FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For Quarter Ended Commission File Number:
SEPTEMBER 30, 2001 0-21026
ROCKY SHOES & BOOTS, INC.
-------------------------
(Exact name of registrant as specified in its charter)
OHIO 31-1364046
---- ----------
(State of Incorporation) (IRS Employer Identification Number)
39 E. CANAL STREET
NELSONVILLE, OHIO 45764
-----------------------
(Address of principal executive offices)
(740) 753-1951
--------------
(Registrant's telephone number, including area code)
(Former name, former address, and former Fiscal year if changed since last
report.)
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 twelve (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 ninety (90) days.
Yes X No
--- ---
4,489,215 common shares, no par value, outstanding at November 13, 2001
ROCKY SHOES & BOOTS, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
PAGE
PART I. FINANCIAL INFORMATION NUMBER
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
September 30, 2001 and 2000 (Unaudited) and December
31, 2000 3
Unaudited Condensed Consolidated Statements of
Operations For the Three Months and Nine Months
Ended September 30, 2001 and 2000 4
Unaudited Condensed Consolidated Statements of Cash
Flows For the Nine Months Ended September 30, 2001 and 2000 5
Notes to Interim Unaudited Condensed Consolidated
Financial Statements 6 - 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10 - 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
EXHIBIT INDEX 20
2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
ROCKY SHOES & BOOTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31, September 30,
2001 2000 2000
Unaudited Unaudited
------------ ------------ ------------
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents $2,553,804 $2,117,994 $1,925,013
Trade receivables - net 34,716,895 18,055,881 39,366,729
Other receivables 2,351,058 2,956,900 3,852,011
Inventories 37,899,594 32,035,237 42,162,237
Deferred income taxes 502,722 536,012 1,017,331
Prepaid expenses 1,498,935 1,295,287 1,816,021
------------ ------------ ------------
Total current assets 79,523,008 56,997,311 90,139,342
FIXED ASSETS - net 21,541,734 24,330,319 25,379,126
OTHER ASSETS 4,602,196 4,723,542 2,512,903
------------ ------------ ------------
TOTAL ASSETS $105,666,938 $86,051,172 $118,031,371
============ ============ ============
LIABILITIES AND
SHAREHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable $3,538,230 $3,502,296 $13,062,373
Current maturities - long term debt 17,845,423 1,070,374 12,595,188
Accrued taxes - other 683,637 560,537 609,112
Accrued salaries and wages 1,360,540 369,925 968,209
Accrued restructuring charge 1,300,000
Accrued other 1,481,547 1,293,214 955,871
------------ ------------ ------------
Total current liabilities 26,209,377 6,796,346 28,190,753
LONG TERM DEBT - less current maturities 26,095,736 26,445,276 38,146,201
DEFERRED LIABILITIES 1,760,214 2,483,878 1,474,595
------------ ------------ ------------
TOTAL LIABILITIES 54,065,327 35,725,500 67,811,549
SHAREHOLDERS' EQUITY:
Common stock, no par value;
10,000,000 shares authorized; issued and
outstanding September 30, 2001,
December 31, 2000,
and September 30, 2000 - 4,489,215 35,284,159 35,284,159 35,284,159
Retained earnings 16,317,452 15,041,513 14,935,663
------------ ------------ ------------
Total shareholders' equity 51,601,611 50,325,672 50,219,822
------------ ------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $105,666,938 $86,051,172 $118,031,371
============ =========== ============
See notes to the interim unaudited condensed consolidated financial statements.
3
ROCKY SHOES & BOOTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
---- ---- ---- ----
NET SALES $38,490,267 $37,230,069 $76,560,294 $75,475,202
COST OF GOODS SOLD 28,685,843 28,485,904 57,436,667 57,726,628
------------ ------------ ------------ ------------
GROSS MARGIN 9,804,424 8,744,165 19,123,627 17,748,574
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 5,723,654 5,893,851 14,424,135 15,757,878
RESTRUCTURING CHARGE 1,300,000 -- 1,300,000 --
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 2,780,770 2,850,314 3,399,492 1,990,696
OTHER INCOME AND (EXPENSES):
Interest expense (764,539) (1,197,902) (1,976,321) (2,329,623)
Other - net 50,097 146,060 330,124 326,119
------------ ------------ ------------ ------------
Total other - net (714,442) (1,051,842) (1,646,197) (2,003,504)
INCOME (LOSS) BEFORE INCOME
TAXES 2,066,328 1,798,472 1,753,295 (12,808)
INCOME TAX (BENEFIT) EXPENSE 586,634 535,500 477,356 (3,500)
------------ ------------ ------------ ------------
NET INCOME (LOSS) $1,479,694 $1,262,972 $1,275,939 $(9,308)
============ ============ ============ ============
NET INCOME (LOSS) PER SHARE
Basic $0.33 $0.28 $0.28 $(0.00)
============ ============ ============ ============
Diluted $0.32 $0.28 $0.28 $(0.00)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING
Basic 4,489,215 4,489,215 4,489,215 4,489,215
============ ============ ============ ============
Diluted 4,564,929 4,489,921 4,540,675 4,489,215
============ ============ ============ ============
See notes to the interim unaudited condensed consolidated financial statements.
