9.4 million or 9.7% when compared to the same period in the
prior year. Unit shipments of first quality merchandise for the wholesale brands
during the first six months were 4.0% higher than the comparable period in 2006.
First quality wholesale gross sales increased by $13.5 million, or 4.8%
above the wholesale net sales level achieved in the first six months of fiscal
2006. The combined positive impact of decreased discounts, returns and
allowances was $0.7 million. Sales of closeout products increased $2.2 million
from the comparable period in the 2006 fiscal year. Additionally, royalty income
increased $1.0 million versus the comparable period in the 2006 fiscal year.
Gross Profit
- ------------
During the first six months of fiscal 2007, the Company's gross profit of
$170.2 million increased $14.7 million or 9.4% above the amount recorded in the
comparable period of fiscal 2006. The gross profit percentage rate for the first
six months of fiscal 2007 increased 0.9 percentage points to 42.1%, versus the
41.2% rate reported in the first six months in the prior year. Contributing to
the improved gross profit dollars was the impact of Robeez gross sales in 2007
and increased sales of higher priced Sperry Top-Sider products in the premier
department store, moderate and independent retail channels. Offsetting a portion
of these increases were the lower gross profit dollars caused by the declines in
Keds sales, an increase in promotional event sales in the Stride Rite Children's
Group retail stores, and a shift in product mix. The gross profit comparison was
also impacted by the $2.6 million pre-tax expense recorded in the first quarter
of the prior year which related to the flow through of the remaining purchase
accounting inventory write-up to fair value recorded as part of the Saucony
acquisition.
Operating Costs
- ---------------
During the first six months of fiscal 2007, selling and administrative
expenses were $128.8 million, an increase of $9.6 million or 8.1% as compared to
the first six months of fiscal 2006. This increase was principally the result of
the inclusion of Robeez which added $6.2 million in operating expenses. Also
contributing to the higher expense levels in the first six months of fiscal 2007
was $3.5 million in incremental costs associated with the increased number of
Stride Rite Children's Group retail stores, which includes Saucony's factory
outlet stores in addition to increased cost in European operations which added
$1.8 million in expenses during the first six months. Offsetting a portion of
these expense increases was $1.6 million in reduced pension expense due to the
previously announced changes in our defined benefit plan that included stopping
the accrual of future retirement benefits and preserving earned benefits as of
December 31, 2006. In addition, the first six months' acquisition related
integration costs of $0.6 million for Robeez in fiscal 2007 were $1.5 million
lower than the integration expenses in the prior year's comparable period
related to the acquisition of Saucony. The first half of fiscal 2007 results
also included $0.5 million of expenses related to the pending merger with
Payless Shoes Source, Inc. As a percentage of sales, operating costs were 31.9%
in the first six months of fiscal 2007 compared to 31.6% in the first six months
of fiscal 2006.
Other Income and Taxes
- ----------------------
Investment income related to the Company's cash equivalents and marketable
securities was $0.7 million in the first six months of fiscal 2007, which was up
slightly as compared to the similar period in fiscal 2006. Interest expense,
which relates to borrowings under the revolving credit agreement, increased by
$0.4 million in the first six months of fiscal 2007 as compared to the first six
months of fiscal 2006.
The provision for income taxes increased $4.8 million for the first six
months of fiscal 2007 as compared to the similar period in fiscal 2006. This
increase was due to the higher pre-tax income amount coupled with a higher tax
rate. Affecting the tax rate comparisons was 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. Our effective tax rate was 35.8% for the first six
months of fiscal 2007 as compared to 26.9% for the first six months of fiscal
2006.
Net Income
- ----------
Net income for the first six months of fiscal 2007 was $25.3 million, an
increase of $0.1 million, compared to the same period in the prior year. The
higher net sales and resulting gross profit, due, in part, to the addition of
Robeez, were able to offset corresponding increases in operating expenses and a
larger provision for income taxes.
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 2006, the Company completed its acquisition of three holding
companies that, together with their direct and indirect subsidiaries, constitute
the Robeez Group ("Robeez") pursuant to a Share Purchase Agreement. At that
time, Robeez became our wholly-owned subsidiary. Robeez' results of operations
have been included in our results since the date of acquisition. Robeez has been
reported as a separate segment based on management's evaluation of the business
for the purposes of assessing performance and allocating resources.
