UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
{x} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 1, 1999
OR
{ } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number 000-05083
SAUCONY, INC.
(Exact name of registrant as specified in its charter)
Massachusetts 04-1465840
(State or other jurisdiction of (I.R.S. employer identification number)
incorporation or organization)
13 Centennial Drive, Peabody, MA 01960
(Address of principal executive offices)
978-532-9000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
Class Outstanding as of November 8, 1999
Class A Common Stock-$.33 1/3 Par Value 2,681,727
Class B Common Stock-$.33 1/3 Par Value 3,671,319
---------
6,353,046
<PAGE>
SAUCONY, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of October 1, 1999
and January 1, 1999
Condensed Consolidated Statements of Income for the thirteen weeks and
thirty-nine weeks ended October 1, 1999
and October 2, 1998
Condensed Consolidated Statements of Stockholders' Equity for
the thirty-nine weeks ended October 1, 1999 and October 2, 1998
Condensed Consolidated Statements of Cash Flows for the
thirty-nine weeks ended October 1, 1999 and October 2, 1998
Notes to Condensed Consolidated Financial Statements -
October 1, 1999
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risk
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Signature
<TABLE>
<CAPTION>
SAUCONY, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands)
ASSETS
October 1, January 1,
1999 1999
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,636 $ 5,495
Marketable securities 218 179
Accounts receivable 31,390 19,473
Inventories 31,170 31,072
Prepaid expenses and other current assets 4,056 2,923
--------- ----------
Total current assets 71,470 59,142
--------- ----------
Property, plant and equipment, net 8,343 8,123
--------- ----------
Other assets 2,371 2,614
--------- ----------
Total assets $ 82,184 $ 69,879
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 10,656 $ 7,568
Current maturities of long term debt 375 324
Accounts payable 3,351 6,244
Accrued expenses and other current liabilities 7,536 4,704
--------- ----------
Total current liabilities 21,918 18,840
--------- ----------
Long-term obligations:
Long-term debt 357 559
Deferred income taxes 1,874 1,851
Other long-term obligations 168 157
--------- ----------
Total long-term obligations 2,399 2,567
--------- ----------
Minority interest in consolidated subsidiaries 299 222
--------- ----------
Stockholders' equity:
Common stock, $.33 1/3 par value 2,216 2,178
Additional paid-in capital 16,659 15,921
Retained earnings 41,044 32,360
Accumulated translation (673) (528)
---------- -----------
Total 59,246 49,931
Less:
Common stock held in treasury, at cost (1,665) (1,665)
Unearned compensation (13) (16)
---------- -----------
57,568 48,250
--------- ----------
Total liabilities and stockholders' equity $ 82,184 $ 69,879
========= ==========
See notes to condensed consolidated financial statements
</TABLE>
<TABLE>
<CAPTION>
SAUCONY, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
For the Thirteen Weeks and Thirty-Nine Weeks Ended October 1, 1999 and October 2, 1998
(Unaudited)
(in thousands, except per share data)
Thirteen Thirteen Thirty-Nine Thirty-Nine
Weeks Weeks Weeks Weeks
Ended Ended Ended Ended
October 1, October 2, October 1, October 2,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net sales $ 43,454 $ 26,056 $ 123,566 $ 82,242
Other revenue 137 51 419 251
--------- --------- --------- --------
Total revenue 43,591 26,107 123,985 82,493
--------- --------- --------- --------
Costs and expenses
Cost of sales 26,083 16,806 76,637 52,937
Selling expenses 6,895 4,331 18,236 13,533
General and administrative expenses 4,932 3,819 13,486 11,399
--------- --------- --------- --------
Total costs and expenses 37,910 24,956 108,359 77,869
--------- --------- --------- --------
Operating income 5,681 1,151 15,626 4,624
Non-operating income (expense)
Interest, net (201) (135) (593) (520)
Foreign currency (44) 321 (29) 253
Other 6 (35) 43 8
--------- ---------- --------- --------
Income before income taxes and minority interest 5,442 1,302 15,047 4,365
Provision for income taxes 2,322 497 6,295 1,889
Minority interest in income of consolidated subsidiaries 26 5 68 29
--------- --------- --------- --------
Net income $ 3,094 $ 800 $ 8,684 $ 2,447
========= ========= ========= ========
Per share amounts:
Earnings per common share - basic: $ 0.49 $ 0.13 $ 1.38 $ 0.39
========== ========== ========== =========
Earnings per common share - diluted: $ 0.47 $ 0.13 $ 1.32 $ 0.38
========== ========== ========== =========
Weighted average common shares and equivalents outstanding 6,639 6,363 6,571 6,374