4
ROCKY SHOES & BOOTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
2001 2000
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $1,275,939 $(9,308)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 3,381,738 3,492,468
Deferred income taxes and liabilities (690,374) 163,005
Loss on sale of fixed assets 123,040 667
Change in assets and liabilities:
Receivables (16,055,172) (19,278,758)
Inventories (5,864,357) (9,589,170)
Prepaid expenses (203,648) (593,107)
Other assets 90,972 (419,282)
Accounts payable 45,275 10,870,452
Accrued and other liabilities 2,602,048 645,485
------------ ------------
Net cash used in operating activities (15,294,539) (14,717,548)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (701,658) (2,692,107)
Proceeds from sale of fixed assets 6,498 39,770
------------ ------------
Net cash used in investing activities (695,160) (2,652,337)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long term debt 76,046,760 81,725,969
Payments on long term debt (59,621,251) (64,761,395)
------------ ------------
Net cash provided by financing activities 16,425,509 16,964,574
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 435,810 (405,311)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 2,117,994 2,330,324
------------ ------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $2,553,804 $1,925,013
============ ============
See notes to the interim unaudited condensed consolidated financial statements.
5
ROCKY SHOES & BOOTS, INC.
AND SUBSIDIARIES
NOTES TO THE INTERIM UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. INTERIM FINANCIAL REPORTING
In the opinion of management, the accompanying interim unaudited
condensed consolidated financial statements reflect all adjustments,
which are necessary for a fair presentation of the financial results.
All such adjustments reflected in the interim unaudited condensed
consolidated financial statements are considered to be of a normal and
recurring nature. The results of the operations for the nine-month
periods ended September 30, 2001 and 2000 are not necessarily indicative
of the results to be expected for the whole year. Accordingly, these
interim unaudited condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes
thereto contained in the Company's Annual Report to the Shareholders on
Form 10-K for the year ended December 31, 2000.
Certain reclassifications have been made to the prior year amounts in
order to conform to the current year presentation.
2. INVENTORIES
Inventories are comprised of the following:
September 30, December 31, September 30,
2001 2000 2000
---- ---- ----
Raw materials $5,504,761 $5,043,839 $6,794,388
Work-in Process 2,335,945 1,288,960 2,202,892
Finished goods 27,640,253 23,604,593 30,037,034
Factory outlet finished goods 2,579,635 2,438,398 3,468,476
Reserve for obsolescence or
lower of cost or market (161,000) (340,553) (340,553)
------------ ------------ ------------
Total $37,899,594 $32,035,237 $42,162,237
============ ============ ============
6
3. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and Federal, state and local income taxes was as
follows:
Nine Months Ended
September 30,
2001 2000
Interest $2,001,117 $2,386,016
========== ==========
Federal, state and local
income taxes (refund) $77,348 $(2,020,726)
======= ===========
Accounts payable at September 30, 2001 and December 31, 2000 include a
total of $2,757 and $12,098, respectively, relating to the purchase of
fixed assets.
4. RESTRUCTURING CHARGE
On September 17, 2001, the Company announced a Board of Directors
approved strategic restructuring of the Company's manufacturing
operations resulting in a charge of $1,300,000. The restructuring charge
is an estimate and final amount could differ from the estimate. As a
result, the Company will close its Nelsonville, Ohio manufacturing
facility and move the production capacity to its subsidiary operation in
Puerto Rico. The restructuring activities are expected to be
predominately completed during fourth quarter 2001 and first quarter
2002.
The following table summarizes the pretax restructuring charge recorded
in the condensed consolidated statement of operations for the three
month and nine month periods ended September 30, 2001:
Employee termination:
Severance and related charges $425,000
Curtailment of pension liability
for terminated employees
300,000
Fixed asset impairment 310,000
Unexpired lease obligation 90,000
Other non-recurring expenses 175,000
----------
Total restructuring charge $1,300,000
==========
Fixed asset impairment charges consist of write-down to fair market
value less costs to sell machinery and equipment and leasehold
improvements that will not be held in service after the plant closing.
