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, 2003 0-21026
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ROCKY SHOES & BOOTS, INC.
-------------------------
(Exact name of registrant as specified in its charter)
OHIO 31-1364046
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(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
--- ---
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
--- ---
4,213,050 common shares, no par value, outstanding at November 13, 2003
ROCKY SHOES & BOOTS, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
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PAGE
PART I. FINANCIAL INFORMATION NUMBER
Item 1. Consolidated Financial Statements
Condensed Consolidated Balance Sheets
September 30, 2003 and 2002 (Unaudited) and December 31, 2002 3
Unaudited Condensed Consolidated Statements of Income
For the Three Months and Nine Months Ended September 30, 2003 and 2002 4
Unaudited Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2003 and 2002 5
Notes to Interim Unaudited Condensed Consolidated Financial Statements 6 - 10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 11 - 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
Item 4. Controls and Procedures 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURE 17
2
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
ROCKY SHOES & BOOTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2003 December 31, 2002 September 30, 2002
(Unaudited) (Unaudited)
------------------ ----------------- ------------------
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents $ 1,374,062 $ 4,276,722 $ 1,893,242
Trade receivables - net 39,806,328 15,282,618 29,104,380
Other receivables 822,451 1,173,714 1,747,279
Inventories 42,216,415 23,181,989 30,253,309
Deferred income taxes 578,951 584,511 615,609
Prepaid expenses 1,633,904 1,267,097 1,321,298
------------- ------------- -------------
Total current assets 86,432,111 45,766,651 64,935,117
FIXED ASSETS - net 17,953,270 19,049,287 19,212,820
DEFERRED PENSION ASSET 1,651,222 1,651,222 2,493,590
DEFERRED INCOME TAXES 153,495 153,495 295,784
OTHER ASSETS 3,704,879 1,796,359 2,230,565
------------- ------------- -------------
TOTAL ASSETS $ 109,894,977 $ 68,417,014 $ 89,167,876
============= ============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable $ 7,775,924 $ 1,642,306 $ 4,068,998
Current maturities - long term debt 497,005 486,161 484,200
Accrued taxes - other 377,883 346,168 457,225
Accrued salaries and wages 1,992,671 807,611 1,029,411
Accrued plant closing costs 210,000 210,000 270,499
Accrued other 2,442,185 523,118 1,257,086
------------- ------------- -------------
Total current liabilities 13,295,668 4,015,364 7,567,419
LONG TERM DEBT-less current maturities 40,780,812 10,488,388 29,055,129
DEFERRED LIABILITIES 1,954,277 1,520,338 152,500
------------- ------------- -------------
TOTAL LIABILITIES 56,030,757 16,024,090 36,775,048
SHAREHOLDERS' EQUITY:
Common stock, no par value;
10,000,000 shares authorized; issued and outstanding
September 30, 2003 - 4,126,930: December 31, 2002-
4,492,215; September 30, 2002 - 4,505,465 32,819,489 35,289,038 35,373,578
Accumulated other comprehensive loss (2,311,749) (2,311,749) (831,161)
Retained earnings 23,356,480 19,415,635 17,850,411
------------- ------------- -------------
Total shareholders' equity 53,864,220 52,392,924 52,392,828
------------- ------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 109,894,977 $ 68,417,014 $ 89,167,876
============= ============= =============
See notes to the interim unaudited condensed consolidated financial statements.
