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:
JUNE 30, 2004 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 [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
4,597,476 common shares, no par value, outstanding at July 30, 2004
ROCKY SHOES & BOOTS, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
PAGE
NUMBER
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Condensed Consolidated Balance Sheets
June 30, 2004 and 2003 (Unaudited) and December 31, 2003 3
Unaudited Condensed Consolidated Statements of Operations
for the Three Months and Six Months Ended June 30, 2004 and 2003 4
Unaudited Condensed Consolidated Statements of Cash Flows
for the Three Months and Six Months Ended June 30, 2004 and 2003 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 - 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
Item 4. Controls and Procedures 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities 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 19
SIGNATURES 20
2
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
ROCKY SHOES & BOOTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2004 June 30, 2003
Unaudited December 31, 2003 Unaudited
------------- ----------------- -------------
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents $ 492,408 $ 2,159,050 $ 1,450,044
Trade receivables - net 27,422,370 19,532,287 21,356,964
Other receivables 863,709 830,131 1,062,552
Inventories 38,641,868 38,068,187 38,332,365
Deferred income taxes 959,810 959,810 578,951
Prepaid expenses 1,105,070 1,045,238 1,706,029
------------ ------------ ------------
Total current assets 69,485,235 62,594,703 64,486,905
FIXED ASSETS - net 19,055,324 17,610,238 18,270,014
DEFERRED PENSION ASSET 1,499,524 1,499,524 1,651,222
DEFERRED INCOME TAXES - - 153,495
OTHER ASSETS 4,672,682 4,470,371 3,208,827
------------ ------------ ------------
TOTAL ASSETS $ 94,712,765 $ 86,174,836 $ 87,770,463
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable $ 6,829,747 $ 2,810,161 $ 7,637,974
Current maturities - long term debt 518,226 503,934 490,218
Accrued expenses:
Income taxes 45,064 1,929,808 -
Taxes - other 491,828 372,432 471,780
Salaries and wages 988,107 1,885,896 904,834
Plant closing costs 63,228 195,500 210,000
Other 636,805 686,934 753,743
------------ ------------ ------------
Total current liabilities 9,573,005 8,384,665 10,468,549
LONG TERM DEBT-less current maturities 21,493,872 17,514,994 25,228,589
DEFERRED LIABILITIES 2,225,067 1,890,500 1,842,769
------------ ------------ ------------
TOTAL LIABILITIES 33,291,944 27,790,159 37,539,907
SHAREHOLDERS' EQUITY:
Common stock, no par value;
10,000,000 shares authorized; issued and outstanding
June 30, 2004 - 4,587,476; December 31, 2003 - 4,360,400;
June 30, 2003 - 4,097,930 36,396,070 34,880,199 32,653,420
Accumulated other comprehensive loss (1,950,400) (1,950,400) (2,311,749)
Retained earnings 26,975,151 25,454,878 19,888,885
------------ ------------ ------------
Total shareholders' equity 61,420,821 58,384,677 50,230,556
------------ ------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 94,712,765 $ 86,174,836 $ 87,770,463
============ ============ ============
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 Six Months Ended
June 30, June 30,
---------------------------- ------------------------------
2004 2003 2004 2003
------------ ------------ ------------- -------------
NET SALES $ 27,433,987 $ 21,863,148 $ 49,316,076 $ 35,618,089
COST OF GOODS SOLD 19,657,778 15,128,164 35,921,263 25,417,577
------------ ------------ ------------ ------------
GROSS MARGIN 7,776,209 6,734,984 13,394,813 10,200,512
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 5,396,376 4,944,319 10,724,067 9,194,925
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 2,379,833 1,790,665 2,670,746 1,005,587
OTHER INCOME AND (EXPENSES):
Interest expense (274,868) (313,438) (533,441) (509,618)
Other - net 24,182 88,230 98,388 180,103
------------ ------------ ------------ ------------
Total other - net (250,686) (225,208) (435,053) (329,515)
INCOME BEFORE INCOME
TAXES 2,129,147 1,565,457 2,235,693 676,072
INCOME TAX EXPENSE 681,325 469,638 715,420 202,822
------------ ------------ ------------ ------------
NET INCOME $ 1,447,822 $ 1,095,819 $ 1,520,273 $ 473,250
============ ============ ============ ============
NET INCOME PER SHARE
Basic $ 0.32 $ 0.27 $ 0.34 $ 0.11
============ ============ ============ ============
Diluted $ 0.29 $ 0.25 $ 0.31 $ 0.11
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
Basic 4,557,954 4,067,353 4,492,989 4,214,417
============ ============ ============ ============
Diluted 5,003,956 4,361,037 4,949,805 4,424,355
============ ============ ============ ============
See notes to the interim unaudited condensed consolidated financial statements.