The unexpired lease obligation consists of the remaining term on the
lease of the Nelsonville, Ohio manufacturing facility.
Other non-recurring expenses include legal, accounting, and actuarial
costs, costs to
7
disassemble bottoming machinery, and the cost to ship raw material
inventory from Nelsonville, Ohio to Puerto Rico.
The restructuring charge ($845,000 after tax) resulted in a reduction of
$0.18 per share for the three-month and nine-month periods ended
September 30, 2001.
As of September 30, 2001, the workforce terminations related to the
Nelsonville plant closing are scheduled for November 2001.
5. PER SHARE INFORMATION
Basic earnings per share (EPS) is computed by dividing net income (loss)
applicable to common shareholders by the basic weighted average number
of common shares outstanding during each period. The diluted earnings
per share computation includes common share equivalents, when dilutive.
There are no adjustments to net income necessary in the calculation of
basic and diluted earnings per share.
A reconciliation of the shares used in the basic and diluted income per
common share computation for the three months and nine months ended
September 30, 2001 and 2000 is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
---- ---- ---- ----
Basic Weighted average
shares outstanding 4,489,215 4,489,215 4,489,215 4,489,215
Diluted securities:
Stock options 75,714 706 51,460 --
--------- --------- --------- ---------
Diluted Weighted average
shares outstanding 4,564,929 4,489,921 4,540,675 4,489,215
========= ========= ========= =========
6. RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 141, "Business Combinations," to
establish accounting and reporting requirements for business
combinations. Previously, the purchase method or the pooling method of
accounting for business combinations was acceptable depending on certain
criteria being met. This new standard requires the use of the purchase
method of accounting for all business combinations. This statement is
effective for the Company beginning June 20, 2001. The Company is
currently assessing the impact of SFAS No. 141, and does not anticipate
this statement to have a material effect on its results of operations or
financial position.
Additionally the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" in July 2001. This statement applies to intangibles
and goodwill acquired after June 30, 2001, as well as goodwill and
intangibles previously acquired. Under this statement, goodwill, as well
as other intangibles determined to have an infinite life, will no longer
be amortized; however, these assets will be reviewed for impairment on a
periodic basis.
8
This statement is effective for the Company for the fiscal year
beginning after December 15, 2001. The Company is currently assessing
the impact of SFAS No. 142, and the Company does not anticipate this
statement to have a material effect on its results of operations or
financial position.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. Under this
Statement, obligations that meet the definition of a liability will be
recognized consistently with the retirement of the tangible long-lived
assets. This Statement is effective for financial statements issued for
fiscal years beginning after June 15, 2002. The Company is currently
assessing the impact of SFAS No. 143 and does not anticipate this
statement will have a material effect on its results of operations and
financial position.
In August 2001, the FASB issued SFAS no. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This Statement addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets and supersedes FASB Statement No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of." Because SFAS No. 121 did not address the accounting for a
segment of a business accounted for as a discontinued operation under
APB Opinion No. 30, two accounting models existed for long-lived assets
to be disposed of. The Board decided to establish a single accounting
model based on the framework established in Statement 121, for
long-lived assets to be disposed of by sale. This Statement is effective
for fiscal years beginning after December 15, 2001, and interim periods
within those fiscal years. The Company is currently assessing the impact
of SFAS No. 144, and does not anticipate this statement will have a
material effect on its results of operations and financial position.
7. SUBSEQUENT EVENT
In November 2001, the Company obtained a preliminary estimate of its
pension liability for both of its defined benefit pension plans covering
union and non union employees in Ohio and Puerto Rico. SFAS No. 87,
"Employees Accounting for Pensions" generally requires the Company to
recognize a minimum liability in instances in which a plan's accumulated
benefit obligation exceeds the fair value of plan assets. In addition,
if the additional minimum liability required to be recognized exceeds
the unrecognized prior service cost, the excess shall be recorded as a
reduction of Shareholders' Equity. The Company will record approximately
$850,000 net of taxes in fourth quarter 2001 as a reduction in equity
due primarily to the lower than expected investment returns from the
assets of the Company's pension plans.
