| LACROSSE FOOTWEAR INC Item 1A Risk Factors In evaluating the Company, careful consideration should be given to the following risk factors, in addition to the other information included in this Annual Report on Form 10-K Each of these risk factors could adversely affect the Company’s business, operating results and/or financial condition, as well as adversely affect the value of an investment in the Company’s common stock |
| In addition to the following disclosures, please refer to the other information contained in this report, including the consolidated financial statements and the related notes |
| If we do not accurately forecast consumer demand, we may have excess inventory to liquidate or have greater difficulty filling our customers’ orders, either of which could adversely affect our business |
| The footwear industry is subject to cyclical variations and declines in performance, as well as fashion risks and rapid changes in consumer preferences, the effects of weather, general economic conditions and other factors affecting demand |
| Furthermore, the footwear industry has relatively long lead times for the design and manufacturing of products |
| Consequently, we must commit to production based on our forecasts of consumer demand |
| If we overestimate demand for our products, we may be forced to liquidate excess inventories at a discount to customers, resulting in markdowns and lower gross margins |
| Conversely, if we underestimate consumer demand, we could have inventory shortages, which can result in lost potential sales, delays in shipments to customers, strains on our relationships with customers and diminished brand loyalty |
| A decline in demand for our products, or any failure on our part to satisfy increased demand for our products, could adversely affect our business and results of operations |
| Our business is substantially affected by the weather, and sustained periods of warm and/or dry weather can negatively impact our sales |
| We sell our products to the work and outdoor footwear markets |
| Sales of these products are largely dependent on the timing -8- _________________________________________________________________ [45]Table of Contents and severity of weather in the different regions of the United States |
| Prolonged periods of relatively dry and/or warm weather, particularly in the fall and winter, could have an adverse affect on demand for our products |
| A decline in consumer spending due to unfavorable economic conditions could hinder our product revenues and earnings |
| Footwear, particularly outdoor and recreational footwear, is a cyclical industry that is largely dependent upon overall levels of consumer spending |
| The success of our products depends substantially on the amount of discretionary funds available to consumers and their purchasing preferences |
| Our customers anticipate and respond to adverse changes in economic conditions and uncertainty by reducing inventories and canceling orders |
| As a result, our business and financial condition could be adversely affected by any substantial deterioration in general economic conditions, an increase in energy costs or interest rates, any significant acts of nature, terrorist events, and any other event that could diminish consumer spending and overall consumer confidence |
| We conduct a significant portion of our manufacturing activities outside the US, and therefore we are subject to the risks of international commerce |
| We use third party manufacturers located in foreign countries, primarily in China, to manufacture the majority of our goods, including all of our LaCrosse branded products |
| We also sell a growing percentage of our products to retailers outside of the US Foreign manufacturing and sales activities are subject to numerous risks, including the following: • tariffs, import and export controls and other non-tariff barriers such as quotas and local content rules; • increased transportation costs due to distance, energy prices or other factors; • delays in the transportation and delivery of goods due to increased security concerns; • foreign currency fluctuations (particularly with respect to the euro and Chinese renminbi), for which we do not currently engage in any material hedging transactions; • restrictions on the transfer of funds; • changing economic conditions; • restrictions, due to privacy laws, on the handling and transfer of consumer and other personal information; • changes in governmental policies and regulations; • political unrest, terrorism or war, any of which can interrupt commerce; • expropriation and nationalization; • difficulties in managing foreign operations effectively and efficiently from the US; • difficulties in understanding and complying with local laws, regulations and customs in foreign jurisdictions; and • Limited capital of foreign distributors Additionally, although sales outside of the US did not constitute a significant portion of our revenues in 2005, our international sales have grown over the past several years |
| Our ability to continue to do business in international markets is subject to risks associated with international sales operations, as noted above, as well as the difficulties associated with promoting products in emerging markets |
| We are also subject to additional risk as the Company has a limited number of foreign distributors, who in turn have limited -9- _________________________________________________________________ [46]Table of Contents capital investment |
| Sales to the international markets are achieved through those foreign distributors |
