10-Q 1 test3qtr.txt FORM 10-Q 1 of 19 pages Exhibit Index Appears on Page 15 ----------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended August 31, 2001 ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from to . Commission File Number: 1-4404 THE STRIDE RITE CORPORATION (Exact name of registrant as specified in its charter) Massachusetts 04-1399290 ------------------------- (State or other jurisdiction) (I.R.S. Employer Identified No.) 191 Spring Street, Lexington, Massachusetts 02421 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (617)824-6000 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered -------------------------------- ---------------------- Common stock, $.25 par value New York Stock Exchange Preferred Stock Purchase Rights New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report), and (2) has been subject to such filing requirements for the past 90 days. Yes (X) No ( ) As of October 10, 2001, 41,857,230 shares of the Registrant's common stock, $.25 par value, and the accompanying Preferred Stock Purchase Rights were outstanding. PART I - FINANCIAL INFORMATION ITEM 1. Financial Statements THE STRIDE RITE CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in Thousands)
August 31, September 1, 2001 December 1, 2000 (Unaudited) 2000 (Unaudited) -------------- -------------- -------------- Assets Current Assets: Cash and cash equivalents $ 17,443 $ 62,976 $ 42,762 Accounts and notes receivable, net 83,909 54,375 82,578 Inventories 107,607 105,917 78,766 Deferred income taxes 25,808 25,494 26,489 Other assets 3,169 6,365 4,587 -------- -------- -------- Total current assets 237,936 255,127 235,182 Property and equipment, net 73,686 76,240 75,326 Other assets 21,365 21,106 21,260 -------- -------- -------- Total assets $332,987 $352,473 $331,768 ======== ======== ========
The accompanying notes are an integral part of the condensed consolidated financial statements. 2 PART I - FINANCIAL INFORMATION (Continued) THE STRIDE RITE CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED) (Dollars in Thousands)
August 31, September 1, 2001 December 1, 2000 (Unaudited) 2000 (Unaudited) -------------- ------------- --------------- Liabilities and Stockholders' Equity Current Liabilities: Short-term debt - $ 24,000 - Accounts payable $ 18,815 32,570 $ 20,716 Income taxes payable 19,592 18,716 23,828 Accrued expenses and other liabilities 18,666 21,666 25,552 -------- -------- -------- Total current liabilities 57,073 96,952 70,096 Deferred income taxes 5,236 5,929 5,109 Stockholders' Equity: Preferred stock, $1 par value Shares authorized - 1,000,000 Shares issued - None - - - Common stock, $.25 par value Shares authorized - 135,000,000 Shares issued - 56,946,544 14,237 14,237 14,237 Capital in excess of par value 19,002 20,276 20,275 Retained earnings 390,576 371,821 374,558 Less cost of 15,002,590 shares of common stock held in treasury (15,355,693 on December 1, 2000 and 14,512,359 on September 1, 2000) (153,137) (156,742) (152,507) -------- -------- -------- Total stockholders' equity 270,678 249,592 256,563 -------- -------- -------- Total liabilities and $332,987 $352,473 $331,768 ======== ======== ======== stockholders' equity
The accompanying notes are an integral part of the condensed consolidated financial statements. 3 PART I - FINANCIAL INFORMATION (Continued) THE STRIDE RITE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) For the periods ended August 31, 2001 and September 1, 2000 (In Thousands Except Per Share Data)
Three Months Ended Nine Months Ended ----------------------------- ---------------------------- August 31, September 1, August 31, September 1, 2001 2000 2001 2000 ------------- -------------- ----------- ------------- Net sales $135,368 $144,760 $440,121 $452,956 Cost of sales 87,164 92,700 278,193 288,135 Selling and administrative expenses 39,038 40,242 125,317 124,361 Operating income 9,166 11,818 36,611 40,460 Other income (expense): Interest income 494 1,244 2,462 2,888 Interest expense (353) (394) (1,428) (1,548) Other, net (86) (38) (639) (48) -------- -------- --------- -------- 55 812 395 1,292 -------- -------- --------- -------- Income before income taxes 9,221 12,630 37,006 41,752 Provision for income taxes 2,068 4,848 11,986 15,874 -------- -------- --------- -------- Net income $ 7,153 $ 7,782 $ 25,020 $ 25,878 ======== ======== ========= ======== Net income per common share: Diluted $ .17 $ .18 $ .59 $ .59 ======== ======== ========= ======== Basic $ .17 $ .18 $ .60 $ .60 ======== ======== ========= ======== Dividends per common share $ .05 $ .05 $ .15 $ .15 ======== ======== ========= ======== Average common shares used in per share computations: Diluted 42,372 43,167 42,126 43,582 ======== ======== ========= ======== Basic 41,817 43,004 41,718 43,402 ======== ======== ========= ========