4
ROCKY SHOES & BOOTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30,
2004 2003
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,520,273 $ 473,250
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation and amortization 1,558,687 1,795,013
Deferred income taxes 334,567 327,991
Loss on sale of fixed assets - 8,684
Stock issued as directors' compensation 50,000
Change in assets and liabilities:
Receivables (7,923,661) (5,963,184)
Inventories (573,681) (13,110,306)
Other current assets (59,832) (438,932)
Other assets (214,951) 46,745
Accounts payable 3,837,559 5,993,277
Accrued and other liabilities (2,845,538) 453,460
----------- -----------
Net cash used in operating activities (4,316,577) (10,414,002)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (2,782,106) (1,039,201)
Acquisition of business - (3,510,070)
Proceeds from sale of fixed assets - 27,955
----------- -----------
Net cash used in investing activities (2,782,106) (4,521,316)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 49,651,822 48,091,811
Payments on long-term debt (45,685,652) (33,347,553)
Purchase of treasury stock - (3,106,156)
Proceeds from exercise of stock options 1,465,871 470,538
----------- -----------
Net cash provided by financing activities 5,432,041 12,108,640
----------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS (1,666,642) (2,826,678)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 2,159,050 4,276,722
----------- -----------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 492,408 $ 1,450,044
=========== ===========
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 JUNE 30, 2004 AND 2003
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 unaudited interim consolidated financial
statements are considered to be of a normal and recurring nature. The
results of the operations for the three-month and six-month periods ended
June 30, 2004 and 2003 are not necessarily indicative of the results to be
expected for the whole year. Accordingly, these consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto contained in the Company's Annual Report to
Shareholders on Form 10-K for the year ended December 31, 2003.
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, 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 earnings per share would have resulted in the
amounts as reported below.
Three Months Ended June 30, Six Months Ended June 30,
2004 2003 2004 2003
------------- ------------- ------------- -----------
Net income as reported $ 1,447,822 $ 1,095,819 $ 1,520,273 $ 473,250
Deduct: Stock based employee
compensation expense
determined under fair value
based method for all awards, net 276,830 250,230.00 429,845 333,640
------------- ------------- ------------- -----------
Pro forma net income $ 1,170,992 $ 845,589 $ 1,090,428 $ 139,610
============= ============= ============= ===========
Earnings per share:
Basic - as reported $ 0.32 $ 0.27 $ 0.34 $ 0.11
Basic - pro forma $ 0.26 $ 0.21 $ 0.24 $ 0.03
Diluted - as reported $ 0.29 $ 0.25 $ 0.31 $ 0.11
Diluted - pro forma $ 0.23 $ 0.19 $ 0.22 $ 0.03
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:
June 30, 2004 December 31, 2003 June 30, 2003
------------- ----------------- -------------
Raw materials $ 6,949,144 $ 5,087,468 $ 8,008,009
Work in process 1,469,094 878,091 1,617,562
Finished good 28,878,360 31,168,371 27,602,186
Factory outlet finished goods 1,570,270 1,299,257 1,276,608
Reserve for obsolescence or
lower of cost or market (225,000) (365,000) (172,000)
------------ ------------ ------------
Total $ 38,641,868 $ 38,068,187 $ 38,332,365
============ ============ ============
3. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and Federal, state and local income taxes was as
follows:
Six Months Ended
June 30,
2004 2003
---- ----
Interest $ 503,023 $506,499
========== ========
Federal, state and local
income taxes $2,580,000 $ 80,000
========== ========
Accounts payable at June 30, 2004 and June 30, 2003 include a total of
$209,474 and $5,084 respectively, relating to the purchase of fixed
assets.