========= ========= ========= ========
Cash dividends per share of common stock 0 0 0 0
========= ========= ========= ========
See notes to condensed consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SAUCONY, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
For the Thirty-Nine Weeks Ended October 1, 1999 and October 2, 1998
(Unaudited)
(in thousands, except share data)
Common Stock Paid-in Retained
Class A Class B Capital Earnings
<S> <C> <C> <C> <C>
Balance, January 2, 1998 $ 902 $ 1,248 $ 15,652 $ 28,781
Issuance of 25,500 shares of common stock
upon exercise of stock options 0 8 77 0
Amortization of unearned compensation 0 0 0 0
Acquisition of 95,400 shares of common stock, at cost 0 0 0 0
Net income 0 0 0 2,447
Foreign currency translation adjustments 0 0 0 0
--------- --------- --------- --------
Balance, October 2, 1998 $ 902 $ 1,256 $ 15,729 $ 31,228
========= ========= ========= ========
Balance, January 1, 1999 $ 902 $ 1,276 $ 15,921 $ 32,360
Issuance of 114,014 shares of common stock
upon exercise of stock options 0 38 386 0
Amortization of unearned compensation 0 0 0 0
Tax benefit related to stock options 0 0 319 0
Issuance of non-qualified stock options 0 0 33 0
Net income 0 0 0 8,684
Foreign currency translation adjustments 0 0 0 0
--------- --------- --------- --------
Balance, October 1, 1999 $ 902 $ 1,314 $ 16,659 $ 41,044
========= ========= ========= ========
<CAPTION>
Total
Treasury Stock Unearned Accumulated Stockholders'
Shares Amount Compensation Translation Equity
<S> <C> <C> <C> <C> <C>
Balance, January 2, 1998 198,400 $ (1,054) $ (40) $ (417) $ 45,072
Issuance of 25,500 shares of common stock
upon exercise of stock options 0 0 0 0 85
Amortization of unearned compensation 0 0 23 0 23
Acquisition of 95,400 shares of common
stock, at cost 95,400 (537) 0 0 (537)
Net income 0 0 0 0 2,447
Foreign currency translation adjustments 0 0 0 (279) (279)
-------- --------- ------- ------- ----------
Balance, October 2, 1998 293,800 $ (1,591) $ (17) $ (696) $ 46,811
======== ========== ======== ======= =========
Balance, January 1, 1999 305,400 $ (1,665) $ (16) $ (528) $ 48,250
Issuance of 114,014 shares of common stock
upon exercise of stock options 0 0 0 0 424
Amortization of unearned compensation 0 0 3 0 3
Tax benefit related to stock options 0 0 0 0 319
Issuance of non-qualified stock options 0 0 0 0 33
Net income 0 0 0 0 8,684
Foreign currency translation adjustments 0 0 0 (145) (145)
-------- --------- ------- ------- ----------
Balance, October 1, 1999 305,400 $ (1,665) $ (13) $ (673) $ 57,568
======== ========== ======== ======= =========
See notes to condensed consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SAUCONY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THIRTY-NINE WEEKS ENDED OCTOBER 1, 1999 AND OCTOBER 2, 1998
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(in thousands)
(Unaudited)
October 1, October 2,
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net income $ 8,684 $ 2,447
-------- ---------
Adjustment to reconcile net income to net cash provided (used) by operating
activities:
Depreciation and amortization 1,394 1,295
Provision for bad debts and discounts 3,947 3,821
Deferred income tax benefit (749) (663)
Other 143 264
Changes in operating assets and liabilities, net of effects of acquisitions,
dispositions and foreign currency adjustments:
Decrease (increase) in assets:
Marketable securities (39) 11
Accounts receivable (15,928) (7,604)
Inventories (427) 1,196
Prepaid expenses and other current assets (293) 323
Increase (decrease) in liabilities:
Accounts payable (2,825) (728)
Accrued expenses 3,116 3,465
-------- ---------
Total adjustments (11,661) 1,380
--------- ---------
Net cash provided (used) by operating activities (2,977) 3,827
--------- ---------
Cash flows from investing activities:
Purchases of property, plant and equipment (1,305) (716)
Increase in deferred charges, deposits and other (62) (249)
Proceeds from sale of equipment 3 61
Payments for business acquisitions, net of cash acquired 0 (863)
-------- ----------
Net cash used by investing activities (1,364) (1,767)
--------- ----------
Cash flows from financing activities:
Net short-term borrowings 3,269 (565)
Repayment of long-term debt and capital lease obligations (310) (2,268)
Common stock repurchased 0 (537)
Issuances of common stock 424 85
-------- ---------
Net cash provided (used) by financing activities 3,383 (3,285)
-------- ----------
Effect of exchange rate changes on cash and
cash equivalents 99 (506)
-------- ----------
Net decrease in cash and cash equivalents (859) (1,731)
Cash and equivalents at beginning of period 5,495 4,432
-------- ---------
Cash and equivalents at end of period $ 4,636 $ 2,701
