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 September 29, 2000
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, 2000
Class A Common Stock-$.33 1/3 Par Value 2,591,227
Class B Common Stock-$.33 1/3 Par Value 3,584,269
---------
6,175,496
SAUCONY, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of September 29, 2000
and December 31, 1999..................................................3
Condensed Consolidated Statements of Income for the thirteen weeks
and thirty-nine weeks ended September 29, 2000 and October 1, 1999.....4
Condensed Consolidated Statements of Cash Flows for the
thirty-nine weeks ended September 29, 2000 and October 1, 1999.......5-6
Notes to Condensed Consolidated Financial Statements - September 29,
2000..................................................................7-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................11-18
Item 3. Quantitative and Qualitative Disclosure About Market Risk..........19
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...................................20
Signature...................................................................21
<TABLE>
SAUCONY, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
<CAPTION>
(in thousands)
ASSETS
(Unaudited)
September 29, December 31,
2000 1999
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents....................................................$ 1,932 $ 3,515
Accounts receivable.......................................................... 36,330 23,968
Inventories.................................................................. 35,906 35,270
Prepaid expenses and other current assets.................................... 3,225 3,727
--------- ----------
Total current assets....................................................... 77,393 66,480
--------- ----------
Property, plant and equipment, net.............................................. 7,288 8,279
--------- ----------
Other assets.................................................................... 2,030 2,422
--------- ----------
Total assets....................................................................$ 86,711 $ 77,181
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable................................................................$ 7,607 $ 1,928
Current maturities of long term debt......................................... 275 375
Accounts payable............................................................. 3,791 5,897
Accrued expenses and other current liabilities............................... 7,573 7,203
--------- ----------
Total current liabilities.................................................. 19,246 15,403
--------- ----------
Long-term obligations:
Long-term debt............................................................... 41 292
Deferred income taxes........................................................ 2,042 2,045
Other long-term obligations.................................................. 183 171
--------- ----------
Total long-term obligations................................................ 2,266 2,508
--------- ----------
Minority interest in consolidated subsidiaries.................................. 368 308
--------- ----------
Stockholders' equity:
Common stock, $.33 1/3 par value............................................. 2,243 2,222
Additional paid-in capital................................................... 17,107 16,815
Retained earnings............................................................ 51,040 42,679
Accumulated other comprehensive income....................................... (884) (564)
---------- -----------
Total...................................................................... 69,506 61,152
Less:
Common stock held in treasury, at cost....................................... (4,392) (2,179)
Notes receivable............................................................. (276) 0
Unearned compensation........................................................ (7) (11)
---------- -----------
Total stockholders' equity................................................. 64,831 58,962
--------- ----------
Total liabilities and stockholders' equity......................................$ 86,711 $ 77,181
========= ==========
See notes to condensed consolidated financial statements
</TABLE>
<TABLE>
SAUCONY, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
For the Thirteen Weeks and Thirty-Nine Weeks Ended
September 29, 2000 and October 1, 1999
<CAPTION>
(Unaudited)
(in thousands, except per share data)
Thirteen Thirteen Thirty-Nine Thirty-Nine
Weeks Weeks Weeks Weeks
Ended Ended Ended Ended
September 29, October 1, September 29, October 1,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales.......................................................$ 44,790 $ 43,454 $ 134,645 $123,566
Other revenue................................................... 113 137 375 419
--------- --------- --------- --------
Total revenue................................................... 44,903 43,591 135,020 123,985
--------- --------- --------- --------
Costs and expenses
Cost of sales................................................ 27,455 26,083 83,161 76,637
Selling expenses............................................. 6,551 6,895 20,558 18,236
General and administrative expenses.......................... 4,293 4,932 13,463 13,486
Loss on disposition of cycling division...................... 0 0 2,944 0
--------- --------- --------- --------
Total costs and expenses................................... 38,299 37,910 120,126 108,359
--------- --------- --------- --------
Operating income................................................ 6,604 5,681 14,894 15,626