9
PART 1 - FINANCIAL INFORMATION
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, information derived
from the Company's Interim Unaudited Condensed Consolidated Financial
Statements, expressed as a percentage of net sales. The discussion that follows
the table should be read in conjunction with the Interim Unaudited Condensed
Consolidated Financial Statements of the Company.
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
---- ---- ---- ----
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of Goods Sold 74.5% 76.5% 75.0% 76.5%
----- ----- ----- -----
Gross Margin 25.5% 23.5% 25.0% 23.5%
SG&A expenses (including
restructuring charge in 2001) 18.3% 15.8% 20.6% 20.9%
----- ----- ----- -----
Income from Operations 7.2% 7.7% 4.4% 2.6%
===== ===== ===== =====
Excluding the $1,300,000 third quarter 2001 restructuring charge, SG&A expenses
were 14.9% and 18.8% of net sales, respectively, for the three months and nine
months ended September 30, 2001. Income from operations was 10.6% and 6.2%,
respectively, for third quarter 2001 and the year-to-date period excluding the
restructuring charge.
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2000
Net Sales
Net Sales increased $1,260,198, or 3.4%, to $38,490,267 for the quarter ended
September 30, 2001 compared to $37,230,069 for the same period a year ago. Net
sales for the third quarter 2001 benefited from shipments of Intermediate Cold
Wet military boots pursuant to a contract with the U.S. Government. Net sales of
rugged outdoor footwear, and, to a lesser extent, occupational footwear, were
below the prior year. The Company's prices are slightly higher than the previous
year. This increase was due principally to the growing strength of the ROCKY
brand and raw material price increases.
Gross Margin
Gross margin increased $1,060,259, or 12.1%, to $9,804,424 for the quarter ended
September 30, 2001 compared to $8,744,165 for the same period in 2000. As a
percentage of net sales, gross margin was 25.5% this year compared to 23.5% a
year ago. Among the factors
10
contributing to the increase in gross margin were generally higher selling
prices and additional sales of higher margin sourced footwear. Sourced footwear
sales increased to 46.9% of third quarter 2001 net sales from 39.0% of third
quarter 2000 net sales. The Company has been improving inventory management and
reducing manufacturing costs, which also contributed to the increase in gross
margin.
Selling, General and Administrative Expenses
Selling, general and administrative expenses ("SG&A") decreased $170,197, or
2.9%, to $5,723,654 for the quarter ended September 30, 2001 compared to
$5,893,851 for the same period a year ago. As a percentage of net sales, SG&A
decreased to 14.9% from 15.8% a year ago. SG&A continued to benefit from
reductions in many areas of operations including salaries and wages,
commissions, and bad debt expenses. This decrease was partially offset by
increased advertising, fringe benefits (due to increased accruals for pensions
and anticipated performance incentives) and professional services. The Company
is realizing increased efficiencies from its finished goods distribution center,
which was completed in 2000. Ongoing cost control programs initially implemented
in 2000 are expected to generate additional reductions for the remainder of the
year.
Restructuring Charge
On September 17, 2001, the Company announced a Board of Directors approved
strategic restructuring of its manufacturing operations resulting in a pretax
charge of $1,300,000. The restructuring charge is an estimate and the final
amount could differ from the estimate. As a result, the Company will close its
Nelsonville, Ohio manufacturing facility and move the production capacity to its
subsidiary operation in Puerto Rico. The restructuring activities are expected
to be predominately completed during fourth quarter 2001 and first quarter 2002.
The charge for the realignment of manufacturing operations is expected to be
offset by anticipated savings, including employee expenses, fixed costs, and
inventory carrying costs, within 15 months after manufacturing operations cease
at its Nelsonville facility.
The single largest amount of the $1,300,000 restructuring charge is for employee
related costs for the 67 affected associates, as well as certain operating
expenses and other costs to complete the shift in manufacturing.
The following table summarizes the pretax restructuring charge recorded in the
condensed consolidated statement of operations for the three month and nine
month periods ended September 30, 2001:
11
Employee termination:
Severance and related charges $425,000
Curtailment of pension liability for terminated
employees 300,000
Fixed asset impairment 310,000
Unexpired lease obligation 90,000
Other non-recurring expenses 175,000
----------
Total restructuring charge $1,300,000
==========
Employee termination costs include severance, related employment taxes,
placement services and pension funding for voluntary and involuntary employee
terminations related to 67 employees.
Fixed asset impairment charges consists of write-down to fair market value less
costs to sell of machinery and equipment and leasehold improvements which will
not be held in service after the plant closing. The unexpired lease obligation
consists of the remaining term on the lease of the Nelsonville, Ohio
manufacturing facility.