| If the relationship with those distributors were to deteriorate, it could have an adverse impact assuming the Company is unable to engage suitable alternatives in a timely manner |
| Because we depend on third party manufacturers, we face challenges in maintaining a timely supply of goods to meet sales demand, and we may experience delay or interruptions in our supply chain |
| Any shortfall or delay in the supply of our products may decrease our sales and have an adverse impact on our customer relationships |
| In 2005, third party manufacturers produced approximately 89prca of our footwear products |
| Currently, we have footwear manufacturing arrangements with third party manufacturers located in China and Europe |
| We depend on these manufacturers’ ability to finance the production of goods ordered and to maintain adequate manufacturing capacity |
| We do not exert direct control over the third party manufacturers, so we may be unable to obtain timely delivery of acceptable products |
| Due to various factors, one or more of our third party manufacturers may be unable to continue meeting our production requirements |
| Moreover, some of our third party manufacturers have manufacturing engagements with companies that are much larger than we are and whose production needs are much greater than ours |
| As a result, one or more manufacturers may choose to devote additional resources to the production of products other than ours if capacity is limited |
| In addition, we do not have long-term supply contracts with these third party manufacturers, and any of them may unilaterally terminate their relationship with us at any time or seek to increase the prices they charge us |
| As a result, we are not assured of an uninterrupted supply of products of an acceptable quality and price from our third party manufacturers |
| We may be unable to offset any interruption or decrease in supply of our products by increasing production in our company-operated manufacturing facilities due to capacity constraints, and we may be unable to substitute suitable alternative third party manufacturers in a timely manner or at acceptable prices |
| Any disruption in the supply of products from our third party manufacturers may harm our business and could result in a loss of sales and an increase in production costs, which would adversely affect our results of operations |
| Failure to efficiently import foreign sourced products could result in decreased margins, cancelled orders and unanticipated inventory accumulation |
| Our business depends on our ability to source and distribute products in a timely manner |
| Labor disputes at various ports create significant risks for our business, particularly if these disputes result in work slowdowns, lockouts, strikes, or other disruptions during our peak importing seasons, and could have a material adverse effect on our business, potentially resulting in cancelled orders by customers, unanticipated inventory accumulation, and reduced revenues and earnings |
| Furthermore, many of our imported products are subject to duties, tariffs or quotas that affect the cost and quantity of various types of goods imported into the United States or into our other sales markets |
| The countries in which our products are produced or sold may adjust or impose new quotas, duties, tariffs or other restrictions, any of which could have a material adverse effect on us |
| Any major disruption at one of our two distribution facilities or our domestic manufacturing facility could prevent the timely delivery of our product |
| -10- _________________________________________________________________ [47]Table of Contents We have distribution centers in Portland, Oregon and La Crosse, Wisconsin and a domestic manufacturing facility in Portland, Oregon |
| Both the distribution centers and the manufacturing facility are subject to union agreements |
| Any natural disaster or other serious disruption at one of these facilities due to labor unrest, fire, earthquake, flood, terrorist attack or any other natural or manmade cause could damage a portion of our inventory or impair our ability to use our warehouse as a docking location for product |
| Any of these occurrences could impair our ability to adequately supply our customers and could have an adverse effect on our results of operations |
| The continued consolidation of retailers, and the leveraged growth in the overall number of stores, increases and concentrates the Company’s credit risk |
| Significant retailers in the work and outdoor retail industry continue to expand rapidly through construction of additional stores and acquisitions |
| Further, the industry continues to experience consolidation, resulting in a smaller number of primary retailers |
| The increased capital requirements required to open and operate new stores concentrates the Company’s credit risk in a relatively small number of customers |
| If these retailers were to extinguish their capital and were unable to replenish their liquidity, there is a risk that their outstanding payables to our Company may not be paid |
| Our financial success may be limited by the strength of our relationships with our retail customers and to the success of such retail customers |
| Our financial success is significantly related to the willingness of our retail customers to continue to carry our products and to the success of such customers |
| We do not have long term contracts with any of our retail customers, and sales to our retail customers are generally on an order-by-order basis and are subject to rights of cancellation and rescheduling by the customer |