The accompanying notes are an integral part of the Condensed consolidated financial statements. 4 PART I - FINANCIAL INFORMATION (Continued) THE STRIDE RITE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) For the nine months ended August 31, 2001 and September 2, 2000 (Dollars in Thousands)
August 31, September 1, 2001 2000 -------------- ------------ Cash was provided from (used for) Operations: Net income $ 25,020 $ 25,878 Adjustments to reconcile to net cash provided from (used for) operations: Depreciation and amortization 10,777 9,067 Deferred income taxes, net (1,007) (296) Compensation expense related to executive stock plans 170 171 Gain related to long-term investments (451) - Loss on disposal of property and equipment 83 593 Changes in: Accounts and notes receivable (29,534) (35,100) Inventories (1,690) 42,401 Other current assets 3,196 308 Accounts payable, income taxes, accrued expenses and other current liabilities (15,693) (20,391) --------- -------- Net cash provided from(used for)operations (9,129) 22,631 --------- -------- Investments: Additions to property and equipment (8,118) (17,362) Distribution from long-term investments 451 - Sales(purchases)of marketable securities, net (61) 7 Decrease (increase) in other assets (407) 273 --------- -------- Net cash used for investments (8,135) (17,082) --------- -------- Financing: Short-term debt repayments (24,000) - Proceeds from sale of stock under stock plans 1,979 389 Cash dividends paid (6,248) (6,581) Repurchase of common stock - (13,781) -------- -------- Net cash used for financing (28,269) (19,973) --------- -------- Net decrease in cash and cash equivalents (45,533) (14,424) Cash and cash equivalents at beginning of the period 62,976 57,186 -------- -------- Cash and cash equivalents at end of the period $ 17,443 $ 42,762 ======== ========
The accompanying notes are an integral part of the condensed consolidated financial statements. 5 PART I - FINANCIAL INFORMATION (Continued) THE STRIDE RITE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 The financial information included in this Form 10-Q of The Stride Rite Corporation (the "Company") for the periods ended August 31, 2001 and September, 1, 2000 is unaudited and subject to year-end adjustments. However, such information includes all adjustments (including all normal recurring adjustments) which, in the opinion of management, are considered necessary for a fair presentation of the consolidated results for those periods. The results of operations for the periods ended August 31, 2001 and September 1, 2000 are not necessarily indicative of the results of operations that may be expected for the complete fiscal year. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. The Company filed audited consolidated financial statements for the year ended December 1, 2000 on Form 10-K which included all information and footnotes necessary for such presentation. The Company's preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the respective periods. The most significant estimates included in these financial statements include valuation allowances and reserves for accounts receivable, inventory and income taxes. Actual results could differ from those estimates. NOTE 2 On October 4, 2001 the Company announced a plan to restructure operations. Accordingly, in the fourth quarter of fiscal 2001 the Company will record a nonrecurring charge in connection with the Company's realignment of corporate and divisional operations. The total amount of the charge of approximately $2.5 million, (amounting to $1.5 million after taxes or $.04 per share), is composed of $1.7 million related to employee termination payments and other employee related costs, $0.5 million of costs associated with the closing of one facility and $0.3 million of other costs. As a result of the restructuring approximately 120 positions were eliminated from the Company's administrative staff. 6 PART I - FINANCIAL INFORMATION (Continued) THE STRIDE RITE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 Basic earnings per share excludes dilution and is computed by dividing net earnings available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if options to issue common stock were exercised. The following is a reconciliation of the number of shares used in the basic and diluted earnings per share computations (shares in thousands):
Three Months Ended Nine Months Ended ------------------ ----------------- Aug. 31, Sept. 1, Aug. 31, Sept. 1, 2001 2000 2001 2000 ---- ---- ---- ---- Net income applicable to common shares $ 7,153 $ 7,782 $ 25,020 $ 25,878 Calculation of shares: Weighted average number of common shares outstanding(basic) 41,817 43,004 41,718 43,402 Common shares attributable to assumed exercise of dilutive stock options and stock purchase rights using the treasury stock method 555 163 408 180 -------- -------- -------- -------- Average common shares and common equivalents outstanding during the period (diluted) 42,372 43,167 42,126 43,582 ======== ======== ======== ======== Net income per common share (basic) $ .17 $ .18 $ .60 $ .60 ======== ======== ======== ======== Net income per common share(diluted) $ .17 $ .18 $ .59 $ .59 ======== ======== ======== ========