Non-operating income (expense)
Interest, net................................................ (201) (201) (563) (593)
Foreign currency............................................. 55 (44) 9 (29)
Other........................................................ 21 6 65 43
--------- --------- --------- --------
Income before income taxes and minority interest................ 6,479 5,442 14,405 15,047
Provision for income taxes...................................... 2,659 2,322 5,971 6,295
Minority interest in income of consolidated subsidiaries........ 40 26 73 68
--------- --------- --------- --------
Net income......................................................$ 3,780 $ 3,094 $ 8,361 $ 8,684
========= ========= ========= ========
Per share amounts:
Earnings per common share - basic: .............................$ 0.61 $ 0.49 $ 1.34 $ 1.38
========== ========== ========== =========
Earnings per common share - diluted:............................$ 0.60 $ 0.47 $ 1.31 $ 1.32
========== ========== ========== =========
Weighted average common shares and equivalents outstanding...... 6,347 6,639 6,381 6,571
========= ========= ========= ========
Cash dividends per share of common stock........................ 0 0 0 0
========= ========= ========= ========
See notes to condensed consolidated financial statements
</TABLE>
<TABLE>
SAUCONY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THIRTY-NINE WEEKS ENDED SEPTEMBER 29, 2000 AND OCTOBER 1, 1999
<CAPTION>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(in thousands)
(Unaudited)
September 29, October 1,
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income...................................................................$ 8,361 $ 8,684
-------- ---------
Adjustment to reconcile net income to net cash provided (used) by operating
activities:
Depreciation and amortization.............................................. 1,455 1,394
Provision for bad debts and discounts...................................... 4,493 3,947
Loss on sale of cycling division........................................... 2,944 0
Deferred income tax expense (benefit)...................................... 73 (749)
Other...................................................................... 80 143
Changes in operating assets and liabilities, net of effects of acquisitions,
dispositions and foreign currency adjustments:
Decrease (increase) in assets:
Marketable securities.................................................... (93) (39)
Accounts receivable...................................................... (17,313) (15,928)
Inventories.............................................................. (3,808) (427)
Prepaid expenses and other current assets................................ 155 (293)
Increase (decrease) in liabilities:
Accounts payable......................................................... (2,028) (2,825)
Accrued expenses......................................................... (101) 3,116
--------- ---------
Total adjustments.......................................................... (14,143) (11,661)
--------- ----------
Net cash used by operating activities........................................... (5,782) (2,977)
--------- ----------
Cash flows from investing activities:
Purchases of property, plant and equipment................................... (938) (1,305)
Increase in deferred charges, deposits and other............................. 61 (62)
Proceeds from sale of equipment.............................................. 1 3
Proceeds from sale of cycling division....................................... 1,350 0
-------- ---------
Net cash provided (used) by investing activities................................ 474 (1,364)
-------- ----------
Cash flows from financing activities:
Net short-term borrowings.................................................... 5,912 3,269
Repayment of long-term debt and capital lease obligations.................... (282) (310)
Common stock repurchased..................................................... (2,213) 0
Issuances of common stock.................................................... 38 424
-------- ---------
Net cash provided by financing activities....................................... 3,455 3,383
-------- ---------
Effect of exchange rate changes on cash and
cash equivalents............................................................. 270 99
-------- ---------
Net decrease in cash and cash equivalents....................................... (1,583) (859)
Cash and equivalents at beginning of period..................................... 3,515 5,495
-------- ---------
Cash and equivalents at end of period...........................................$ 1,932 $ 4,636
======== =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes, net of refunds...............................................$ 5,233 $ 5,914
======== =========
Interest...................................................................$ 543 $ 561
======== =========
Non-cash investing and financing activities:
Property purchased under capital leases......................................$ 0 $ 160
======== =========
See notes to condensed consolidated financial statements
</TABLE>
SAUCONY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 29, 2000
(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 December 31, 1999. Operating results for thirty-nine weeks ended
September 29, 2000, are not necessarily indicative of the results for the entire
year.
NOTE 2 - INVENTORIES
Inventories at September 29, 2000 and December 31, 1999 consisted of the
following (in thousands):
September 29, December 31,
2000 1999
---- ----
Finished goods................$ 30,086 $ 30,067