| If we cannot fill our retail customers’ orders in a timely manner, the sales of our products and our relationships with those customers may suffer, and this could have a material adverse effect on our product sales and ability to grow our product line |
| In 2005, our five largest retail customers accounted for approximately 23prca of our revenues |
| If any of our major retail customers experiences a significant downturn in their business or fails to remain committed to our products or brand, then these customers may reduce or discontinue purchases from us |
| In addition, we extend credit to our customers based on an evaluation of each customer’s financial condition |
| If a significant customer to whom we have extended credit experiences financial difficulties, our bad debt expense may increase relative to revenues in the future |
| Any significant increase in our bad debt expense relative to revenues would adversely impact our net income and cash flow and could affect our ability to pay our own obligations as they become due |
| Furthermore, many of our retail customers compete with each other, and if they perceive that we are offering their competitors better pricing and support, they may reduce purchases of our products |
| We face significant competition and if we are unable to compete effectively, sales of our products may decline and our business could be harmed |
| The footwear industry is highly competitive |
| Recent growth in the market for outdoor and work footwear has encouraged the entry of new competitors into the marketplace and has increased competition from established companies |
| Some of our competitors have products with similar characteristics, such as design and materials, to a number of our products |
| In addition, access to offshore manufacturing is also making it easier for new companies to enter the markets in which we compete |
| -11- _________________________________________________________________ [48]Table of Contents Our competitors include footwear manufactures, fashion-oriented footwear marketers, vertically integrated specialty stores and retailers of private label products |
| The principal methods of competition in our industry include product design, product performance, quality, brand image, price, marketing and promotion, customer support and service, the ability to meet delivery commitments to retailers, obtaining access to retail outlets and sufficient floor space |
| A number of our competitors: • have significantly greater financial resources than we have; • have more comprehensive product lines than ours; • have broader market presence than we have in retail outlets, or have their own retail outlets; • have longer-standing relationships with retailers than we have; • have a longer operating history than ours; • have greater distribution capabilities than we have; • have stronger brand recognition than we have; and • spend substantially more on product advertising and sales than we do |
| Our competitors’ greater capabilities in these areas may enable them to better withstand periodic downturns in the footwear industry, compete more effectively on the basis of price and production and more quickly develop new products |
| In addition, a major marketing or promotional success or technological innovation by one of our competitors could adversely impact our competitive position |
| If we fail to compete successfully in the future, our sales and profits may decline, our financial condition may deteriorate and the market price of our common stock is likely to fall |
| In addition, a growing trend in the footwear industry is for dealers and distributors to source product directly from overseas manufacturers in order to increase profitability by eliminating the wholesale distributor or manufacturer |
| While dealers and distributors have not historically manufactured and developed new and innovative products, if consumers largely accept the directly sourced products, it could have an adverse effect on our results of operations |
| We may be unable to meet changing consumer preferences and demands |
| The footwear industry is subject to rapid changes in consumer preferences |
| Our success depends in large part on our ability to continuously develop, market and deliver innovative and functional products at a pace, intensity, and price that is competitive with other brands in our market |
| In addition, we must design and manufacture products that appeal to many consumer segments at a range of price points |
| While we continually update our product line with new and innovative products, our products may not continue to be popular and new products we may introduce may not achieve adequate consumer acceptance for us to recover development, manufacturing, marketing and other costs |
| Our failure to anticipate, identify and react to shifts in consumer preferences and maintain a strong brand image could adversely affect our sales and results of operations |
| -12- _________________________________________________________________ [49]Table of Contents Changes in the price or availability of raw materials could disrupt our operations and adversely affect our financial results |
| We purchase raw materials, finished goods, and component parts from various suppliers to be used in the manufacturing of our products |
| Changes in our relationships with suppliers or increases in the costs of purchased raw materials, component parts or finished goods could result in manufacturing interruptions, delays, inefficiencies or our inability to market the products |
| We also rely on transport companies to deliver our products from abroad to our distribution centers, and in some cases directly to our customers |