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 six months ended June
30, 2004 and 2003 is as follows:
7
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
---- ---- ---- ----
Basic Weighted average
shares outstanding 4,557,954 4,067,353 4,492,989 4,214,417
Diluted securities:
Stock options 445,982 293,684 456,816 209,938
--------- --------- --------- ---------
Diluted Weighted average
shares outstanding 5,003,936 4,361,037 4,949,805 4,424,355
========= ========= ========= =========
5. RECENTLY ADOPTED FINANCIAL ACCOUNTING STANDARDS
In December 2003, the FASB issued Revised SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits" ("SFAS No.
132"). SFAS No. 132 revises the annual disclosure requirements for
pensions and postretirement plans to include additional disclosures about
assets, obligations, cash flows, and net periodic benefit costs of defined
benefit pension and other defined benefit postretirement plans. SFAS No.
132 also revises the interim disclosure requirements to include
disclosures of the net periodic benefit costs for each period in which an
income statement is presented and the employer's contributions paid and
expected to be paid during the current fiscal year, if the contributions
are significantly different than previously disclosed amounts. The
Statement is effective for financial statements with fiscal years ending
after December 15, 2003. For interim-period disclosures, the Statement is
effective for interim periods beginning after December 15, 2003. We have
adopted this Statement for interim-period disclosures in these condensed
consolidated financial statements, and we will adopt the annual
disclosures with our December 31, 2004 Form 10-K. The adoption of FAS No.
132 does not have an impact on our financial condition or results of
operations, as it pertains only to disclosure provisions.
In May 2004, the FASB issued FSP FAS 106-2 to provide guidance on
"Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003" (FSP FAS
106-2), which supersedes FSP FAS 106-1, "Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003". FSP FAS 106-2 is effective for interim and
annual periods beginning after June 15, 2004. The effect of FSP 106-2 is
not expected to have a material effect on our results of operations, cash
flows or financial position.
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 raw material and
finished goods inventory, and certain records in connection with the Gates
business in exchange for a total purchase price of $4.9 million, of which
$3.5 million had been expended through June 30, 2003.
8
7. CAPITAL STOCK
The Company was authorized to repurchase up to 500,000 shares of our
outstanding common shares. Purchases occurred on the open market and/or in
privately negotiated transactions as market conditions warranted. During
the three-month period ended March 31, 2003, the Company repurchased
483,533 shares at an average price of $6.42. As of March 31, 2003, the
Company had purchased a total of 499,933 shares at an average price of
$6.38. No additional shares have been repurchased since March 31, 2003.
For the six months ended June 30, 2004, options for 224,400 of the
Company's common stock were exercised at an average price of $6.46. The
outside members of the Board of Directors received a total of 2,676 shares
in lieu of cash as part of their director compensation.
8. RETIREMENT PLANS
SFAS No. 132 (revised 2003), "Employers' Disclosures about Pensions and
Other Postretirement Benefits," generally requires additional disclosures
to those in the original Statement 132 about the assets, obligations, cash
flows, and net periodic benefit cost of defined benefit pension plans and
other defined benefit postretirement plans.
Net pension cost of the Company's plans is as follows:
Three Months Ended Six Months Ended
JUNE 30, JUNE 30,
2004 2003 2004 2003
Service cost $ 128,080 $ 96,923 $ 256,159 $ 193,846
Interest 90,758 150,870 252,271 301,740
Expected return on assets (86,391) (138,247) (257,465) (276,494)
Amortization of unrecognized net loss 32,141 44,660 67,552 89,320
Amortization of unrecognized transition obligation 4,076 4,077 8,153 8,154
Amortization of unrecognized prior service cost 33,849 33,848 67,697 67,696
--------- --------- --------- ---------
Net pension cost $ 202,513 $ 192,131 $ 394,367 $ 384,262
========= ========= ========= =========
The Company's unrecognized benefit obligations existing at the date of
transition for the non-union plan is being amortized over 21 years.
Actuarial assumptions used in the accounting for the plans were as
follows:
JUNE 30,
2004 2003
Discount rate 5.75% 5.75%
Average rate of increase in compensation levels
(non-union only) 3.0% 3.0%
Expected long-term rate of return on plan assets 8.0% 8.0%
9
The Company's desired investment result is a long-term rate of return on
assets that is at least a 8%. The target rate of return for the plans have
been based upon the assumption that returns will approximate the long-term
rates of return experienced for each asset class in the Company's
investment policy. The Company's investment guidelines are based upon an
investment horizon of greater than five years, so that interim
fluctuations should be viewed with appropriate perspective. Similarly, the
Plan's strategic asset allocation is based on this long-term perspective.