Other non-recurring expenses include legal, accounting, and actuarial costs,
costs to disassemble bottoming machinery, and the cost to ship raw material
inventory from Nelsonville, Ohio to Puerto Rico.
The restructuring charge ($845,000 after tax) resulted in a reduction of $0.18
per share for the three-month and nine-month periods ended September 30, 2001.
Interest Expense
Interest expense decreased $433,363, or 36.2%, to $764,539 in the quarter ended
September 30, 2001 compared to $1,197,902 the prior year. The Company benefited
from lower outstanding balances and interest rates during third quarter 2001.
The Company's funded debt decreased 13.4% to $43,941,159 at September 30, 2001
versus $50,741,389 a year ago due to reductions to inventories, accounts
receivable and capital expenditures.
Income Taxes
Income taxes for the three months ended September 30, 2001 increased to $586,634
compared to $535,500 for the same period a year ago. The Company's effective tax
rate of 28.3% for the three months ended September 30, 2001 compares with an
effective tax rate of 29.7% for the same period last year and reflects lower tax
rates in Puerto Rico.
12
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 2000
Net Sales
Net sales for the nine months ended September 30, 2001 increased $1,085,092 or
1.4% to $76,560,294 versus $75,475,202 for the same period a year ago. Net sales
primarily continued to benefit from shipments of Intermediate Cold Wet military
boots, pursuant to a contract with the U.S. Government. Partially offsetting the
positive effects of this contract were lower sales in the rugged outdoor and
occupational footwear categories. The Company's prices are slightly higher than
the previous year. This increase was due principally to the growing strength of
the ROCKY brand and raw material price increases.
Gross Margin
Gross margin for the nine months ended September 30, 2001 increased $1,375,053
to $19,123,627 versus $17,748,574 for the same period a year ago. As a
percentage of net sales, gross margin was 25.0% in the first nine months of 2001
versus 23.5% for the same period a year ago. Factors contributing to the
increase in gross margin were generally higher selling prices and additional
sales of higher margin sourced footwear. Sourced footwear sales increased to
40.9% of the first nine months 2001 net sales from 35.1% last year. The Company
has been improving inventory management and reducing manufacturing costs, which
also contributed to the increase in gross margin.
Selling, General and Administrative Expenses
Selling, general, and administrative expenses (SG&A) for the nine months ended
September 30, 2001 were $14,424,135 compared with $15,757,878 for the same
period a year ago. As a percentage of net sales, SG&A was 18.8% through
September 30, 2001 versus 20.9% for the same period in 2000. The decrease is
attributable to across the board efforts to reduce SG&A expenses, which included
significant reductions in commissions, salaries and wages, and bad debts.
Partially offsetting these cost reductions were increased expenses relating to
advertising, fringe benefits (due to increased accruals for pensions and
anticipated performance incentives) and professional fees. The Company is
realizing increased efficiencies from its finished goods distribution center,
which was completed in 2000. Ongoing cost control programs initiated during 2000
and 2001 are expected to generate additional reductions for the remainder of the
year.
Interest Expense
Interest expense for the nine months ended September 30, 2001 decreased $353,302
or 15.2% to $1,976,321 versus $2,329,623 for the same period a year ago. The
Company benefited from lower outstanding balances and interest rates during the
nine months ended September 30, 2001, which were partially offset by a $295,000
reduction in second quarter 2000 interest expense due to the termination of an
interest rate swap agreement. The Company's funded debt decreased 13.4% to
$43,941,159 at September 30, 2001 versus $50,741,389 a year ago due to
reductions to inventories, accounts receivable and capital expenditures.
Income Taxes
13
Income taxes for the nine months ended September 30, 2001 increased to $477,356
compared to an income tax benefit of $3,500 for the same period a year ago. The
Company's effective tax rate of 27.2% for the nine months ended September 30,
2001 compares with an effective tax benefit rate of 27.3% for the same period
last year and reflects lower tax rates in Puerto Rico.
Liquidity and Capital Resources
The Company has principally funded working capital requirements and capital
expenditures through borrowings under its line of credit and other indebtedness.
Working capital is primarily used to support changes in accounts receivable and
inventory because of the Company's seasonal business cycle and business
expansion. These requirements are generally lowest in the months of January
through March of each year and highest during the months of May through October.
In addition, the Company requires financing to support additions to machinery,
equipment and facilities as well as the introduction of new styles of footwear.
At September 30, 2001, the Company had working capital of $53,313,631 versus
$50,200,965, at December 31, 2000.