======== =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes, net of refunds $ 5,914 $ 246
======== =========
Interest $ 561 $ 526
======== =========
Non-cash investing and financing activities:
Property purchased under capital leases $ 160 $ 26
======== =========
See notes to condensed consolidated financial statements
</TABLE>
<PAGE>
SAUCONY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 1, 1999
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and, therefore, do not
include all information and footnotes necessary for a fair presentation of
financial position, results of operations and cash flows in conformity with
generally accepted accounting principles. In the opinion of management, all
adjustments (consisting solely of normal recurring adjustments) necessary for a
fair presentation have been included. These interim consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements and the notes, thereto, included in the Company's Annual Report on
Form 10-K, as filed with the Securities and Exchange Commission, for the fiscal
year ended January 1, 1999. Operating results for thirty-nine weeks ended
October 1, 1999, are not necessarily indicative of the results for the entire
year.
NOTE 2 - RECLASSIFICATION
Certain items in prior years Consolidated Financial Statements have been
reclassified to conform to the 1999 presentation.
NOTE 3 - INVENTORIES
Inventories at October 1, 1999 and January 1, 1999 consisted of the following
(in thousands):
October 1, January 1,
1999 1999
Finished goods $ 25,873 $ 24,194
Work in progress 1,196 834
Raw materials 4,101 6,044
----------- -----------
$ 31,170 $ 31,072
=========== ===========
<PAGE>
NOTE 4 - EARNINGS PER SHARE
<TABLE>
<CAPTION>
(Unaudited)
(in thousands, except per share amounts)
Thirteen Weeks Ended Thirteen Weeks Ended
October 1, 1999 October 2, 1998
--------------------------- --------------------------
Earnings Earnings Earnings Earnings
per per per per
Common Common Common Common
Share - Share - Share - Share -
Basic Diluted Basic Diluted
<S> <C> <C> <C> <C>
Net income available for common
shares and assumed conversions $ 3,094 $ 3,094 $ 800 $ 800
========== ========= ========== ==========
Weighted-average common shares
and equivalents outstanding 6,336 6,336 6,229 6,229
Effect of dilutive securities:
Employee stock options 0 303 0 134
---------- --------- ---------- ----------
Weighted-average common shares
and equivalents outstanding 6,336 6,639 6,229 6,363
========== ========= ========== ==========
Earnings per share $ 0.49 $ 0.47 $ 0.13 $ 0.13
========== ========= ========= ==========
<CAPTION>
Thirty-Nine Weeks Ended Thirty-Nine Weeks Ended
October 1, 1999 October 2, 1998
--------------------------- --------------------------
Earnings Earnings Earnings Earnings
per per per per
Common Common Common Common
Share - Share - Share - Share -
Basic Diluted Basic Diluted
<S> <C> <C> <C> <C>
Net income available for common
shares and assumed conversions $ 8,684 $ 8,684 $ 2,447 $ 2,447
========== ========= ========== ==========
Weighted-average common shares
outstanding 6,293 6,293 6,235 6,235
Effect of dilutive securities:
Employee stock options 0 278 0 139
---------- --------- ---------- ----------
Weighted-average common shares
and equivalents outstanding 6,293 6,571 6,235 6,374
========== ========= ========== ==========
Earnings per share $ 1.38 $ 1.32 $ 0.39 $ 0.38
========== ========= ========= ==========
</TABLE>
<PAGE>
NOTE 5 - STATEMENT OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
(in thousands)
Thirteen Thirteen Thirty-Nine Thirty-Nine
Weeks Weeks Weeks Weeks
Ended Ended Ended Ended
October 1, 1999 October 2, 1998 October 1, 1999 October 2, 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net income $ 3,094 $ 800 $ 8,684 $ 2,447
Other comprehensive income:
Foreign currency translation adjustment 216 (63) (145) (279)
=
Income tax benefit related to other
comprehensive expense 37 (38) (117) (124)
--------- -------- ---------- ---------=
Other comprehensive income, net of tax 179 (25) (28) (155)
--------- -------- ---------- ---------
Comprehensive income $ 3,273 $ 775 $ 8,656 $ 2,292
========= ======= ========= ========
</TABLE>
NOTE 6 - OPERATING SEGMENT DATA
The Company's operating segments are organized based on the nature of products
and consist of the Saucony Segment and Other Products Segment. The determination
of the reportable segments for the thirteen and thirty-nine weeks ended October
1, 1999 and October 2, 1998, as well as the basis of measurement of segment
profit or loss, is consistent with the segment reporting disclosed in the
Company's Annual Report on Form 10-K as filed for the fiscal year ended January
1, 1999.