Work in progress.............. 324 920
Raw materials................. 5,496 4,283
----------- -----------
$ 35,906 $ 35,270
=========== ===========
<TABLE>
NOTE 3 - EARNINGS PER SHARE
<CAPTION>
(Unaudited)
(in thousands, except per share amounts)
Thirteen Weeks Ended Thirteen Weeks Ended
September 29, 2000 October 1, 1999
--------------------------- --------------------------
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....................$ 3,780 $ 3,780 $ 3,094 $ 3,094
========== ========= ========== ==========
Weighted-average common shares
and equivalents outstanding....................... 6,204 6,204 6,336 6,336
Effect of dilutive securities:
Employee stock options............................ 0 143 0 303
---------- --------- ---------- ----------
Weighted-average common shares
and equivalents outstanding....................... 6,204 6,347 6,336 6,639
========== ========= ========== ==========
Earnings per share...................................$ 0.61 $ 0.60 $ 0.49 $ 0.47
========== ========= ========= ==========
Thirty-Nine Weeks Ended Thirty-Nine Weeks Ended
September 29, 2000 October 1, 1999
--------------------------- --------------------------
Earnings Earnings Earnings Earnings
per per per per
Common Common Common Common
Share - Share - Share - Share -
Basic Diluted Basic Diluted
Net income available for common
shares and assumed conversions....................$ 8,361 $ 8,361 $ 8,684 $ 8,684
========== ========= ========== ==========
Weighted-average common shares
outstanding....................................... 6,221 6,221 6,293 6,293
Effect of dilutive securities:
Employee stock options............................ 0 160 0 278
---------- --------- ---------- ----------
Weighted-average common shares
and equivalents outstanding....................... 6,221 6,381 6,293 6,571
========== ========= ========== ==========
Earnings per share...................................$ 1.34 $ 1.31 $ 1.38 $ 1.32
========== ========= ========= ==========
</TABLE>
<TABLE>
NOTE 4 - STATEMENT OF COMPREHENSIVE INCOME
<CAPTION>
(in thousands)
Thirteen Thirteen Thirty-Nine Thirty-Nine
Weeks Weeks Weeks Weeks
Ended Ended Ended Ended
September 29, October 1, September 29, October 1,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income.......................................$ 3,780 $ 3,094 $ 8,361 $ 8,684
Other comprehensive income:
Foreign currency translation adjustment........ (172) 216 (371) (145)
=
Income tax (expense) benefit related to other
comprehensive expense......................... 78 (37) 156 117
--------- ---------- --------- -------- =
Other comprehensive income, net of tax........... (94) 179 (215) (28)
---------- --------- ---------- ---------
Comprehensive income.............................$ 3,686 $ 3,273 $ 8,146 $ 8,656
========= ========= ========= ========
</TABLE>
NOTE 5 - OPERATING SEGMENT DATA
The Company's operating segments are organized based on the nature of products
and consist of the Saucony Segment and Other Products Segment. The determination
of the reportable segments for the thirteen and thirty-nine weeks ended
September 29, 2000 and October 1, 1999, 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
December 31, 1999.
<TABLE>
<CAPTION>
(in thousands)
Thirteen Thirteen Thirty-Nine Thirty-Nine
Weeks Weeks Weeks Weeks
Ended Ended Ended Ended
September 29, October 1, September 29, October 1,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Saucony..............................$ 39,518 $ 37,164 $ 119,916 $ 107,597
Other products....................... 5,385 6,427 15,104 16,388
--------- ---------- ---------- ----------
$ 44,903 $ 43,591 $ 135,020 $ 123,985
========= ========== ========== ==========
Income (loss) before income taxes and minority interest:
Saucony..............................$ 5,856 $ 5,695 $ 17,997 $ 15,929
Other products....................... 623 (253) (3,592) (882)
--------- ----------- ----------- -----------
$ 6,479 $ 5,442 $ 14,405 $ 15,047
========= ========== ========== ==========
</TABLE>
NOTE 6 - LOSS ON SALE OF CYCLING DIVISION AND RELATED EXPENSES
On June 29, 2000, the Company sold substantially all of the assets and business
of its cycling division, consisting of inventory, prepaid expenses, equipment
and tradenames to QR Merlin Acquisition LLC for $1,350 in cash and the
assumption of $39 in liabilities. In connection with the sale, the Company
recorded a pre-tax loss of $2,944, inclusive of $1,240 of expenses associated
with the transaction and resulting from the exit of the cycling business, or
$1,727 after-tax or $0.27 per diluted share. As a result of the transaction, a
majority of the cycling division employees were severed and certain long-lived
assets used exclusively in the cycling business were deemed impaired. Expenses
associated with the sale and exit of the cycling division are as follows:
Transaction costs.............................................$ 444
Costs to exit facility and equipment leases and other
non-cancelable contractual commitments...................... 251
Employee severance and termination benefits................... 243
Writeoff leasehold improvements............................... 84
Writeoff goodwill and other deferred charges.................. 218
--------
Total.........................................................$ 1,240
========
Included in accrued expenses at September 29, 2000 are $452 of costs associated
with the sale and exit of the cycling business, which the Company expects will
be paid by the end of fiscal 2000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Dollar amounts throughout this Item 2 are in thousands, except per share
amounts.
