-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JN4lPxUvoiUduaictAgmigMoEFrmbjViHmzsXQAcPk39pzlzSKeUI9NITw8E2Sw1 ncgAP7+8Aq2o8Jt3V30hww== 0000049401-99-000068.txt : 19991115 0000049401-99-000068.hdr.sgml : 19991115 ACCESSION NUMBER: 0000049401-99-000068 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991001 FILED AS OF DATE: 19991112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SAUCONY INC CENTRAL INDEX KEY: 0000049401 STANDARD INDUSTRIAL CLASSIFICATION: RUBBER & PLASTICS FOOTWEAR [3021] IRS NUMBER: 041465840 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-05083 FILM NUMBER: 99749831 BUSINESS ADDRESS: STREET 1: 13 CENTENNIAL DR STREET 2: CENTENNIAL INDUSTRIAL PK CITY: PEABODY STATE: MA ZIP: 01961 BUSINESS PHONE: 5085329000 MAIL ADDRESS: STREET 1: 13 CENTENNIAL DRIVE STREET 2: CENTENNIAL INDUSTRIAL PARK CITY: PEABODY STATE: MA ZIP: 01960 FORMER COMPANY: FORMER CONFORMED NAME: HYDE ATHLETIC INDUSTRIES INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: HYDE A R & SONS CO DATE OF NAME CHANGE: 19701030 10-Q 1 10Q FOR PERIOD ENDED OCTOBER 1, 1999 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 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
SAUCONY, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (Unaudited) (in thousands) ASSETS October 1, January 1, 1999 1999 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
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 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
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 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 ========= ========= ========= ======== Total Treasury Stock Unearned Accumulated Stockholders' Shares Amount Compensation Translation Equity 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
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 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
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 =========== =========== NOTE 4 - EARNINGS PER SHARE
(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 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 ========== ========= ========= ========== 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 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 ========== ========= ========= ==========
NOTE 5 - STATEMENT OF COMPREHENSIVE INCOME
(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 --------------- --------------- --------------- --------------- 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 ========= ======= ========= ========
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.
(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 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 ========= ========== ========== ==========
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.
Percent Change Increase (Decrease) Thirteen Weeks Thirty-Nine Weeks Ended Ended Ocober 1, 1999 October 1, 1999 -------------- --------------- Net sales 66.8% 50.2% Gross profit 87.8 60.1 Selling, general and administrative expenses 45.1 27.2 $ Change (in thousands) Thirteen Weeks Thirty-Nine Weeks Ended Ended October 1, 1999 October 1, 1999 Operating income $ 4,530 $ 11,002 Income before tax 4,140 10,682 Net income 2,294 6,237 Percent of Net Sales Thirteen Weeks Ended Thirty-Nine Weeks Ended October 1, October 2, October 1, October 2, 1999 1998 1999 1998 ---- ---- ---- ---- 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
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:
Thirteen Weeks Ended October 1, 1999 and October 2, 1998 1999 1998 ---------------------- ---------------------- $ % $ % - - - - 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% ========== ======== ========== ======== Thirty-Nine Weeks Ended October 1, 1999 and October 2, 1998 1999 1998 ---------------------- ---------------------- $ % $ % - - - - 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% ========== ======== ========== ========
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. 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. 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. 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 EX-27 2 FDS --
5 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. 0000049401 Saucony, Inc. 1000 9-MOS Dec-31-1999 Jan-02-1999 Oct-01-1999 4636 218 31390 2622 31170 71470 19361 11018 82184 21918 357 0 0 2216 55352 82184 123566 123985 76637 76637 31722 2006 593 15047 6295 8684 0 0 0 8684 1.38 1.32
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