<TABLE>
<CAPTION>
(in thousands)
Thirteen Thirteen Thirty-Nine Thirty-Nine
Weeks Weeks Weeks Weeks
Ended Ended Ended Ended
October 1, 1999 October 2, 1998 October 1, 1999 October 2, 1998
<S> <C> <C> <C> <C>
Revenues:
Saucony $ 37,164 $ 21,009 $ 107,597 $ 68,671
Other products 6,427 5,098 16,388 13,822
--------- ---------- ---------- ----------
$ 43,591 $ 26,107 $ 123,985 $ 82,493
========= ========== ========== ==========
Income (loss) before income taxes:
Saucony $ 5,695 $ 1,453 $ 15,929 $ 4,759
Other products (253) (151) (882) (394)
---------- ----------- ----------- -----------
$ 5,442 $ 1,302 $ 15,047 $ 4,365
========= ========== ========== ==========
</TABLE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Highlights
The following table sets forth the comparison, as a percent change and in
absolute dollars, of certain items in the consolidated statement of earnings for
the thirteen and thirty-nine weeks ended October 1, 1999 and October 2, 1998
and, for the periods indicated, the percentage of certain items in the
consolidated statement of earnings relative to net sales.
<TABLE>
<CAPTION>
Percent Change
Increase (Decrease)
Thirteen Weeks Thirty-Nine Weeks
Ended Ended
Ocober 1, 1999 October 1, 1999
-------------- ---------------
<S> <C> <C>
Net sales 66.8% 50.2%
Gross profit 87.8 60.1
Selling, general and administrative expenses 45.1 27.2
<CAPTION>
$ Change
(in thousands)
Thirteen Weeks Thirty-Nine Weeks
Ended Ended
October 1, 1999 October 1, 1999
<S> <C> <C>
Operating income $ 4,530 $ 11,002
Income before tax 4,140 10,682
Net income 2,294 6,237
<CAPTION>
Percent of Net Sales
Thirteen Weeks Ended Thirty-Nine Weeks Ended
October 1, October 2, October 1, October 2,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Gross margin 40.0% 35.5% 38.0% 35.6%
Selling, general and administrative expenses 27.2 31.3 25.7 30.3
Operating income 13.1 4.4 12.6 5.6
Income before tax 12.5 5.0 12.2 5.3
Net income 7.1 3.0 7.0 3.0
</TABLE>
<PAGE>
The following table sets forth net sales (in thousands) and percentages of net
sales of the Company's product lines in the thirteen and thirty-nine weeks ended
October 1, 1999 and October 2, 1998, respectively:
<TABLE>
<CAPTION>
Thirteen Weeks Ended October 1, 1999 and October 2, 1998
1999 1998
---------------------- ----------------------
$ % $ %
- - - -
<S> <C> <C> <C> <C>
Saucony $ 37,075 85.3% $ 20,976 80.5%
Other 6,379 14.7% 5,080 19.5%
---------- -------- ---------- --------
Total $ 43,454 100.0% $ 26,056 100.0%
========== ======== ========== ========
<CAPTION>
Thirty-Nine Weeks Ended October 1, 1999 and October 2, 1998
1999 1998
---------------------- ----------------------
$ % $ %
- - - -
<S> <C> <C> <C> <C>
Saucony $ 107,328 86.9% $ 68,451 83.2%
Other 16,238 13.1% 13,791 16.8%
---------- -------- ---------- --------
Total $ 123,566 100.0% $ 82,242 100.0%
========== ======== ========== ========
</TABLE>
Thirteen Weeks Ended October 1, 1999 Compared to Thirteen Weeks Ended
October 2, 1998
Consolidated Net Sales
Net sales increased 67% to $43,454,000 in the thirteen weeks ended October 1,
1999 from $26,056,000 in the thirteen weeks ended October 2, 1998. The impact of
foreign exchange rate changes in the thirteen weeks ended October 1, 1999 was
negligible.