<TABLE>
HIGHLIGHTS
Thirteen Weeks and Thirty-Nine Weeks Ended September 29, 2000 Compared to
Thirteen Weeks and Thirty-Nine Weeks Ended October 1, 1999
<CAPTION>
Percent Change
Increase (Decrease)
Thirteen Thirty-Nine
Weeks Weeks
<S> <C> <C>
Net sales...................................................... 3.1% 9.0%
Gross profit...................................................(0.2) 9.7
Selling, general and administrative............................(8.3) 7.2
</TABLE>
<TABLE>
<CAPTION>
$ Change
Thirteen Thirty-Nine
Weeks Weeks
<S> <C> <C>
Operating income............................................. $ 923 ($ 733)
Income before tax............................................ 1,037 (643)
Net income................................................... 686 (323)
</TABLE>
<TABLE>
<CAPTION>
Percent of Net Sales
Thirteen Weeks Thirty-Nine Weeks
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Gross profit....................................... 38.7% 40.0% 38.2% 38.0%
Selling, general and administrative................ 24.2 27.3 25.3 25.7
Operating income................................... 14.7 13.1 11.1 12.6
Income before tax.................................. 14.5 12.5 10.7 12.2
Net income......................................... 8.4 7.0 6.2 7.0
</TABLE>
The following table sets forth the approximate contribution to net sales (in
dollars and as a percentage of consolidated net sales) attributable to our
Saucony product line and our other product lines for the thirteen weeks and
thirty-nine weeks ended September 29, 2000 and October 1, 1999:
<TABLE>
<CAPTION>
Thirteen Weeks Ended September 29, 2000 and October 1, 1999
2000 1999
-------------------------- --------------------------
<S> <C> <C> <C> <C>
Saucony........................$ 39,394 88.0% $ 37,075 85.3%
Other.......................... 5,396 12.0% 6,379 14.7%
----------- --------- ----------- --------
Total..........................$ 44,790 100.0% $ 43,454 100.0%
=========== ========= =========== ========
Thirty-Nine Weeks Ended September 29, 2000 and October 1, 1999
2000 1999
-------------------------- --------------------------
Saucony........................$ 119,503 88.8% $ 107,328 86.9%
Other.......................... 15,142 11.2% 16,238 13.1%
----------- --------- ----------- --------
Total..........................$ 134,645 100.0% $ 123,566 100.0%
=========== ========= =========== ========
</TABLE>
THIRTEEN WEEKS ENDED SEPTEMBER 29, 2000 COMPARED TO THIRTEEN WEEKS ENDED
OCTOBER 1, 1999
CONSOLIDATED NET SALES
Net sales increased $1,336, or 3%, to $44,790 in the thirteen weeks ended
September 29, 2000 from $43,454 in the thirteen weeks ended October 1, 1999. At
constant currency exchange rates, the net sales increase for the thirteen weeks
ended September 29, 2000 would have been 4%. Excluding cycling division sales in
the prior period, the net sales increase for the thirteen weeks ended September
29, 2000 was 7% over the comparable prior period.
On a geographic basis, domestic net sales increased $107, or .3%, to $38,497 in
the thirteen weeks ended September 29, 2000 from $38,390 in the thirteen weeks
ended October 1, 1999. International net sales increased $1,229, or 24%, to
$6,293 in the thirteen weeks ended September 29, 2000 from $5,064 in the
thirteen weeks ended October 1, 1999.
SAUCONY BRAND SEGMENT
Worldwide net sales of Saucony-branded footwear and apparel increased $2,319, or
6%, to $39,394 in the thirteen weeks ended September 29, 2000 from $37,075 in
the thirteen weeks ended October 1, 1999, primarily due to higher domestic and
international average unit sell prices and increased international footwear unit
volume, offset somewhat by lower domestic Originals product lines unit volume.
Overall average selling prices increased 12% in the thirteen weeks ended
September 29, 2000 due to a shift in the domestic product unit volume sales mix
from lower priced Originals products to higher priced technical footwear as
compared to the comparable prior period and a change in the Originals product
mix to higher priced footwear.
On a geographic basis, domestic net sales increased $828, or 3%, to $33,466 in
the thirteen weeks ended September 29, 2000 from $32,638 in the thirteen weeks
ended October 1, 1999 due primarily to an increase in the average per unit sell
prices resulting from a shift in the domestic product sales mix to increased
technical footwear unit volume. In the thirteen weeks ended September 29, 2000,
domestic technical footwear unit volume increased 29%, while Originals footwear
unit volume decreased 27%. In the thirteen weeks ended September 29, 2000
average per pair sell prices increased 12% as compared to the thirteen weeks
ended October 1, 1999. Sales of discontinued footwear accounted for
approximately 5% of domestic Saucony net sales in the thirteen weeks ended
September 29, 2000 as compared to 1% in the thirteen weeks ended October 1,
1999. Originals unit volume accounted for 53% of domestic unit volume in the
thirteen weeks ended September 29, 2000 compared to 67% of domestic unit volume
in the thirteen weeks ended October 1, 1999.
International net sales increased $1,491, or 34%, to $5,928 in the thirteen
weeks ended September 29, 2000 from $4,437 in the thirteen weeks ended October
1, 1999 due primarily to increased distributor footwear unit volume, increased
unit shipment volume in Canada and in Benelux, and higher average per pair sell
prices, offset somewhat by the impact of currency exchange.
OTHER PRODUCTS SEGMENT
Net sales of Other Products decreased $983, or 15%, to $5,396 in the thirteen
weeks ended September 29, 2000 from $6,379 in the thirteen weeks ended October
1, 1999, due primarily to the elimination of sales resulting from the cycling
division divestiture, offset in part by increased Hind-branded apparel sales,
due to increased unit volumes and, to a lesser extent, by increased sales by our
factory outlet division resulting from the addition of two factory outlet
stores.