The Company expects to make contributions to the plan in 2004 of
approximately $1.5 million. For the six months ended June 30, 2004, no
Company contribution had been made.
In 2001, the Company announced a restructuring plan to consolidate and
realign the Company's footwear manufacturing operations. As part of the
plan, 67 employees were eliminated and the plan assets were frozen as of
September 30, 2001. In April of 2004 the remaining assets of the Union
pension plan were used to purchase individual annuities for the terminated
employees. No further contributions will be made to the plan.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PART 1 - FINANCIAL INFORMATION
ITEM 2
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 Six Months Ended
June 30, June 30,
2004 2003 2004 2003
---- ---- ---- ----
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of Goods Sold 71.7% 69.2% 72.8% 71.4%
----- ----- ----- -----
Gross Margin 28.3% 30.8% 27.2% 28.6%
Selling, General and
Administrative Expenses 19.7% 22.6% 21.7% 25.8%
----- ----- ----- -----
Income from Operations 8.6% 8.2% 5.5% 2.8%
===== ===== ===== =====
THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THREE MONTHS ENDED
JUNE 30, 2003
Net Sales
Net sales increased in the second quarter 2004 to $27.4 million compared to
$21.9 million for the same period in 2003. This 25.5% increase was attributable
to a 13% increase in branded sales and shipments of boots to the U.S. military.
The $2.8 million increase in branded sales was lead by increased sales of
GATES(R) products and ROCKY(R) apparel. Shipments of boots for delivery to the
U.S. military were $2.8 million in second quarter 2004 compared to none for the
same period last year.
Gross Margin
Gross profit was $7.8 million, or 28.3% of net sales for the first quarter 2004
compared to $6.7 million, or 30.8% of net sales, for the same period in the
prior year. The decrease in gross margin percentage was due to shipments of
boots for delivery to the U.S. military and related start-up costs for these
boots in 2004 compared to none for the same period last year. The Company
manufactures military boots at lower gross margin than its branded products.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses were $5.4 million, or
19.7% of net sales,
11
for the quarter ended June 30, 2004 compared to $4.9 million, or 22.6% of net
sales, for the same period in the prior year. The decline in SG&A expenses as a
percentage of sales was attributable to nominal SG&A expenses related to the
sales of boots for delivery to the U.S. military. The increase in SG&A expenses
was primarily due to higher advertising expenses that increased $0.2 million,
higher commissions that increased $0.1 million, distribution costs associated
with the growth in branded product sales that increased $0.1 million and
industry trade show expense that increased $0.1 million when compared to a year
ago.
Interest Expense
Interest expense was $0.3 million in the second quarter 2004 compared to $0.3
million for the same period the prior year. The Company's funded debt as of June
30, 2004 was $3.7 million below funded debt on the same date last year.
Income Taxes
Income tax expense for the quarter ended June 30, 2004 was $.7 million compared
to $.5 million and for the same period a year ago. The Company's effective tax
rate was 32.0% for the three months ended June 30, 2004 versus 30.0% for the
same period in 2003. The increase in the effective tax rate in 2004 over 2003 is
due primarily to the increase in sales of sourced products, which are taxed at
U.S. effective tax rates.
SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2003
Net Sales
Net sales increased in the six months ended June 30, 2004 to $49.3 million
compared to $35.6 million for the same period in 2003. This represents a 38.5%
increase and is attributable to a $6.0 million increase in branded sales and
$7.7 million increase in sales to the U.S. military when compared to the prior
year. The branded sales increase was led by sales of GATES(R) products, ROCKY(R)
Work footwear and ROCKY(R) apparel categories.
Gross Margin
Gross profit for the six months ended June 30, 2004 was $13.3 million, or 27.2%
of net sales compared to $10.2 million, or 28.6% of net sales, the prior year.
The decrease in gross margin percentage was due to shipments of boots for
delivery to the U.S. military and related start-up costs for these boots in 2004
compared to none for the same period last year. The Company manufactures
military boots at lower gross margin than its branded products.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses were $10.7 million, or
21.7% of net sales, for the six months ended June 30, 2004 compared to $9.2
million, or 25.8% of net sales, the prior year. The increase in SG&A expenses
was primarily due to commissions that increased $0.5 million, advertising
expenses that increased $0.2 million, distribution costs associated with the
growth in branded product sales that increased $0.2 million and industry trade
show expense that increased $0.3 million when compared to a year ago.