| If petroleum costs were to increase it could cause a disruption in the transportation industry, which could result in significantly higher freight costs to our Company |
| Increased petroleum costs also affect our manufacturing costs, as rubber is a key component of our footwear |
| Our profit margins may decrease if prices of purchased raw materials, component parts, finished goods, or petroleum increase and we are unable to pass on those increases to our customers |
| Our failure or inability to protect our intellectual property could significantly harm our competitive position and reduce future revenues |
| Protecting our intellectual property is an important factor in maintaining our brand and our competitive position in the footwear industry |
| If we do not or are unable to adequately protect our intellectual property, our sales and profitability could be adversely affected |
| We currently hold a number of patents and trademarks and have patent and trademark applications pending |
| However, our efforts to protect our proprietary rights may be inadequate and applicable laws provide only limited protection |
| We have a number of licensing agreements, both for product, camouflage patterns and trademarks, which are significant to our business |
| If the Company is unable to renew the agreements, and suitable replacements are not available in a timely manner, this may reduce revenues |
| We depend on a limited number of suppliers for key production materials, and any disruption in the supply of such materials could interrupt product manufacturing and increase product costs |
| We depend on a limited number of sources for the primary materials used to make our footwear |
| For example, we and our contract manufacturers purchase GORE-TEX^® waterproof fabric directly from WL Gore and Associates (“Gore”), for both our LaCrosse and Danner footwear |
| Over 90prca of Danner styles are GORE-TEX^® lined |
| Either party upon 90 days written notice may terminate our agreements with Gore |
| While we consider our relationship with Gore to be good, if Gore were to terminate our agreements, the time required to obtain substitute materials could interrupt our production cycle |
| Further, consumers may be unwilling to accept any such replacement material |
| Any termination or delay in our license with Gore, or in the procurement of any other key component, could result in lost potential sales, delays in shipments to customers, strained relationships with customers and diminished brand loyalty |
| In order to be successful, we must retain and motivate key employees, and the failure to do so could have an adverse impact on our business |
| Our future success will depend in part on the continued service of key personnel, including Joseph P Schneider, our President and Chief Executive Officer, and David P Carlson, our Executive Vice President and Chief Financial Officer |
| Our future success will also depend on our ability to attract and retain key managers, product development engineers, sales people, and others |
| We face intense competition for such -13- _________________________________________________________________ [50]Table of Contents individuals throughout the footwear and work and outdoor products industries |
| Not being able to attract or retain these employees could have a material adverse effect on revenues and earnings |
| If we fail to comply with the covenants contained in our revolving credit facility we may be unable to secure additional financing and repayment obligations on our outstanding indebtedness may be accelerated |
| Our revolving credit facility contains financial and operating covenants with which we must comply |
| As of December 31, 2005, we were in compliance with each of these covenants |
| However, among other factors, our continued compliance with these covenants is dependent on our financial results, which are subject to fluctuation as described elsewhere in these risk factors |
| If we fail to comply with the covenants in the future or if our lender does not agree to a waiver of any future non-compliance, we may be unable to borrow additional funds and our outstanding indebtedness may become immediately due and payable, which could materially harm our business |
| Our articles of incorporation, bylaws and Wisconsin corporate law each contain provisions that could delay, defer or prevent a change in control of our company or changes in our management |
| Among other things, these provisions: • classify our board of directors so that only some of our directors are elected each year; • do not permit cumulative voting in the election of directors, which would otherwise allow less than a majority of stockholders to elect director candidates; and • establish advance notice and other procedural requirements for submitting nominations for election to the board of directors and for proposing matters that can be acted upon by stockholders at a meeting |
| These provisions could discourage proxy contests and make it more difficult for our stockholders to elect directors and take other corporate actions, which may prevent a change of control and/or changes in our management that a stockholder might consider favorable |
| In addition, Subchapter XI of the Wisconsin Business Corporation Law includes provisions that may discourage, delay, or prevent a change in control of us |
| Any delay or prevention of a change of control or change in management that stockholders might otherwise consider to be favorable could cause the market price of our common stock to decline |