The following options were not included in the computation of diluted EPS because the options' exercise price was greater than the average market price of the common shares:
Third Quarter First Nine Months --------------------------------------------- 2001 2000 2001 2000 --------- --------- ---------- ----------- Options to purchase shares of common stock (in thousands) 996 3,378 1,745 3,273
7 PART I - FINANCIAL INFORMATION (Continued) THE STRIDE RITE CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We caution investors that any forward-looking statements presented in this report and presented elsewhere by management from time to time are based on management's beliefs and assumptions made by, and information currently available to, management. When used, the words "anticipate", "estimate", "project", "should", "expect" and similar expressions are intended to identify forward-looking statements. Such statements are subject to risks, uncertainties and assumptions and are not guarantees of future performance, which may be affected by various trends and factors that are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. Accordingly, past results and trends should not be used by investors to anticipate future results or trends. Some of the key factors that may have a direct bearing on our results are presented in the Company's Form 10-K for the fiscal year ended December 1, 2000 which was filed with the Securities and Exchange Commission. Results of Operations The following table summarizes the Company's performance for the third quarter and first nine months of fiscal 2001 as compared to the results for the same periods in fiscal 2000:
Increase (Decrease) Percent vs. 2000 results: Third Quarter Nine Months Net sales (6.5)% (2.8)% Gross profit (7.4)% (1.8)% Selling and administrative expenses (3.0)% 0.8 % Operating income (22.4)% (9.5)% Income before income taxes (27.0)% (11.4)% Net income (8.1)% (3.3)%
Operating Ratios as a Percent to Net Sales:
Third Quarter Nine Months -------------------------------------- 2001 2000 2001 2000 -------- -------- --------- --------- Gross profit 35.6% 36.0% 36.8% 36.4% Selling and administrative expenses 28.8% 27.8% 28.5% 27.5% Operating income 6.8% 8.2% 8.3% 8.9% Income before income taxes 6.8% 8.7% 8.4% 9.2% Net income 5.3% 5.4% 5.7% 5.7%
8 PART I - FINANCIAL INFORMATION (Continued) THE STRIDE RITE CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Net Sales Net sales in the third quarter of fiscal 2001 decreased $9.4 million or 6.5% below the net sales level for the same period of fiscal 2000. The major reason for the decline was the weak retail environment, particularly in the department store sector, which resulted in a shortfall in reorders, an important component of third quarter sales. In the third quarter of 2001, wholesale brand revenues decreased 11%, while retail sales of Company-owned stores increased 10% from the same period in 2000. Over the first nine months of 2001, consolidated net sales decreased by $12.8 million, 2.8% below the sales for the comparable period of 2000. Revenues related to the Company's wholesale brands declined 6% during the first nine months of 2001, while retail sales increased 13%. Unit shipments of current line merchandise for the wholesale brands during the first nine months of 2001 were 4.0% below the comparable period in 2000. The Company's average selling price was also lower in the first nine months of 2001, decreasing 3% from last year. Sales of discontinued products decreased $1.6 million in the first nine months of 2001 as compared to the same period in 2000. Sales of Stride Rite Children's Group increased 3% in the third quarter of fiscal 2001, the result of a 10% increase in retail sales and a 3% decrease in sales to independent accounts, as compared to the same period in 2000. During the third quarter of 2001, sales at comparable, company-owned retail stores increased 1.1% from 2000. For the first nine months of 2001, sales of the Stride Rite Children's Group increased 8% from the same period in 2000, with the retail revenues increasing 13% and the wholesale portion of the brand showing a 2% sales gain. Sales of the Stride Rite brand in the first nine months of 2001 were helped by the introduction of the Munchkin(R) product line in the mid tier retail channel. During the third quarter, the Children's Group began shipping Toddler Tech(TM) the next stage of footwear incorporating the Natural Motion System(TM). At the end of the third quarter of 2001, the Children's Group operated 212 stores, compared to 199 stores