12
Interest Expense
Interest expense for the six months ended June 30, 2004 increased to $0.5
million versus $0.5 million for the same period a year ago. The increase in
interest is the result of more borrowing on the line of credit in 2004.
Income Taxes
Income taxes for the six months ended June 30, 2004 increased to $.7 million
compared to $.2 million and the same period last year. The Company's effective
tax rate of 32.0% for the first half of 2004 compares with an effective tax rate
30% for the same period a year ago.
Liquidity and Capital Resources
The Company principally funds working capital requirements and capital
expenditures through income from operations, borrowings under its credit
facility 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. At June 30, 2004, the Company had working capital
of $59.9 million versus $54.0 million on the same date last year and $54.2
million at December 31, 2003.
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 $45.0 million. As of June 30, 2004, the Company had borrowed
$16.8 million against its then currently available line of credit of $37.1
million compared with $20.4 million and $26.8 million respectively in the same
period of 2003.
The Company's cash flow used in operations was $4.3 million in the first six
months of 2004 compared to $10.4 million in the same period of 2003. Increases
in accounts receivable was partially offset by an increase in accounts payable,
both the result of increased sales volume. The reduction in accrued liabilities
was due to the payment of income taxes and incentives that resulted from the
record operating results of fiscal 2003. Most of the respective balance sheet
fluctuations reflect the seasonal nature of the Company's business, and the
increased sales and bookings for the current year.
The principal use of cash flows in investing activities for the first six months
of 2004 and 2003 has been for the acquisition and investment in property, plant,
and equipment. In the first half of 2003 the Company acquired certain assets of
Gates-Mills, Inc. In the first six months of 2004, property, plant, and
equipment expenditures were $2.8 million versus $1.0 million in the same period
of 2003. The Gates-Mills, Inc. assets were acquired for $3.5 million in 2003.
The current year expenditures primarily represent investments in expansion of
the workspace at the Company's distribution center, retail outlet, as well as
sales fixtures and displays.
The Company's net cash provided by financing activities for the six months ended
June 30, 2004 was $5.4 million, comprised of the proceeds from the exercise of
stock options of $1.4 million, as well as a net increase on its revolving credit
facility and long-term mortgage facility of $4.0 million.
13
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
Management's Discussion and Analysis of Financial Condition and Results of
Operations discuss the Company's consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these consolidated financial statements
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period.
Management regularly reviews its accounting policies to make certain they are
current and also provide readers of the consolidated financial statements with
useful and reliable information about our operating results and financial
condition. These include, but are not limited to, matters related to accounts
receivable, inventories, pension benefits, and income taxes. Implementation of
these accounting policies includes estimates and judgments by management based
on historical experience and other factors believed to be reasonable. This may
include judgments about the carrying value of assets and liabilities based on
considerations that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions.
Management believes the following critical accounting policies are most
important to the portrayal of the Company's financial condition and results of
operations, and require more significant judgments and estimates in the
preparation of its consolidated financial statements.
Revenue Recognition:
Customer sales are recognized when revenue is realized and earned. The Company
recognizes revenue when the risk and title passes to the customer, generally at
the time of shipment. Customer sales are recorded net of allowances for
estimated returns, trade promotions and other discounts, which are recognized as
a deduction from sales at the time of sale.
Sales returns and allowances:
Revenue principally consists of sales to customers, and, to a lesser extent,
license fees. Revenue is recognized upon shipment of product to customers, while
license fees are recognized when earned. The Company records a reduction to
gross sales based on estimated customer returns and allowances. These reductions
are influenced by historical experience, based on customer returns and
allowances. The actual amount of sales returns and allowances realized may
differ from the Company's estimates. If the Company determines that sales
returns or allowances should be either increased or decreased, then the
adjustment would be made to net sales in the period in which such a
determination is made.
14
Accounts receivable allowances:
Management maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. If the
financial condition of the Company's customers were to deteriorate, resulting in
an impairment of their ability to make payments, additional allowances may be
required. Management also records estimates for customer returns and discounts
offered to customers. Should a greater proportion of customers return goods and
take advantage of discounts than estimated by the Company, additional allowances
may be required.