Saucony Brand Segment
Worldwide net sales of branded Saucony footwear and apparel increased 77% to
$37,075,000 in the thirteen weeks ended October 1, 1999 from $20,976,000 in the
thirteen weeks ended October 2, 1998, primarily due to an increase of 118% in
unit volume in the footwear category. Overall average sell prices declined 13%
in the thirteen weeks ended October 1, 1999 as compared to the thirteen weeks
ended October 2, 1998, due to a higher proportion of more moderately-priced
Originals footwear in the Company's domestic product mix.
Domestic net sales increased 98% to $32,638,000 in the thirteen weeks ended
October 1, 1999 from $16,522,000 in the thirteen weeks ended October 2, 1998.
This increase was due primarily to increased unit volumes for Saucony's
Originals (introduced in the second quarter of 1998), for core technical
footwear models. Average unit sell prices increased for both Saucony's core
technical footwear and Originals in the thirteen weeks ended October 1, 1999,
however, due to the sales mix, overall average unit sell prices declined.
Originals unit volume accounted for 67% of domestic unit volume shipped in the
thirteen weeks ended October 1, 1999.
International net sales decreased .4% to $4,437,000 in the thirteen weeks ended
October 1, 1999 from $4,454,000 in the thirteen weeks ended October 2, 1998 due
primarily to the discontinuance of operations in Australia, which was offset in
part by increased footwear unit volumes recorded by the Company in Canada and
Western Europe.
Other Products Segment
Net sales of Other Products increased 26% to $6,379,000 in the thirteen weeks
ended October 1, 1999 from $5,080,000 in the thirteen weeks ended October 2,
1998, reflecting increased in domestic and international sales of the Company's
Hind apparel brand, increased sales volume at the cycling division and, to a
lesser extent, increased sales at the Company's factory outlet stores, due to
the addition of two stores in 1999, offset in part by lower international sales
due to the cessation of operations in Australia in July 1998.
Cost and Expenses
The Company's gross profit increased 88% to $17,371,000 in the thirteen weeks
ended October 1, 1999 from $9,250,000 in the thirteen weeks ended October 2,
1998 due to higher domestic unit volumes and, to a lesser extent, improved
international margins. The Company's gross margin increased to 40.0% in the
thirteen weeks ended October 1, 1999 from 35.5% in the thirteen weeks ended
October 2, 1998 due to a change in product mix, purchasing economies, lower
levels of product returns and markdowns and decreased foreign sales of
non-current models.
Selling, general and administrative expenses increased to $11,827,000, or 27.2%
of net sales, in the thirteen weeks ended October 1, 1999 from $8,150,000, or
31.3% of net sales, in the thirteen weeks ended October 2, 1998. Selling
expenses increased $2,564,000 in the thirteen weeks ended October 1, 1999 due to
increased domestic spending for print media, athlete and event sponsorship and
co-operative advertising, as well as increased sales commissions, performance
incentives and payroll and related expenses. General and administrative expenses
increased $1,113,000 in the thirteen weeks ended October 1, 1999 due to
increased staffing, increased performance-based compensation, increased bad debt
expense and increased administrative cost related to Hind apparel and the
Company's cycling division. Domestic selling and administrative spending
increases were partially offset by reduced international spending as a result of
the cessation of operations in Australia in July 1998.
Net interest expense increased 49% to $201,000 in the thirteen weeks ended
October 1, 1999 from $135,000 in the thirteen weeks ended October 2, 1998 due to
increased borrowings against the Company's domestic credit facility to finance
domestic working capital requirements.
Income Before Tax (in thousands)
Thirteen Weeks Ended
October 1, October 2,
1999 1998
Segment
Saucony Brand $ 5,695 $ 1,453
Other Products (253) (151)
---------- ---------
Consolidated $ 5,442 $ 1,302
========= ========
Consolidated income before tax increased to $5,442,000 in the thirteen weeks
ended October 1, 1999 from $1,302,000 in the thirteen weeks ended October 2,
1998 due primarily to increased domestic and international Saucony Brand income
and the improved financial performance of Hind apparel, offset by higher losses
sustained by the cycling division.