COST AND EXPENSES
Our gross profit decreased to $17,335 in the thirteen weeks ended September 29,
2000 from $17,371 in the thirteen weeks ended October 1, 1999 due primarily to
increased domestic sales of discontinued footwear and the negative impact of the
comparatively stronger U.S. dollar on European margins. Gross margin decreased
1.3% to 38.7% in the thirteen weeks ended September 29, 2000 from 40.0% in the
thirteen weeks ended October 1, 1999 due to an increase in sales of discontinued
footwear, which accounted for approximately 4% of consolidated net sales in the
quarter, the negative impact of the comparatively stronger U.S. dollar on
European margins and domestic pricing pressures.
Selling, general and administrative expenses decreased in absolute dollars to
$10,844 in the thirteen weeks ended September 29, 2000 from $11,827 in the
thirteen weeks ended October 1, 1999. As a percent of net sales, selling,
general and administrative expenses decreased to 24.2% of net sales, in the
thirteen weeks ended September 29, 2000 from 27.3% of net sales, in the thirteen
weeks ended October 1, 1999. The decrease in selling, general and administrative
expenses was due to spending reductions, which amounted to approximately $2,250,
resulting from both the divestiture of the cycling division and lower provisions
for doubtful accounts, offset somewhat by increased print media advertising,
administrative staffing increases, increased professional fees and increased
costs associated with the addition of two factory outlet stores. The increased
provision for doubtful accounts in the thirteen weeks ended October 1, 1999 was
due primarily to the pending bankruptcy filing by Just for Feet, Inc., which
occurred on November 4, 1999. Selling expenses as a percent of net sales
decreased to 14.6% in the thirteen weeks ended September 29, 2000 from 15.9% in
the thirteen weeks ended October 1, 1999, while general and administrative
expenses decreased to 9.6% of net sales in the thirteen weeks ended September
29, 2000 from 11.4% in the thirteen weeks ended October 1, 1999.
Net interest expense of $201 in the thirteen weeks ended September 29, 2000 was
consistent with net interest expense in the thirteen weeks ended October 1,
1999, due to lower average debt levels in the thirteen weeks ended September 29,
2000, offset by higher borrowing rates.
INCOME BEFORE TAX AND MINORITY INTEREST
Thirteen Weeks Ended
September 29, October 1,
2000 1999
---- ----
Segment
Saucony Brand..................$ 5,856 $ 5,695
Other Products................. 623 (253)
--------- ---------
Total..........................$ 6,479 $ 5,442
========= ========
Consolidated income before tax and minority interest increased to $6,479 in the
thirteen weeks ended September 29, 2000 from $5,442 in the thirteen weeks ended
October 1, 1999 due primarily to the lower provisions for doubtful accounts and
the elimination of operating losses incurred at our cycling division in the
thirteen weeks ended October 1, 1999, due to the divestiture of the division.
INCOME TAXES
The provision for income taxes increased to $2,659 in the thirteen weeks ended
September 29, 2000 from $2,322 in the thirteen weeks ended October 1, 1999, due
primarily to the increased domestic pre-tax income due in large part to the
divestiture of the cycling division. The effective tax rate decreased to 41.0%
in the thirteen weeks ended September 29, 2000 from 42.7% in the thirteen weeks
ended October 1, 1999 due primarily to a shift in the composition of domestic
and foreign pre-tax earnings.
NET INCOME
Net income increased to $3,780 in the thirteen weeks ended September 29, 2000
from $3,094 in the thirteen weeks ended October 1, 1999. Diluted earnings per
share increased to $0.60 in the thirteen weeks ended September 29, 2000 compared
to $0.47 in the thirteen weeks ended October 1, 1999. Weighted average common
shares and equivalent shares used to calculate diluted earnings per share were
6,347 and 6,639, respectively, in the thirteen weeks ended September 29, 2000
and October 1, 1999.
THIRTY-NINE WEEKS ENDED SEPTEMBER 29, 2000 COMPARED TO THIRTY-NINE WEEKS ENDED
OCTOBER 1, 1999
CONSOLIDATED NET SALES
Net sales increased 9% to $134,645 in the thirty-nine weeks ended September 29,
2000 from $123,566 in the thirty-nine weeks ended October 1, 1999. At constant
currency exchange rates, the net sales increase for the thirteen weeks ended
September 29, 2000 would have been 10%. Excluding cycling division sales in the
thirty-nine weeks ended September 25, 2000 and October 1, 1999, the net sales
increase was 12% in the thirty-nine weeks ended September 29, 2000 over the
comparable prior period.
On a geographic basis, domestic net sales increased $8,734, or 8%, to $117,281
in the thirty-nine weeks ended September 29, 2000 from $108,547 in the
thirty-nine weeks ended October 1, 1999. International net sales increased
$2,345, or 16%, to $17,364 in the thirty-nine weeks ended September 29, 2000
from $15,019 in the thirty-nine weeks ended October 1, 1999.