open at the end of the third quarter in 2000. The Company opened 21 new stores and closed 10 underperforming locations in the first nine months of 2001. In the third quarter of fiscal 2001, sales of the Keds brand were 15% lower than the comparable period of 2000. For the first nine months of 2001, Keds' net sales decreased 9% as compared to 2000, with the sales of women's and children's products decreasing 13% and 20%, respectively, from the first nine months of 2000. These decreases were partially offset by higher sales of Grasshopper's products which were 47% above the level achieved in the first nine months of 2000. The third quarter sales decrease in the women's product line was principally the result of lower initial shipments on new Fall product introductions. The sales decline in the children's products is primarily due to weak performance of Fall seasonal items. At the end of the third quarter three Keds retail stores had been opened and two additional locations are scheduled to open during the fourth quarter of fiscal 2001. 9 PART I - FINANCIAL INFORMATION (Continued) THE STRIDE RITE CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Sales of Tommy Hilfiger footwear products in the third quarter of fiscal 2001 decreased 16% as compared to the same period in 2000. For the first nine months of fiscal 2001, sales of Tommy Hilfiger footwear decreased 5% as compared to the same period in 2000. The overall weakness in the department store sector had a significant negative impact on the sales of Tommy Hilfiger footwear products. The decrease in sales for the nine month period affected all segments of the Tommy Hilfiger business. Sales of the Sperry brand decreased 8% in the third quarter of fiscal 2001 to bring sales of the brand for the first nine months of this year to 12% below the comparable period in 2000. With the exception of increases in sales of men's and women's boat shoes, all other categories reported declines in sales during the third quarter. International revenues in the third quarter of 2001 were above the comparable period of 2000 by 3%. For the first nine months of 2001, International revenues were flat to the comparable period of 2000. Gross Profit During the first nine months of fiscal 2001, gross profit decreased $2.9 million or 1.8% below the same period in 2000. This decrease compares to the net sales decrease of 2.8% for the same period. The consolidated gross profit percent in the first nine months of fiscal 2001 increased 0.4 percentage points, finishing at 36.8% in 2001 compared to 36.4% in 2000. Gross profit performance in the third quarter of 2001 deteriorated over the same period in 2000, 35.6% in 2001 compared to 36.0% in the 2000 third quarter. The Company's gross profit performance for the quarter and the nine month period benefited from the sales increases in company-owned retail stores which have a higher gross profit percentage. The 2001 third quarter gross profit was negatively impacted by higher obsolescence charges as these costs reduced gross profit by 5.9 percentage points compared to a reduction of 3.6 percentage points in the 2000 third quarter. The Company's LIFO provision had little impact on gross profit comparisons for the first nine months of 2001, with LIFO decreasing gross profit by $1.1 million (0.3% of net sales) in 2001 compared to a decrease of $1.4 million (0.3% of net sales) in 2000. Operating Costs Selling and administrative expenses in the first nine months of fiscal 2001 increased $1 million or 0.8% from the spending level in the first nine months of fiscal 2000. Operating costs as a percentage of sales in the first nine months of 2001 increased 1.0 percentage point from the same period in 2000 (28.5% in 2001 compared to 27.5% in 2000). 10 PART I - FINANCIAL INFORMATION (Continued) THE STRIDE RITE CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Higher retail store expenses, primarily related to the start-up of new stores, increased overall operating expenses by 0.8 percentage points during the first nine months of 2000. Advertising expense represented 5.1% of net sales in the first nine months of 2001, which was below the spending rate of 5.7% for 2000. Advertising costs in the first nine months of fiscal 2001 decreased $3.4 million or 13%, with most of the cost decrease occurring in the third quarter of the year. This advertising cost decrease is largely due to reductions in Keds and Tommy Hilfiger spending in the third quarter. Other Income and Taxes Other income (expense) increased pre-tax income by $0.4 million in the first nine months of fiscal 2001 compared to an increase of $1.3 million in the similar period of 2000. Interest income for the first nine months f 2001 was $2.5 million, down from the $2.9 million for the first nine months of 2000. Interest expense in the first nine months of 2001 decreased slightly to $1.4 million compared