Inventories:
Management identifies slow moving or obsolete inventories and estimates
appropriate loss provisions related to these inventories. Historically, these
loss provisions have not been significant as the vast majority of the Company's
inventories are considered saleable and the Company has been able to liquidate
slow moving or obsolete inventories through the Company's factory outlet stores
or through various discounts to customers. Should management encounter
difficulties liquidating slow moving or obsolete inventories, additional
provisions may be necessary. Management regularly reviews the adequacy of its
inventory reserves and makes adjustments to them as required.
Pension benefits:
Accounting for pensions and other postretirement benefits involves estimating
the cost of benefits to be provided well into the future and attributing that
cost over the time period each employee works. To accomplish this, extensive use
is made of assumptions about inflation, investment returns, mortality, turnover,
medical costs and discount rates. These assumptions are reviewed annually.
Pension and post-retirement benefit expenses are determined by actuaries using
assumptions concerning the discount rate, expected return on plan assets and
rate of compensation increase. An actuarial analysis of benefit obligations and
plan assets is determined as of September 30 each year. The funded status of the
Company's plans and reconciliation of accrued pension cost is determined
annually as of December 31. Further discussion of the Company's pension and
post-retirement benefit plans and related assumptions is included in Note 9,
Retirement Plans, to the consolidated financial statements included in the
Annual Report on Form 10-K. Actual results would be different using other
assumptions. Management records an accrual for pension costs associated with the
Company sponsored noncontributory defined benefit pension plans covering the
union and non-union workers of the Company. The union plan was frozen in 2001
and no additional benefits have been earned under this plan since that time; the
obligations under this plan were settled in April 2004. Future adverse changes
in market conditions or poor operating results of underlying plan assets could
result in losses or a higher accrual.
Income taxes:
15
Currently, management has not recorded a valuation allowance to reduce its
deferred tax assets to the amount that it believes is more likely than not to be
realized. The Company has considered future taxable income and ongoing prudent
and feasible tax planning strategies in assessing the need for a valuation
allowance, however in the event the Company were to determine that it would not
be able to realize all or part of its net deferred tax assets in the future, an
adjustment to the deferred tax assets would be charged to income in the period
such determination was made. Finally, if the Company decided to repatriate any
of its earnings in its Five Star subsidiary to the United States, the Company's
effective tax rate would increase.
Intangible Assets:
The Company had $4.2 million of intangible assets at June 30, 2004 and $4.1
million at December 31, 2003. Goodwill and trademarks are tested for impairment
at least annually by comparing the fair value of the reporting units to their
carrying values. Fair values are estimated using discounted cash flow
methodologies that are based on projections of the amounts and timing of future
revenues and cash flows. Based on this testing, none of our goodwill nor
trademarks were impaired as of December 31, 2003, and no impairment indicators
have occurred since that date.
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 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.
16
PART 1 - FINANCIAL INFORMATION
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes since December 31, 2003.
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.
17
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities.
See Note 7 to the Condensed Consolidated Financial Statements for
further discussion.
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
The 2004 Annual Meeting of Shareholders was held on May 11, 2004, and
the following proposals were acted upon:
Proposal: To elect three Class II Directors of the Company, each to
serve for a two-year term expiring at the 2006 Annual Meeting of
Shareholders
Number of Shares Voted
-----------------------------------------
WITHHELD
FOR AUTHORITY TOTAL
--- --------- -----
Michael L. Finn 4,084,727 272,353 4,357,080
G. Courtney Haning 4,100,102 256,978 4,357,080
Curtis A. Loveland 3,066,909 1,290,171 4,357,080
Proposal: To approve and adopt the Company's 2004 Stock Incentive Plan.
Number of Shares Voted
For Stock Incentive Plan 1,639,183
Against Stock Incentive Plan 1,622,050
Withheld Authority 16,239
---------
Total Shares Voted 3,277,472
Item 5. Other Information.
None
18
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.
1) Form 8-K dated April 29, 2004, filed with the Securities and
Exchange Commission on April 29, 2004 pursuant to Item 12,
regarding the Company's financial results for the first
quarter ended March 31, 2004.
19
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: August 4, 2004 /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.
20