SAUCONY BRAND SEGMENT
Worldwide net sales of Saucony-branded footwear and apparel increased $12,175,
or 11%, to $119,503 in the thirty-nine weeks ended September 29, 2000 from
$107,328 in the thirty-nine weeks ended October 1, 1999, primarily due to a 7%
increase in footwear unit volume and higher average unit sell prices. Overall
average selling prices increased 5% in the thirty-nine weeks ended September 29,
2000 due to a shift in the domestic product unit volume sales mix from lower
priced Originals products to higher priced technical footwear as compared to the
comparable prior period and a change in the Originals product mix to higher
priced footwear.
On a geographic basis, domestic net sales increased $9,692, or 10%, to $103,678
in the thirty-nine weeks ended September 29, 2000 from $93,986 in the
thirty-nine weeks ended October 1, 1999 due primarily to higher average per pair
sell prices and, to a lesser extent, a 4% increase in footwear unit volumes. In
the thirty-nine weeks ended September 29, 2000 average per pair sell prices
increased 6% as compared to the thirty-nine weeks ended October 1, 1999.
Domestic technical footwear unit volume and Original footwear unit volume
increased 8% and 1%, respectively, in the thirty-nine weeks ended September 29,
2000 as compared to the prior year. Sales of discontinued footwear accounted for
approximately 4% of domestic Saucony net sales in the thirty-nine weeks ended
September 29, 2000 as compared to 3% in the thirty-nine weeks ended October 1,
1999. Originals unit volume accounted for 57% of domestic unit volume in the
thirty-nine weeks ended September 29, 2000 compared to 58% of domestic unit
volume in the thirty-nine weeks ended October 1, 1999.
International net sales increased $2,483, or 19%, to $15,825 in the thirty-nine
weeks ended September 29, 2000 from $13,342 in the thirty-nine weeks ended
October 1, 1999 due primarily to increased distributor footwear unit volume,
increased unit shipment volume in Canada and in Benelux, and, to a lesser
extent, higher average per pair sell prices, offset somewhat due to the impact
of currency exchange.
OTHER PRODUCTS SEGMENT
Net sales of Other Products decreased $1,096, or 7%, to $15,142 in the
thirty-nine weeks ended September 29, 2000 from $16,238 in the thirty-nine weeks
ended October 1, 1999, due primarily to the elimination of sales as a result of
the divestiture of our cycling division, offset in part by increased sales at
our factory outlet division stores, due to the addition of two factory outlet
stores, and increased unit volume shipments of Hind-branded apparel.
COST AND EXPENSES
Our gross profit increased 10% to $51,484 in the thirty-nine weeks ended
September 29, 2000 from $46,929 in the thirty-nine weeks ended October 1, 1999
due primarily to higher domestic and international footwear unit volumes. Gross
margin improved .2% to 38.2% in the thirty-nine weeks ended September 29, 2000
from 38.0% in the thirty-nine weeks ended October 1, 1999 due to a change in our
product mix, lower levels of product returns and discounts resulting from the
product mix changes, offset in part by domestic pricing pressures and, to a
lesser extent, the negative impact of the comparatively stronger U.S. dollar on
European margins.
Selling, general and administrative expenses increased in absolute dollars to
$34,021 in the thirty-nine weeks ended September 29, 2000 from $31,722 in the
thirty-nine weeks ended October 1, 1999. As a percent of net sales, selling,
general and administrative expenses decreased to 25.3% of net sales, in the
thirty-nine weeks ended September 29, 2000 from 25.7% of net sales, in the
thirty-nine weeks ended October 1, 1999. The increase in selling, general and
administrative expenses was due to increased television and print media
advertising, increased event sponsorship, increased variable selling expenses,
administrative staffing increases, increased costs associated with the addition
of two factory outlet stores and increased professional fees, offset in part by
lower provisions for doubtful accounts. The increased provision for doubtful
accounts in the thirty-nine weeks ended October 1, 1999 was due primarily to the
pending bankruptcy filing by Just for Feet, Inc., which occurred on November 4,
1999. Selling expenses as a percent of net sales increased to 15.3% in the
thirty-nine weeks ended September 29, 2000 from 14.8% in the thirty-nine weeks
ended October 1, 1999, while general and administrative expenses decreased to
10.0% of net sales in the thirty-nine weeks ended September 29, 2000 from 10.9%
in the thirty-nine weeks ended October 1, 1999.