to $1.5 million in 2000. Higher average borrowing levels were offset by a significant decrease in the Company's average interest rate, 5.8% in the first nine months of 2001 compared to 7.5% in 2000. Average short-term borrowings in the first nine months of 2000 were $27.6 million, 5% above the average borrowings of $26.3 million in the comparable period of 2000. The provision for income taxes decreased $3.9 million in the first nine months of fiscal 2001 as compared to the similar period in 2000. The income tax decrease was due to the lower pre-tax income earned in the period as well as a reduction in the effective tax rate for the nine month period, 32.4% versus 38.0%, in the prior year. The lower tax rate is based on the year-end projected tax rate and reflects a reduction in the need for certain tax accruals established in prior periods. Nonrecurring Charges On October 4, 2001 the Company announced a plan to restructure operations. Accordingly, in the fourth quarter of fiscal 2001, the Company will record a $2.5 million nonrecurring charge in connection with the Company's realignment of corporate and divisional operations. The Company expects cash payments will be made through the third quarter of fiscal 2002. Net Income Net income for the first nine months of fiscal 2001 decreased $0.9 million, down 3.3% from the income earned in the same period of fiscal 2000. Lower gross profit and higher operating expenses were substantially offset by the lower effective income tax rate. The Company's return on net sales of 5.7% in the first nine months of 2001 was equal to the 5.7% return in the first nine months of last year. 11 PART I - FINANCIAL INFORMATION (Continued) THE STRIDE RITE CORPORATION ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Liquidity and Capital Resources At August 31, 2001, the Company's balance sheet reflects a current ratio of 4.2 to 1 with no long-term debt. The Company's cash and cash equivalents totaled $17.4 million at the end of the latest quarter, below the prior year's cash and cash equivalents total of $42.8 million. When combined with intermediate-term fixed income investments, which are included in other assets, total available cash and investments amounted to $29.6 million at August 31, 2001 compared to $54.0 million in 2000. The Company uses its $75 million revolving credit facility to fund seasonal working capital needs. No borrowings under this line of credit were outstanding as of August 31, 2001 or September 1, 2000. During the first nine months of fiscal 2001, the Company used $9.1 million of cash for operations. This negative cash flow amount was significantly below the $22.6 million of cash provided from operations during the same period in fiscal 2000. At August 31, 2001, accounts receivable and inventory levels totaled $191.5 million, an increase of $30.2 million or 19% above the $161.3 million asset amount at the end of the third quarter of 2000. Accounts receivable at the end of the third quarter of 2001 increased $1.3 million or up 1.6% compared to the prior year, contrary to the wholesale businesses' sales decrease of 11% in the third quarter of 2001. Inventories were higher at the end of the third quarter of 2001, up $28.8 million or 36.6% from the 2000 level, due to higher inventory levels at the Children's Group and Keds divisions. Additions to property and equipment totaled $8.1 million in the first nine months of fiscal 2001 compared to $17.4 million for the same period in fiscal 2000. The lower capital expenditures were the result of reduced spending on information technology in fiscal 2001 and not incurring building costs related to the expansion of the Company's Huntington, Indiana distribution facility in fiscal 2000. During the first nine months of 2001, the Company did not repurchase any shares of its common stock. At August 31, 2001, the Company has 2.1 million shares remaining on the repurchase authorization approved by the Board of Directors in December 1999. The Company did repurchase 90,000 shares of its common stock in mid-September. 12 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. The following exhibits are contained in this -------- report: Exhibit No. Description of Exhibit 10(i) Amended and Restated License Agreement between Registrant and Tommy Hilfiger Licensing, Inc. (b) Reports on Form 8-K There were no reports filed on Form 8-K during the most recent quarterly period. 13 THE STRIDE RITE CORPORATION SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned duly authorized. THE STRIDE RITE CORPORATION (Registrant) Date: October 11, 2001 By: /S/ Frank A. Caruso -------------------------- Frank A. Caruso Chief Financial Officer 14 THE STRIDE RITE CORPORATION INDEX TO EXHIBITS Exhibit Sequential Page No. No. Description of Exhibit 10(i) Amended and Restated License Agreement 16 between Registrant and Tommy Hilfiger Licensing, Inc. 15