3
ROCKY SHOES & BOOTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
------------ ------------ ------------ ------------
NET SALES $ 41,349,824 $ 30,453,543 $ 76,967,913 $ 63,397,202
COST OF GOODS SOLD 28,264,032 21,601,185 53,681,609 47,266,558
------------ ------------ ------------ ------------
GROSS MARGIN 13,085,792 8,852,358 23,286,304 16,130,644
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 7,628,958 5,119,050 16,823,883 13,535,584
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 5,456,834 3,733,308 6,462,421 2,595,060
OTHER INCOME AND (EXPENSES):
Interest expense (437,241) (422,366) (946,859) (1,038,434)
Other - net (18,744) 102,168 161,359 269,197
------------ ------------ ------------ ------------
Total other - net (455,985) (320,198) (785,500) (769,237)
------------ ------------ ------------ ------------
INCOME BEFORE INCOME
TAXES 5,000,849 3,413,110 5,676,921 1,825,823
INCOME TAX EXPENSE 1,533,254 1,024,933 1,736,076 547,747
------------ ------------ ------------ ------------
NET INCOME $ 3,467,595 $ 2,388,177 $ 3,940,845 $ 1,278,076
============ ============ ============ ============
NET INCOME PER SHARE
Basic $ 0.84 $ 0.53 $ 0.94 $ 0.28
============ ============ ============ ============
Diluted $ 0.77 $ 0.52 $ 0.88 $ 0.28
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING
Basic 4,109,147 4,505,465 4,178,942 4,500,675
============ ============ ============ ============
Diluted 4,512,886 4,555,208 4,459,783 4,613,994
============ ============ ============ ============
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,
2003 2002
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,940,845 $ 1,278,076
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 2,674,593 3,073,782
Deferred income taxes and liabilities 439,499 (1,791,524)
Loss on sale of fixed assets 8,743 9,583
Change in assets and liabilities:
Receivables (24,172,447) (13,535,061)
Inventories (16,994,356) (2,539,645)
Prepaid expenses (366,807) (268,106)
Other assets 136,614 (109,325)
Accounts payable 5,364,170 2,495,946
Accrued and other liabilities 3,135,842 (344,295)
------------ ------------
Net cash used in operating activities (25,833,304) (11,730,569)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (1,444,034) (1,509,457)
Acquisition of business (3,510,070)
Proceeds from sale of fixed assets 51,029 12,750
------------ ------------
Net cash used in investing activities (4,903,075) (1,496,707)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long term debt 86,558,753 64,882,869
Payments on long term debt (56,255,485) (52,788,705)
Purchase of treasury stock (3,106,156)
Proceeds from exercise of stock options 636,607 71,419
------------ ------------
Net cash provided by financing activities 27,833,719 12,165,583
------------ ------------
DECREASE IN CASH AND CASH
EQUIVALENTS (2,902,660) (1,061,693)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 4,276,722 2,954,935
------------ ------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 1,374,062 $ 1,893,242
============ ============
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 FOR THE PERIODS ENDED SEPTEMBER 30, 2003 AND 2002
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, 2003 and 2002 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, 2002.
Certain reclassifications have been made to the prior year amounts in
order to conform to the current year presentation.
The Company accounts for its stock option plans in accordance with APB
Opinion No. 25, "Accounting for Stock Issued to Employees", under which
no compensation cost has been recognized. Had compensation cost for all
stock option plans been determined consistent with the SFAS No. 123,
"Accounting for Stock Based Compensation," the Company's net income and
income per share would have resulted in the amounts as reported below.
Three Months Ended September 30, Nine Months Ended September 30,
2003 2002 2003 2002
----------- ----------- ----------- ---------
Net income as reported $ 3,467,595 $ 2,388,177 $ 3,940,845 $ 1,278,076
Deduct: Stock based employee
compensation expense
determined under fair value
based method for all awards, net 333,640 405,853
----------- ----------- ----------- -----------
Pro forma net income $ 3,467,595 $ 2,388,177 $ 3,607,205 $ 872,223
=========== =========== =========== ===========
Earnings per share:
Basic - as reported $ 0.84 $ 0.53 $ 0.94 $ 0.28
Basic - pro forma $ 0.84 $ 0.53 $ 0.86 $ 0.19
Diluted - as reported $ 0.77 $ 0.52 $ 0.88 $ 0.28
Diluted - pro forma $ 0.77 $ 0.52 $ 0.82 $ 0.19
The pro forma amounts are not representative of the effects on reported
net income for future years.