On June 29, 2000, we sold substantially all of the assets and business of our
cycling division, consisting of inventory, prepaid expenses, equipment and
tradenames to QR Merlin Acquisition LLC for $1,350 in cash and the assumption of
$39 in liabilities. In connection with the sale, we recorded a pre-tax loss of
$2,944, inclusive of $1,240 of expenses associated with the transaction and
expenses resulting from our exit of the cycling business, or $1,727 after-tax or
$0.27 per diluted share. As a result of the transaction, a majority of the
cycling division employees were severed and assets used exclusively in the
cycling business were deemed impaired and have been written off. Expenses
associated with the sale and exit of the cycling division are as follows:
Transaction costs.........................................$ 444
Costs to exit facility and equipment leases
and other non-cancelable contractual commitments........ 251
Employee severance and termination benefits............... 243
Writeoff leasehold improvements........................... 84
Writeoff goodwill and other deferred charges.............. 218
---------
Total.....................................................$ 1,240
=========
Included in accrued expenses at September 29, 2000 are $452 of costs associated
with the sale and the exit of the cycling business, which we expect will be paid
by the end of fiscal 2000.
Net interest expense decreased 5% to $563 in the thirty-nine weeks ended
September 29, 2000 from $593 in the thirty-nine weeks ended October 1, 1999 due
to lower average debt levels in the thirteen weeks ended September 29, 2000,
offset in part by higher interest rates.
INCOME BEFORE TAX AND MINORITY INTEREST
Thirty-Nine Weeks Ended
September 29, October 1,
2000 1999
---- ----
Segment
Saucony Brand.................$ 17,997 $ 15,929
Other Products................ (3,592) (882)
---------- ---------
Total.........................$ 14,405 $ 15,047
========= ========
Consolidated income before tax and minority interest decreased to $14,405 in the
thirty-nine weeks ended September 29, 2000 from $15,047 in the thirty-nine weeks
ended October 1, 1999 due primarily to the loss on the sale of the cycling
division and, to a lesser extent, operating losses incurred at our cycling
division due to lower unit volume offset somewhat by increased pre-tax income
for both domestic and international Saucony businesses.
INCOME TAXES
The provision for income taxes decreased to $5,971 in the thirty-nine weeks
ended September 29, 2000 from $6,295 in the thirty-nine weeks ended October 1,
1999, due primarily to the loss on the sale of the cycling division which
reduced domestic pre-tax income. The effective tax rate decreased to 41.5% in
the thirty-nine weeks ended September 29, 2000 from 41.8% in the thirty-nine
weeks ended October 1, 1999 due primarily to a shift in the composition of
domestic and foreign pre-tax earnings.
NET INCOME
Net income decreased to $8,361 in the thirty-nine weeks ended September 29, 2000
from $8,684 in the thirty-nine weeks ended October 1, 1999. Diluted earnings per
share decreased to $1.31 in the thirty-nine weeks ended September 29, 2000
compared to $1.32 in the thirty-nine weeks ended October 1, 1999. The loss on
the sale of the cycling division reduced net income and diluted earnings per
share by $1,727 and $0.27, respectively in the thirty-nine weeks ended September
29, 2000. Weighted average common shares and equivalent shares used to calculate
diluted earnings per share were 6,381 and 6,571, respectively, in the
thirty-nine weeks ended September 29, 2000 and October 1, 1999.
LIQUIDITY AND CAPITAL RESOURCES
As of September 29, 2000, our cash and cash equivalents totaled $1,932, a
decrease of $1,583 from December 31, 1999. The decrease is due primarily to an
increase in accounts receivable of $12,820, net of the provision for bad debt
and discounts and, to a lesser extent, an increase in inventory of $3,808,
offset somewhat by an increase in borrowings against our domestic and foreign
credit facilities of $5,912. The increase in accounts receivable is due to
increased net sales of our Saucony footwear products in the thirty-nine weeks
ended September 29, 2000. Our days sales outstanding for accounts receivable
increased to 74 days in the thirty-nine weeks ended September 29, 2000 from 69
days in the thirty-nine weeks ended October 1, 1999 due to the timing of
shipments in the in the thirty-nine weeks ended September 29, 2000. Inventories
increased $3,808 in the thirty-nine weeks September 29, 2000 due to near-term
shipment requirements. As a consequence of the increased inventory level, our
inventory turns ratio decreased to 3.1 turns in the thirty-nine weeks ended
September 29, 2000 from 3.3 turns in the thirty-nine weeks ended October 1,
1999. The number of days sales in inventory increased 6% to 118 days in the
thirty-nine weeks ended September 29, 2000 from 111 days in the thirty-nine
weeks ended October 1, 1999.
For the thirty-nine weeks ended September 29, 2000, we used $5,782 of net cash
in operating activities, expended $938 to acquire capital assets, borrowed
$5,912 under our credit facilities, expended $282 to reduce long-term debt and
$2,213 to repurchase 207,400 shares of our Common Stock, received $1,350 from
the sale of the cycling division and received $38 from the issuance of shares of
our Common Stock.
Additional 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 September 29, 2000 included a decrease of $2,028 in
accounts payable (due to the timing of inventory purchases), a decrease of $101
in accrued expenses (due primarily to decreased incentive compensation accruals)
and a decrease of $155 in prepaid expenses (due to reduced prepayments for
administrative expenses).