Income Taxes
The provision for income taxes increased to $2,322,000 in the thirteen weeks
ended October 1, 1999 from $497,000 in the thirteen weeks ended October 2, 1998,
due primarily to increased domestic pre-tax income. The effective tax rate
increased to 42.7% in the thirteen weeks ended October 1, 1999 from 38.2% in the
thirteen weeks ended October 2, 1998 due primarily to a shift in the composition
of domestic and foreign pre-tax earnings and an increase in the U.S. federal tax
rate to 35% due to the increase in domestic pre-tax income.
<PAGE>
Net Income and Earnings Per Share
Net income increased to $3,094,000 in the thirteen weeks ended October 1, 1999
from $800,000 in the thirteen weeks ended October 2, 1998. Diluted earnings per
share increased to $0.47 in the thirteen weeks ended October 1, 1999 compared to
$0.13 in the thirteen weeks ended October 2, 1998.
Thirty-Nine Weeks Ended October 1, 1999 Compared to Thirty-Nine Weeks Ended
October 2, 1998
Consolidated Net Sales
Net sales increased 50% to $123,566,000 in the thirty-nine weeks ended October
1, 1999 from $82,242,000 in the thirty-nine weeks ended October 2, 1998. The
impact of foreign exchange rate changes in the thirty-nine weeks ended October
1, 1999 was negligible.
Saucony Brand Segment
Worldwide net sales of branded Saucony footwear and apparel increased 57% to
$107,328,000 in the thirty-nine weeks ended October 1, 1999 from $68,451,000 in
the thirty-nine weeks ended October 2, 1998, primarily due to a 95% unit volume
growth in the footwear category. Overall average sell prices declined 16% in the
thirty-nine weeks ended October 1, 1999 due to a higher proportion of more
moderately-priced Originals in the Company's domestic product mix.
Domestic net sales increased 78% to $93,986,000 in the thirty-nine weeks ended
October 1, 1999 from $52,674,000 in the thirty-nine weeks ended October 2, 1998
due primarily to increased unit volumes for Saucony's Originals (introduced in
the second quarter of 1998), and, to a lesser extent, increased unit volumes for
Saucony's core technical footwear models. Average unit sell prices increased for
both Saucony's core technical footwear and Originals in the thirteen weeks ended
October 1, 1999, however, due to the sales mix, overall average unit sell prices
declined. Originals unit volume accounted for 58% of domestic unit volume
shipped in the thirty-nine weeks ended October 1, 1999.
International net sales decreased 15% to $13,342,000 in the thirty-nine weeks
ended October 1, 1999 from $15,777,000 in the thirty-nine weeks ended October 2,
1998 due primarily to the discontinuance of operations in Australia and
decreased distributor unit volumes, both of which were offset in part by
increased unit volumes recorded by the Company in Canada and Western Europe.
Other Products Segment
Net sales of Other Products increased 18% to $16,238,000 in the thirty-nine
weeks ended October 1, 1999 from $13,791,000 in the thirty-nine weeks ended
October 2, 1998, reflecting increased domestic and international sales of the
Company's Hind apparel brand, continued sales growth at the cycling division
and, to a lesser extent, increased sales at the Company's factory outlet stores,
due to the addition of two stores in 1999, offset in part by lower international
sales due to the cessation of operation in Australia in July 1998.
Cost and Expenses
The Company's gross profit increased 60% to $46,929,000 in the thirty-nine weeks
ended October 1, 1999 from $29,305,000 in the thirty-nine weeks ended October 2,
1998 due to higher domestic unit volumes and, to a lesser extent, improved
international margins. The Company's gross margin improved to 38.0% in the
thirty-nine weeks ended October 1, 1999 from 35.6% in the thirty-nine weeks
ended October 2, 1998 due to a change in the product mix, purchasing economies,
lower levels of product returns and markdowns and decreased foreign sales of
non-current models.
Selling, general and administrative expenses increased to $31,722,000, or 25.7%
of net sales, in the thirty-nine weeks ended October 1, 1999 from $24,932,000,
or 30.3% of net sales, in the thirty-nine weeks ended October 2, 1998. Selling
expenses increased $4,703,000 in the thirty-nine weeks ended October 1, 1999 due
to increased domestic spending for print media, athlete and event sponsorship,
co-operative advertising, as well as increased sales commissions, performance
incentives and payroll and related expenses. General and administrative expenses
increased $2,087,000 in the thirty-nine weeks ended October 1, 1999 due to
increased staffing, increased performance-based compensation, increased bad debt
expense and increased administrative cost related to Hind apparel and the
Company's cycling division. Domestic selling and administrative expense
increases were offset in part by reduced international administrative spending
as a result of the cessation of operations in Australia in July 1998.