6
2. INVENTORIES
Inventories are comprised of the following:
September 30, December 31, September 30,
2003 2002 2002
------------ ------------ ------------
Raw materials $ 5,424,458 $ 3,535,884 $ 4,855,657
Work-in-Process 949,095 436,435 2,299,573
Finished goods 34,486,579 18,301,351 21,527,293
Factory outlet finished goods 1,728,283 1,080,319 1,731,786
Reserve for obsolescence or
lower of cost or market (372,000) (172,000) (161,000)
------------ ------------ ------------
Total $ 42,216,415 $ 23,181,989 $ 30,253,309
============ ============ ============
3. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and Federal, state and local income taxes was as
follows:
Nine Months Ended
September 30,
2003 2002
---- ----
Interest $ 937,343 $ 1,015,141
========== ===========
Federal, state and local
income taxes - net $ 90,000 $ 75,000
========== ===========
Accounts payable at September 30, 2003 and December 31, 2002 include a
total of $177,276 and $34,198, respectively, relating to the purchase of
fixed assets and $594,865 and $0, respectively, related to the
additional goodwill accrued in the Gates(R) asset acquisition.
7
4. PER SHARE INFORMATION
Basic earnings per share (EPS) is computed by dividing net income
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, 2003 and 2002 is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
--------- --------- --------- ---------
Basic weighted average
shares outstanding 4,109,147 4,505,465 4,178,942 4,500,675
Diluted securities:
Stock options 403,739 49,743 280,841 113,319
--------- --------- --------- ---------
Diluted weighted average
shares outstanding 4,512,886 4,555,208 4,459,783 4,613,994
========= ========= ========= =========
5. RECENTLY ADOPTED FINANCIAL ACCOUNTING STANDARDS
In November 2002, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). FIN 45 requires a guarantor to
recognize a liability, at the inception of the guarantee, for the fair
value of obligations it has undertaken in issuing the guarantee and also
include more detailed disclosures with respect to guarantees. FIN 45 is
effective for guarantees issued or modified starting January 1, 2003 and
required the additional disclosures beginning with the Company's fiscal
year ended December 31, 2002. The provisions of FIN 45 have been adopted
with no material impact on the Company's results of operations or
financial condition.
In November 2002, the Emerging Issues Task Force reached a consensus on
Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables"
("EITF 00-21"). EITF 00-21 provides guidance on how to determine whether
an arrangement involving multiple deliverables contains more than one
unit of accounting. EITF 00-21 is effective for arrangements entered
into after June 30, 2003. The adoption of EITF 00-21 did not have a
material impact on the Company's results of operations or financial
condition.
In December 2002, the FASB issued SFAS No.148, "Accounting for
Stock-Based Compensation - Transition and Disclosure" (see Footnote 1).
SFAS No. 148 provides alternative methods of transition for a voluntary
change to the fair-value-based method of accounting for stock-based
employee compensation and amends the disclosure requirements of SFAS No.
123. The transition provisions of this Statement are effective for
fiscal years ending after December 15, 2002, and the disclosure
requirements of the Statement are effective for interim periods
beginning after December 15, 2002. The Company accounts for stock-based
employee compensation arrangements in accordance with the provision of
APB No. 25 and complies with the disclosure provisions of SFAS No. 123
and SFAS No. 148.
8
In January 2003, the FASB issued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities ("FIN 46"), to expand upon
and strengthen existing accounting guidance that addresses when a
company should include in its financial statements the assets,
liabilities and activities of another entity. Until now, one company
generally has included another entity in its consolidated financial
statements only if it controlled the entity through voting interests.
FIN 46 changes that by requiring a variable interest entity, as defined,
to be consolidated by a company if that company is subject to a majority
of the risk of loss from the variable interest entity's activities or
entitled to receive a majority of the entity's residual returns or both.