Stride Rite Children's Group - Retail
- -------------------------------------
The net sales of the Stride Rite Children's Group - Retail segment
increased $7.4 million or 7.9% in the first six months of fiscal 2007 as
compared to the same period in the prior year. Sales at comparable Children's
Group retail stores (stores open for 52 weeks in each fiscal year) increased
1.2% for the first six months of 2007. At the end of the first six months of
fiscal 2007, the Stride Rite Children's Group - Retail operated 315 Stride Rite
children's shoe stores and outlets. This is a net increase of 27 stores, or 9.4%
from the end of the same period in the prior year. In addition Stride Rite
Children's Group-Retail operated 11 Saucony outlet stores. Current plans for
fiscal 2007 include the opening of 32 Children's Group retail stores and the
closing of 15 underperforming retail locations.
The Stride Rite Children's Group - Retail operating income decreased due to
a lower gross profit percentage and higher operating expenses which offset the
income impact of higher sales versus the prior year. The gross profit margin
decline was primarily the result of a high level of promotional events in our
retail stores and a lower gross profit dollar product mix. The operating expense
increase is primarily related to the additional number of stores and certain
increased indirect store costs.
Stride Rite Children's Group - Wholesale
- ----------------------------------------
Net sales decreased $3.1 million or 7.8% during the first six months of
2007 as compared to the same period last year. This decrease was attributable to
lower sales of first quality products to all channels, mainly in the Stride Rite
and Tommy Hilfiger product lines, as well as a decrease in closeout products
sales. Partially offsetting these declines were higher sales of Sperry Top-Sider
and Saucony children's products.
The Stride Rite Children's Group - Wholesale operating income decreased
versus the prior year. Operating income decreased year over year due to lower
sales and the corresponding gross profit impact, partially offset by lower
operating expenses.
Other Wholesale Footwear
- ------------------------
The increase in net sales of the Other Wholesale Footwear segment was
primarily attributable to increases in Sperry Top-Sider, Saucony and Stride Rite
International. These increases were partially offset by sales decreases in Keds
and Hind.
During the first six months of fiscal 2007, the increase in Saucony
domestic sales was driven by strong sales of several new technical and athletic
product introductions. Offsetting a portion of this was a decrease in
promotional product sales.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Sperry Top-Sider sales increase was attributable to strong sales of
both men's and women's product lines. The growth in the Sperry Top-Sider product
sales in the first six months of fiscal 2007 resulted from increases in the
premier department store, moderate and independent retail channels. Offsetting a
portion of this sales growth was a decrease in promotional product sales.
The Stride Rite International division's net sales growth in the first six
months of fiscal 2007 was primarily the result of strong sales of Saucony
products in Europe, Keds sales increases in Canada, Europe and Australia and
Sperry Top-Sider's sales in Europe, Asia and Latin America. Offsetting a portion
of this increase were lower Tommy Hilfiger sales in Canada and Latin America.
The Keds sales decline during the first six months of fiscal 2007 versus
the same period last year was partially attributable to a decrease in core
product sales in the mid-tier and value channels, as well as lower children's
sales partially offset by sales increases in the women's product in the premium
department stores as well as in the Grasshoppers product line. We have continued
to add new distribution in the younger-oriented specialty stores and premier
department stores. These updated product offerings have generally performed well
in these channels.
The Hind sales decline was primarily related to sales declines in the
outdoor channel. We expect this trend to continue through the remainder of
fiscal 2007 as we reposition the technical apparel strategy.
The increased operating income versus the prior year in this segment was
primarily related to the impact of higher net sales in Saucony, Sperry Top-Sider
and Stride Rite International and the corresponding increases in gross profit
dollars. Also contributing to the favorable operating income comparison is the
$2.6 million expense recorded in last year's first quarter for the flow through
of the remaining purchase accounting write-up of acquired Saucony inventory to
fair value. Offsetting these increases were the impact of lower net sales in
Keds and Hind and the corresponding decreases in gross profit dollars.
Tommy Hilfiger Footwear, Inc.