OVERALL LIQUIDITY
Our liquidity is contingent upon a number of factors, principally our future
operating results. Management believes that our current cash and cash
equivalents, credit facilities and internally generated funds are adequate to
meet our working capital requirements and to fund our capital investment needs
and debt service payments.
INFLATION AND CURRENCY RISK
The effect of inflation on our results of operations over the past three years
has been minimal. The impact of currency fluctuation on our purchase of
inventory from foreign suppliers has been non-existent as all transactions were
denominated in U.S. dollars. We are, however, subject to currency fluctuation
risk with respect to the operating results of our foreign subsidiaries and
certain foreign currency denominated payables. We have entered into forward
foreign exchange contracts to minimize certain transaction currency risk.
ACCOUNTING PRONOUNCEMENTS
SFAS 133 and SFAS 137
In June 1998, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," (SFAS 133) (as amended by Financial Accounting Standards No. 137, a
deferral of the effective date of FASB statement No. 133 (SFAS 137)), which is
effective for fiscal quarters of fiscal years commencing after June 15, 2000,
with early adoption permitted. SFAS 133 defines the accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts and hedging activities. Upon adoption of SFAS 133, all derivatives
must be recognized on the balance sheet at their then fair value and any
deferred gains or losses remaining on the balance sheet under previous
hedge-accounting rules must be removed from the balance sheet. In the period of
adoption, the transition adjustments may effect current earnings and may effect
other comprehensive income. SFAS 133 requires companies to recognize adjustments
to the fair value of derivatives that are not hedges currently in earnings when
they occur. For derivatives that qualify as hedges, changes in the fair value of
the derivatives can be recognized currently in earnings, along with an
offsetting adjustment against the basis of the underlying hedged item or be
deferred in other comprehensive income. We will be adopting SFAS 133 in the
fourth quarter of fiscal 2000, the initial application of which will not have a
material effect on earnings or on our financial position.
Staff Accounting Bulletin No. 101
On December 8, 1999 the Securities and Exchange Commission (the "SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements," which provides guidance on properly applying Generally Accepted
Accounting Principles to revenue recognition in financial statements. In March
and June 2000 the SEC issued Staff Accounting Bulletins No. 101A and No. 101B,
respectively, to delay the implementation date of SAB 101 until the fourth
quarter of fiscal years beginning after December 15, 1999. We will be adopting
SAB 101 in the fourth quarter of fiscal 2000, the initial application of which
will not have a material effect on earnings or on our financial position.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements that
involve substantial risks and uncertainties. For this purpose, any statements
contained in this Quarterly Report on Form 10-Q that are not statements of
historical fact may be deemed to be forward-looking statements. In some cases
you can identify these statements by forward-looking words such as "anticipate,"
"believe," "could," "estimate," "expect," "intend," "may," "should," "will," and
"would," or similar words that convey uncertainty of future events or outcomes.
There are a number of important factors that could cause actual results to
differ materially from the results anticipated by these forward-looking
statements. These important factors include those listed under "CERTAIN OTHER
FACTORS THAT MAY AFFECT FUTURE RESULTS" in the Company's Annual Report on Form
10-K for the period ended December 31, 1999, which are hereby incorporated by
reference into this Quarterly Report on Form 10-Q and attached hereto as Exhibit
99.1, as well as any other cautionary language in this Quarterly Report on Form
10-Q.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We have performed an analysis to assess the potential effect of reasonably
possible near-term changes in inflation and foreign currency exchange rates. The
effect of inflation on our results of operations over the past three years has
been minimal. The impact of currency fluctuation on the purchase of inventory by
us from foreign suppliers has been non-existent as all transactions were
denominated in U.S. dollars. However, we are subject to currency fluctuation
risk with respect to the operating results of our foreign subsidiaries and
certain foreign currency denominated payables. We have entered into certain
forward foreign exchange contracts to minimize certain transaction currency
risk.
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
a. Exhibits
10.1 - Employment Agreement dated as of August 17, 2000 by and between the
Company and John H. Fisher.
10.2 - Executive Retention Agreement dated as of August 17, 2000 by and between
the Company and John H. Fisher.
10.3 - Employment Agreement dated as of August 17, 2000 by and between the
Company and Charles A. Gottesman.
10.4 - Executive Retention Agreement as of August 17, 2000 by and between the
Company and Charles A. Gottesman.
27.0 - Financial Data Schedule
99.1 - Certain Other Factors that May Affect Future Results, incorporated by
reference to pages 19 - 21 of the Company's Annual Report on Form 10-K for the
period ended December 31, 1999.
b. Reports on Form 8-K
On July 13, 2000, the Company filed a Current Report on Form 8-K, dated June 29,
2000, pursuant to which the Company reported that it sold substantially all of
the assets and business of its cycling and wetsuit division.
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 13, 2000