FIN 46 also requires disclosures about variable interest entities that
the company is not required to consolidate but in which it has a
significant variable interest. The consolidation requirements of FIN 46
apply immediately to variable interest entities created after January
31, 2003 and to older entities in the first fiscal year or interim
period beginning after June 15, 2003. Certain of the disclosure
requirements, none of which appear to apply to the Company at this time,
are effective in all financial statements issued after January 31, 2003,
regardless of when the variable interest entity was established. The
provisions of FIN 46 have been adopted and based upon a review of such
provisions it has been determined that there are no variable interest
entities which would require consolidation or disclosure at this time.
Many proposed FASB Staff Positions ("FSP"s) have been issued related to
FIN 46 since FIN 46 was first issued in January 2003. Specifically, FSP
FIN 46-6 delays the effective date to the period ending after December
15, 2003 if certain conditions are met.
In April 2003, the FASB issued SFAS No. 149, "Amendments of Statement
133 on Derivative Instruments and Hedging Activities." This Statement
amends and clarifies financial accounting and reporting for certain
derivative instruments, and hedging activities for decisions made as
part of the Derivatives Implementation Group. This Statement is
generally effective for contracts entered into or modified after June
30, 2003. The Company has not completed its evaluation of SFAS No. 149,
but does not believe it will have a significant impact on the Company's
results of operations or financial condition.
Statement of Financial Accounting Standards No. 150 ("SFAS 150"),
"Accounting for Certain Financial Instruments with Characteristics of
Both Liabilities and Equity", was issued in May 2003 and is effective
for financial instruments entered into or modified after May 31, 2003
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. SFAS 150 establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an
issuer classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances). The requirements of SFAS
150 apply to issuers' classification and measurement of freestanding
financial instruments, including those that comprise more than one
option or forward contract. SFAS 150 does not apply to features that are
embedded in a financial instrument that is not a derivative in its
entirety. This statement will not have a material effect on the
Company's consolidated financial statements.
6. ACQUISITION
On April 15, 2003, the Company completed the purchase of certain assets
from Gates-Mills, Inc. ("Gates"). Under the terms of the purchase
agreement, Rocky acquired all of the intellectual property of Gates,
including ownership of the Gates(R) trademark, selected
9
raw material and finished goods inventory, and certain records in
connection with the Gates business in exchange for $3,510,070 plus a
deferred purchase price if sales by the Company related to the Gates
product line from the date of purchase through December 31, 2003 reach
certain performance targets. The Company has accrued an additional
$594,865 as additional goodwill because net sales of the product line
through September 30, 2003 have exceeded the performance targets
established for all of 2003. The Company has filed the financial
statements and the pro-forma financial information required by the
Regulation S-X Article 3.05 and Article 11.01. Final allocation of the
purchase price has not been determined; however, it will be based on an
independent appraisal of the fair value of the assets acquired.
7. CAPITAL STOCK
The Company is authorized to repurchase up to 500,000 shares of its
outstanding common shares through December 31, 2003. The purchases may
occur on the open market and/or in privately negotiated transactions as
market conditions warrant. As of September 30, 2003, the Company had
purchased a total of 499,933 shares at an average price of $6.38.
For the nine months ended September 30, 2003, options for 121,398 of the
Company's common stock were exercised at an average price of $5.24.
10
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.
PERCENTAGE OF NET SALES
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
------ ------ ------ ------
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of Goods Sold 68.4% 70.9% 69.7% 74.6%
------ ------ ------ ------
Gross Margin 31.6% 29.1% 30.3% 25.4%
SG&A expenses 18.4% 16.8% 21.9% 21.4%
------ ------ ------ ------
Income from Operations 13.2% 12.3% 8.4% 4.0%
====== ====== ====== ======
THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2002
Net Sales
Net sales increased $10,896,281, or 35.8%, to $41,349,824 for the quarter ended
September 30, 2003 compared to $30,453,543 for the same period a year ago. The
increase reflects improved performance within each sales category. Most notable
were an increase within ROCKY(R) branded footwear sales of 20.7% (approximately
$5,200,000) and $5,415,173 net sales of the recently acquired of GATES(R) brand.