Net interest expense increased 14% to $593,000 in the thirty-nine weeks ended
October 1, 1999 from $520,000 in the thirty-nine weeks ended October 2, 1998 due
to increased borrowings against the Company's domestic credit facility to
finance domestic working capital requirements, which was partially offset by
lower debt levels resulting from the paydown of the Company's senior notes
payable in the second quarter of 1998.
Income Before Tax (in thousands)
Thirty-Nine Weeks Ended
October 1, October 2,
1999 1998
Segment
Saucony Brand $ 15,929 $ 4,759
Other Products (882) (394)
---------- ---------
Consolidated $ 15,047 $ 4,365
========= ========
Consolidated income before tax increased to $15,047,000 in the thirty-nine weeks
ended October 1, 1999 from $4,365,000 in the thirty-nine weeks ended October 2,
1998 due primarily to increased domestic Saucony Brand income and the improved
financial performance of Hind apparel, offset by higher losses sustained by the
cycling division.
Income Taxes
The provision for income taxes increased to $6,295,000 in the thirty-nine weeks
ended October 1, 1999 from $1,889,000 in the thirty-nine weeks ended October 2,
1998, due primarily to increased domestic pre-tax income. The effective tax rate
decreased to 41.8% in the thirty-nine weeks ended October 1, 1999 from 43.3% in
the thirty-nine weeks ended October 2, 1998 due primarily to a deferred tax
valuation allowance recorded in the thirty-nine weeks ended October 2, 1998,
relating to foreign operating losses that were not expected to be realized,
partially offset by an increase in the U.S. federal tax rate to 35% due to the
increase in domestic pre-tax income.
Net Income and Earnings Per Share
Net income increased to $8,684,000 in the thirty-nine weeks ended October 1,
1999 from $2,447,000 in the thirty-nine weeks ended October 2, 1998. Diluted
earnings per share increased to $1.32 in the thirty-nine weeks ended October 1,
1999 compared to $0.38 in the thirty-nine weeks ended October 2, 1998.
Liquidity and Capital Resources
As of October 1, 1999 the Company's cash and cash equivalents totaled
$4,636,000, a decrease of $859,000 from January 1, 1999. The decrease is due
primarily to an increase in accounts receivable of $11,981,000, net of the
provision for bad debts and discounts, offset somewhat by an increase in accrued
liabilities of $3,116,000 and an increase in borrowings of $3,269,000 against
the Company's domestic credit facility. The increase in accounts receivable is
due to increased net sales of the Company's Saucony, Hind and cycling products
in the thirty-nine weeks ended October 1, 1999. The Company's days sales
outstanding for its accounts receivable decreased to 69 days in the thirty-nine
weeks ended October 1, 1999 from 75 days in the thirty-nine weeks ended October
2, 1998. Inventories increased $427,000 in the thirty-nine weeks ended October
1, 1999 due to increased domestic inventory levels of Saucony footwear. The
Company's inventory turns ratio increased to 3.3 turns in the thirty-nine weeks
ended October 1, 1999 from 2.9 turns in the thirty-nine weeks ended October 2,
1998 due primarily to the increased demand for the Originals footwear line.
For the thirty-nine weeks ended October 1, 1999, the Company used $2,977,000 of
net cash from operating activities, expended $1,305,000 to acquire capital
assets, and expended $310,000 to reduce long-term debt and received $424,000
from the issuance of common stock in connection with the exercise of employee
stock options.
Principal factors (other than net income, accounts receivable, provision for bad
debts and discounts and inventory) affecting the operating cash flows in the
thirty-nine weeks ended October 1, 1999 were a decrease of $2,825,000 in
accounts payable (due to the timing of payments for inventory purchases), an
increase of $3,116,000 in accrued expenses (due to increased income taxes
payable on higher levels of pre-tax income and increased variable selling and
administrative expenses associated with a higher level of net sales) and an
increase of $293,000 in prepaid expenses (due to an increase in current deferred
taxes and an increase in advance payments for advertising and sponsorship).