- -----------------------------
The net sales of Tommy Hilfiger footwear adult products increased by $1.1
million, or 3.8%, above the sales in the first six months of fiscal 2006. This
was primarily attributable to positive trends in both women's and men's product
lines sales to family shoe store accounts. In fiscal 2007, under this license,
we are projecting an improved sales trend compared to last year, although still
an overall sales decline.
The Tommy Hilfiger operating income increase versus prior year was
primarily related to the impact of higher net sales and the corresponding
increase in gross profit dollars coupled with decreases in operating expenses.
Robeez
- ------
Robeez sales for the first six months of fiscal 2007 were $13.0 million.
Robeez met the Company's financial expectations for the six months.
Robeez' operating income of $475 thousand for the first six months related
to gross profit dollars generated from sales less operating expenses.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Liquidity and Capital Resources
- -------------------------------
At the end of the second fiscal quarter of 2006, our balance sheet
reflected a current ratio of 3.6 to 1.0 with $54.2 million in long term debt.
Our cash and cash equivalents totaled $21.3 million at June 1, 2007, a decrease
of $2.0 million from the total cash and cash equivalents of $23.3 million at the
end of the second quarter of fiscal 2006. The decrease in our cash balance,
versus the comparable period last year, is primarily attributable to funding a
portion of the Robeez acquisition which was completed in September 2006.
During the first six months of fiscal 2007, the Company generated $12.0
million of cash from operations as compared to $1.8 million used to fund
operations in the first six months of fiscal 2006. Inventory levels at the end
of the first six months of fiscal 2007 increased $2.4 million, or 1.9% from the
levels recorded at the end of the prior year's second quarter. The increase in
inventory related primarily to the addition of Robeez product. Accounts
receivable at June 1, 2007 were $110.0 million or 14.4% higher than the amount
at the end of last year's second quarter which was primarily due to the addition
of Robeez and the timing of 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 44 days at the end of the second fiscal quarter of
2007 which increased when compared to the DSO of 42 days at the end of the same
period last year. Accounts payable, at the end of the second quarter of fiscal
2007, increased $10.5 million from the level recorded at the end of the prior
year's second quarter. The increase was primarily due to the addition of Robeez
and the timing of product payments. During the second fiscal quarter of 2007,
the Company did not contribute to its defined benefit pension plan and, at this
time, the Company plans to make an $802,000 contribution to its defined benefit
pension plan during the fourth quarter of the 2007 fiscal year.
Additions to property and equipment totaled $7.6 million in the first six
months of fiscal 2007, a decrease compared to the $9.4 million in the first six
months of fiscal 2006. The capital purchases in the first six months of 2007
related primarily to the Company's continued retail store expansion efforts, a
new trade show booth for the brands and improvements within our warehousing and
distribution facilities. Funding of our capital expenditures was provided from
operations and our revolving credit facility.
At the end of the second quarter of fiscal 2007, there was $54.2 million
outstanding under the Company's revolving credit facility. The credit facility
was entered into in September 2005 as part of the Saucony acquisition and also
to provide funds for working capital and general corporate purposes. As of June
1, 2007, letters of credit totaling $11.7 million were outstanding for the
purchase of inventories. The use 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 and permitted by the terms of the revolving credit agreement. All
letters of credit generally expire within one year.
During the first six months of fiscal 2007 we returned $4.8 million to
shareholders through cash dividends. Effective with the March 15, 2007 dividend
payment, the Company's Board of Directors increased the quarterly dividend rate
from $0.06 per share to $0.07 per share. This will result in an annual increase
in dividend payments to shareholders of approximately $1.5 million. We did not
repurchase any common shares under our share repurchase program during the first
half. As of June 1, 2007 we have approximately 3.0 million shares remaining on
our share repurchase authorization approved by the Board of Directors in June
2004.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
We do not have any relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured finance or
special purpose entities, which would have been established for the purpose of
facilitating off-balance-sheet arrangements or other contractually narrow or
limited purposes. As such, we are not exposed to any financing, liquidity,
market or credit risk that could arise if we had engaged in such relationships.