Net sales of ROCKY(R) Outdoor Gear more than doubled compared to the third
quarter 2002. A portion of the sales increase was due to slightly higher prices
on certain branded products principally due to raw material price increases.
Gross Margin
Gross margin improved to a record 31.6% of net sales, or $13,085,792, for the
third quarter 2003 compared with 29.1%, or $8,852,358, for the same period last
year. The principal factor contributing to the record gross profit margin was an
increase in sourced products, which were 73.2% of net sales for the third
quarter 2003 versus 57.8% for the same period last year.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses were $7,628,958, or 18.4%
of net sales, for the three months ended September 30, 2003 versus $5,119,050,
or 16.8% of net sales, the
11
prior year. The increase was primarily attributable to higher incentive
compensation accruals due to increased profits, higher commissions paid as a
result of the increase in net sales, and costs to develop and launch recent
product introductions.
Income from Operations
The above factors contributed to the increase in income from operations to
$5,456,834 or 13.2% of net sales for the third quarter from $3,733,308 or 12.3%
a year ago. Consistent with the increase in income from operations, net income
increased $1,079,418 over the corresponding period in the prior year.
Interest Expense
Interest expense increased $14,875, or 3.5%, to $437,241 in the quarter ended
September 30, 2003 compared to $422,366 the prior year. Increased borrowing for
the quarter used to finance expanded operations and inventory purchases was
partially offset by lower interest rates during third quarter 2003.
Income Taxes
Income taxes increased to $1,533,254 for the three months ended September 30,
2003 compared to $1,024,933 for the same period a year ago. The Company's
effective tax rate was 30.7% for the three months ended September 30, 2003
compared with 30.0% for the same period last year. This reflects increased sales
of sourced products which do not benefit from the favorable tax rates for the
Company's operations in Puerto Rico and the Dominican Republic.
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 2002
Net Sales
Net sales for the nine months ended September 30, 2003 was a record for the
year-to-date period. Net sales increased 21.4% to $76,967,913 for the nine
months ended September 30, 2003 compared with $63,397,202 for the same period
last year. This was due to solid increases in ROCKY(R) branded product sales,
net sales of $7,626,970 for the recently acquired GATES(R) brand, and increased
sales of ROCKY(R) Outdoor Gear versus a year ago. During the first nine months
of 2003, the Company had no military sales versus $6,432,805 during the same
period last year. A portion of the sales increase was due to slightly higher
prices on certain branded products principally due to raw material price
increases.
Gross Margin
Gross margin rose to $23,286,304 or 30.3% of net sales for the first nine months
of 2003 versus $16,130,644 or 25.4% for the same period a year ago. The increase
in sourced product sales to 66.0% of net sales for the nine months ended
September 30, 2003 from 47.0% for the same period last year and no sales to the
U.S. military in 2003 were the primary contributing factors to the improvement.
Selling, General and Administrative Expenses
SG&A expenses of $16,823,883 for the nine months ended September 30, 2003 were
21.9% of
12
net sales versus $13,535,584 or 21.4% of net sales the prior year. The higher
SG&A expenses for the 2003 year-to-date period are primarily attributable to
higher incentive compensation accruals due to increased profits and higher
commissions paid related to the increase in net sales.
Interest Expense
Interest expense for the nine months ended September 30, 2003 decreased $91,575
or 8.8% to $946,859 versus $1,038,434 for the same period a year ago. Interest
rates through September 30, 2003 were lower than for the same period last year.
Increased borrowing to finance expanded operations and purchases partially
offset the interest rate reductions.
Income from Operations
The above factors contributed to the increase in income from operations, which
more than doubled to 8.4% of net sales for the nine months ended September 30,
2003 from 4.1% of net sales for the same period last year. Consistent with the
increase in income from operations, net income increased $2,662,769 over the
corresponding period in the prior year.