The liquidity of the Company is contingent upon a number of factors, principally
the Company's future operating results. Management believes that the Company's
current cash and cash equivalents, credit facilities and internally generated
funds are adequate to meet its working capital requirements and to fund its
capital investments needs and debt service payments.
Year 2000
The Company views its exposure to the Year 2000 problem in three areas: (i)
internal computer systems used to manage the Company's business, (ii)
microprocessors and other electronic devices included as components of equipment
used by the Company ("embedded chips") and (iii) computer systems used by
suppliers and customers of the Company. The Company's plan, under the
coordination of the Vice President Information Systems, is to resolve its
internal Year 2000 problems following sequential phases of evaluation, updating
and testing and to pursue Year 2000 compliance awareness and supporting
documentation from key suppliers and customers. In the evaluation phase, the
Company reviews the applicable system to identify Year 2000 problems and
determines the necessary remediation steps. The updating and testing phases
involve the implementation and testing, respectively, of Year 2000 remediation
measures.
Based on the evaluation of its exposure for the Year 2000 problem, the Company
has modified or replaced portions of its software, computer and other equipment
systems. The Company has incurred costs of approximately $20,000 in fiscal 1998
and expects to incur additional costs of $170,000 in fiscal 1999 related to the
Year 2000 modifications. To date, the Company has evaluated substantially all of
its internal computer systems and embedded chips and has completed the majority
of necessary upgrades. The Company expects its internal systems and embedded
processors will be Year 2000 ready for the new millennium.
The Company has interviewed key suppliers to determine their capability to
continue providing goods and services. Based on responses from over 80% of those
surveyed, the Company believes that its suppliers are unlikely to disrupt
inventory agreements due to a Year 2000 problem. The Company continues to
educate suppliers regarding Year 2000 issues and expand its understanding of
potential supply-chain problems. However, based upon factory discussions and
current supply-chain responsiveness, the Company has no plans to acquire excess
inventory or take other contingency actions based upon a potential Year 2000
problem.
The Company has interviewed key customers and those accounts that utilize
Electronic Data Interchange (EDI) as the principal means of placing orders. Many
large customers have provided the Company with written information about their
Year 2000 compliance programs. Also, substantially all of the Company's EDI
accounts are in production status with Year 2000 ready document exchanges.
However, small and medium size customers present a potential Year 2000 business
risk because of the Company's limited ability to influence their actions or
internal processes.
The Company has determined the risks associated with the reasonably worst-case
scenarios. Except for power loss at the electric utility level or a breakdown in
customer receiving and distribution activities, which are beyond the Company's
control, there are manual backup and outsourcing opportunities readily available
to support the Company's internal fulfillment systems.
The foregoing discussion of the Company's Year 2000 readiness contains
forward-looking statements that were derived using numerous assumptions. Despite
the Company's belief that its Year 2000 program reduces the risk of an internal
compliance failure and is taking an active approach to assess the readiness of
its business partners, there can be no assurances that all parties will achieve
timely Year 2000 compliance or that such non-compliance will not have a material
adverse impact to the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company has performed an analysis to assess the potential effect of
reasonably possible near-term changes in inflation and foreign currency exchange
rates. The effect of inflation on the Company's results of operations over the
past three years has been minimal. The impact of currency fluctuation on the
purchase of inventory by the Company from foreign suppliers has been minimal as
the transactions were denominated in U.S. dollars. The Company, however, is
subject to currency fluctuation risk with respect to the operating results of
the Company's foreign subsidiaries and certain foreign currency-denominated
payables. The Company has entered into certain forward foreign exchange
contracts to minimize the transaction currency risk.
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
a. Exhibits
27.0 - Financial Data Schedule
99.1 - Certain Factors that May Effect Future Results, set out on
pages 25-27 of the Company's Annual Report on Form 10-K for the period
ended January 2, 1998. Such Form 10-K shall not be deemed to be filed
except to the extent that portions thereof are expressly incorporated by
reference herein.
b. Reports on Form 8-K
None.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SAUCONY, INC.
By: /s/ Michael Umana
Michael Umana
Vice President, Finance
Chief Financial Officer
(Duly authorized officer and principal financial officer)
Date: November 12, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial
information extracted from Saucony, Inc's.
Industries, Inc. Form 10-Q for the period
ended October 1, 1999 and is qualified in
its entirety by reference to such 10-Q.
</LEGEND>
<CIK> 0000049401
<NAME> Saucony, Inc.
<MULTIPLIER> 1000
<S> <C>
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<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-02-1999
<PERIOD-END> Oct-01-1999
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