PART I - FINANCIAL INFORMATION (Continued)
THE STRIDE RITE CORPORATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes from the information previously
reported under Item 7A of the Company's Annual Report on Form 10-K for the
fiscal year ended December 1, 2006.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
For the quarterly period ended June 1, 2007, the Company carried out an
evaluation under the supervision of and with the participation of the Company's
management, including the participation of its Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Rule 13a-15 of the
Securities Exchange Act of 1934, as amended. Based upon that evaluation, as of
the end of the period covered by this report, our Chief Executive Officer and
Chief Financial Officer have concluded that our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934, as amended) are effective to ensure that information
required to be disclosed by the Company in reports that it files or submits
under the Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms. We continue to review and document our
disclosure controls and procedures and may from time to time make changes aimed
at enhancing their effectiveness and ensuring that our systems evolve with our
business.
(b) Changes in internal controls over financial reporting.
There was no change in the Company's internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Securities
Exchange Act of 1934, as amended) during our second 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 1, 2006, 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.
The Company did not repurchase equity securities under the repurchase
program in the second quarter of fiscal 2007. There is a maximum of 2,998,994
shares that may yet be purchased under the program as of June 1, 2007.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of the Company's shareholders was held on April 12,
2007. The three directors nominated by the Company's Board of Directors were
elected by the vote set forth below:
Votes
---------------------------------------
Name of Director For Withheld
--------------------------- ---------------------------------------
Mark J. Cocozza 33,957,441 219,138
Christine M. Cournoyer 34,007,228 169,351
James F. Orr III 34,005,984 170,595
The Company's other directors, whose term of office continues after the
2007 stockholders' meeting, are as follows:
David M. Chamberlain
F. Lance Isham
Edward L. Larsen
Shira D. Goodman
Frank R. Mori
Myles J. Slosberg
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (continued)
The Company's shareholders also ratified the Company's selection of
PricewaterhouseCoopers LLP as auditors of the Company for the 2007 fiscal year
by the vote set forth below:
Votes
------------------------------------------------------------
For Against Abstentions
------------------ ----------------- -----------------
33,897,265 257,780 19,314
PART II - OTHER INFORMATION (continued)
THE STRIDE RITE CORPORATION
ITEM 6. EXHIBITS
Exhibit No. Description of Exhibit
- -------------- --------------------------------------------------------
2 (i) The Agreement and Plan of Merger among the
Registrant, Payless ShoeSource, Inc. and San Jose
Acquisition Corp dated as of May 22, 2007. This document
was filed as Exhibit 2.1 to the Registrant's Form 8-K on
May 23, 2007 and is incorporated herein by reference.
3 (i) Restated Articles of Organization of the Registrant
with amendments thereto through November 28, 1986,
incorporated by reference from Exhibit 4(i) to the
Registrant's Form S-8 filed on October 25, 1996.
3 (ii) Articles of Amendment dated April 7, 1987 to
Restated Articles of Organization, incorporated by
reference from Exhibit 4(i) to the Registrant's Form S-8
filed on October 25, 1996.
3 (iii) Articles of Amendment dated December 16, 1987 to
Restated Articles of Organization of the Registrant,
incorporated by reference from Exhibit 4(i) to the
Registrant's Form S-8 filed on October 25, 1996.
3 (iv) Articles of Amendment dated December 3, 1991 to the
Restated Articles of Organization of the Registrant,
incorporated by reference from Exhibit 4(i) to the
Registrant's Form S-8 filed on October 25, 1996.
3 (v) Certificate of Vote of Directors establishing a series
of a Class of Stock dated as of June 18, 1997.
3 (vi) By-laws of the Registrant, as amended. This document
was filed as Exhibit 3 of the Registrant's Form 10-Q for
the fiscal period ended June 1, 1990 and is
incorporated herein by reference.
4 (i) Reference is made to Exhibits 3(i), (ii), (iii) and
(iv) referred to above, which are expressly incorporated
herein by reference.
31.1* Certification of the Company's Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
31.2* Certification of the Company's Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
32.1* Certification of the Company's Chief Executive Officer
pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
32.2* Certification of the Company's Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
*Filed herewith
THE STRIDE RITE CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned duly authorized.
THE STRIDE RITE CORPORATION
--------------------------------------
(Registrant)
Date: July 11, 2007 By: /s/ Frank A. Caruso
------------- --------------------------------------
Frank A. Caruso
Chief Financial Officer