Income Taxes
Income taxes for the nine months ended September 30, 2003 increased $1,188,329
to $1,736,076 compared to $547,747 for the same period a year ago. The Company's
effective tax rate was 30.6% for the nine months ended September 30, 2003 versus
30.0% for the same period in 2002. This reflects increased sales of sourced
products which do not benefit from the favorable tax rates for the Company's
operations in Puerto Rico and the Dominican Republic.
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,
clothing and accessories. At September 30, 2003, the Company had working capital
of $73,136,443 versus $57,367,698 on the same date last year and $41,751,287 at
December 31, 2002.
Funded debt was $41,277,817 at September 30, 2003 compared with $29,539,329 on
the same date last year. Historically, the Company's funded debt is highest at
the end of the third quarter due to significant shipments during the quarter for
the fall and winter seasons. The increase in funded debt at September 30, 2003
compared to last year was principally due to borrowings for the purchase of
certain assets of Gates(R) and the Company's share repurchase program earlier
this year, as well as additional inventory to support sales growth.
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 $45,000,000. As a result of the limitations on its maximum
borrowing amount at September 30, 2003, the Company had borrowed $35,667,731
against its then currently available line of credit of $43,117,936.
13
The Company's cash flow used in operations increased to $25,833,304 in the first
nine months of 2003 from $11,730,569 for the same period in the prior year. The
period-over-period comparison reflects increases in accounts receivable and
inventories which was partially offset by the increase in net income and
accounts payable. All of the respective balance sheet fluctuations reflect the
seasonal nature of the Company's business, the increased sales and bookings for
the current year, the increase in sales of sourced product and the Gates(R)
asset acquisition.
The principal use of cash flows in investing activities for the first nine
months of 2003 and 2002 has been for business acquisition and investment in
property, plant, and equipment. In the nine months of 2003 the Company invested
$4,104,935 to acquire certain assets of Gates(R); there were no comparable
investments for the same period in 2002. In the first nine months of 2003,
property, plant, and equipment expenditures were $1,444,034 versus $1,509,457
for the same period in 2002. The current year expenditures primarily represent
investments in injection molding equipment to improve the capabilities of the
Company's Puerto Rico subsidiary and investments in molds used in the production
of new products sourced in the Far East.
The Company's cash flows from financing activities for the nine months ended
September 30, 2003 reflect the repurchase of common shares as treasury stock for
$3,106,156, proceeds from employee stock option exercises, and fluctuations in
borrowings under its revolving credit facility and long-term mortgage facility
to finance working capital requirements and other operating capital
expenditures.
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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
There have been no significant changes in critical accounting policies from
those disclosed in the Company's Annual Report on Form 10-K for the year ended
December 31, 2002.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995.
This Quarterly Report on 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 intent, beliefs, expectations,
projections, forecasts, and plans 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
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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 herein 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 herein 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.
PART 1 - FINANCIAL INFORMATION
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes since December 31, 2002.
ITEM 4 - CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company's management
carried out an evaluation, with the participation of the Company's principal
executive officer and principal financial officer, of the effectiveness of the
Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) promulgated under the Securities Exchange Act of 1934). Based upon
that evaluation, the Company's principal executive officer and principal
financial officer concluded that the Company's disclosure controls and
procedures were effective as of the end of the period covered by this report. It
should be noted that the design of any system of controls is based in part upon
certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions, regardless of how remote.
There were no changes in the Company's internal controls over financial
reporting that occurred during the Company's most recent fiscal quarter that
have materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
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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) Exhibits.
31.1 Certification of CEO under Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of CFO under Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of CEO under Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of CFO under Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
Form 8-K dated July 24, 2003, filed with the Securities and
Exchange Commission on July 24, 2003 pursuant to Item 12
(under Item 9), regarding the Company's financial results for
the second quarter ended June 30, 2003.
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SIGNATURE
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, 2003 /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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