The Company's line of credit provides for advances based on a percentage of
eligible accounts receivable and inventory with maximum borrowings under the
line of credit of $50,000,000. As of September 30, 2001, the Company had
borrowed $37,359,458 against its currently available line of credit of
$43,534,129.
The Company's cash flow used in operations increased to $15,294,539 in the first
nine months of 2001 from $14,717,548 for the same period in the prior year. The
period over period comparison reflects net income of $1,275,939 this year versus
a net loss $9,308 last year, and a smaller increase in accounts payable. These
amounts were substantially offset by higher accounts receivable and inventories.
All of the responsible balance sheet fluctuations are normal and reflect the
seasonal nature of the Company's business.
Inventory declined 10.1% to $37,899,594 on September 30, 2001 versus $42,162,237
as of the same date last year. Controlled production schedules during the past
year combined with improved inventory management contributed to the favorable
comparison. The current level of inventory combined with anticipated production
during the fourth quarter is considered sufficient to meet anticipated demand
for the remainder of the year.
The principal use of cash flows in investing activities for the first nine
months of 2001 and 2000 has been for investment in property, plant, and
equipment. In the first nine months of 2001, property, plant, and equipment
expenditures were approximately $702,000 versus $2,692,000 for the same period
in 2000. The reduction resulted from decreased needs for capital expenditures
due to completion of the Company's finished goods distribution center in January
2000 and increased production of sourced footwear from the Far East. It is
anticipated that capital expenditures for fiscal 2001 will not exceed $1.2
million compared with $3.1 million last year. The Company's capital expenditure
requirements for the foreseeable future are expected to remain below prior years
due to the recent completion of all currently planned capital expansion projects
and the continuing trend toward increased sales of sourced footwear as a
percentage of the Company's total net sales.
The Company's cash flows from financing activities reflect the increases and
decreases in borrowings under its revolving credit facility and long-term
mortgage facility to finance working
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capital requirements and other operating capital expenditures.
The Company believes it will be able to finance such future capital requirements
and meet operating expenditure requirements in 2001 through available cash on
hand, additional long-term borrowings under its existing bank agreements, and
operating cash flows.
The majority of expenditures planned for 2001 are costs associated with
production or sourcing of new styles of footwear and replacement of machinery,
equipment, and in-store displays.
Inflation
The Company cannot determine the precise effects of inflation; however,
inflation continues to have an influence on the cost of materials, salaries, and
employee benefits. The Company attempts to offset the effects of inflation
through increased selling prices, productivity improvements, and reduction of
costs.
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SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995.
This Form 10-Q contains forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the
Securities Act of 1933, as amended, which are intended to be covered by the safe
harbors created thereby. Those statements include, but may not be limited to,
all statements regarding the intent, belief and expectations of the Company and
its management. Investors are cautioned that such statements involve risks and
uncertainties, including, but not limited to, changes in consumer demand,
seasonality, impact of weather, competition, reliance on suppliers, changing
retailing trends, reliance on foreign manufacturing, changes in tax rates,
limited protection of proprietary technology, and other risks, uncertainties and
factors described in the Company's most recent Annual Report on Form 10-K and
other filings from time to time with the Securities and Exchange Commission. One
or more of these factors have affected, and in the future could affect the
Company's business and financial results and cause actual results to differ
materially from plans and projections. Although the Company and its management
believe that the assumptions underlying the forward-looking statements contained
herein are reasonable, any of the assumptions could be inaccurate. Therefore,
there can be no assurance that the forward-looking statements included in this
Form 10-Q will prove to be accurate. In light of the significant uncertainties
inherent in the forward-looking statements contained herein, the inclusion of
such information should not be regarded as a representation by the Company, its
management or any other person that the Company's objectives and plans will be
achieved. All forward-looking statements made in this Form 10-Q are based on
information presently available to the management of the Company. The Company
undertakes no obligation to publicly update or revise any forward-looking
statements.
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PART 1 - FINANCIAL INFORMATION
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes since December 31, 2000.
17
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 2. Changes in Securities and Use of Proceeds.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Reports on Form 8-K.
None.
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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 thereunto duly authorized.
ROCKY SHOES & BOOTS, INC.
Date: November 14, 2001 /s/ James E. McDonald
-----------------------------------
James E. McDonald, Vice President and
Chief Financial Officer*
* In his capacity as Vice President and Chief Financial Officer, Mr.
McDonald is duly authorized to sign this report on behalf of the
Registrant.
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