LaCrosse Footwear Inc

ACC 712 LaCrosse Footwear: Equity Valuation By Derek Greene Lee Hollander Chris Szydlowski April 6, 2005 LaCrosse Footwear, Inc. – Equity Valuation Business Strategy Business Overview: LaCrosse Footwear Inc. designs, develops, manufactures, and markets premium quality footwear and apparel for the outdoor and work markets (safety and industrial). Based out of Portland, Oregon, LaCrosse sells its products under the LACROSSE® and the DANNER® brands. The LACROSSE® brand encompasses footwear, rainwear, and protective clothing made from rubber and leather, while the DANNER® brand focuses solely on featuredriven footwear that is composed of leather. Products are distributed through retail and industrial channels. LaCrosse has no plans to expand into international markets, but does own a 12% equity interest in Danner Japan, Ltd. from which royalties are earned and booked as revenues. For 2004, royalties from the equity venture comprised less than 4% of net sales1. Industry Analysis: LaCrosse Footwear Inc. competes in the mature and highly fragmented footwear and apparel industries. For sustained profitability and growth, these industries are reliant upon the general state of the economy and positive movements in economic indicators such as consumer confidence, unemployment, RDPI (real disposable personal income), and population growth. Over the past six years, deflationary pricing pressure has taken its toll as the Consumer Price Index for Apparel and Footwear has declined 8.3%2. The deflationary pricing pressure is expected to continue into the foreseeable future, due to the elimination of quota, as of January 1, 2005, retailer consolidation, increased competition from imports, and increases in energy costs. In addition to the pricing pressure, Apparel and Footwear’s share of personal consumption expenditures has decreased from 4.3% to 3.6% over the past six years3, which represents a 16% decline. Strategy: LaCrosse hedges its risk against deflationary pricing pressure and intense competition in the footwear and apparel industries by positioning its products as the high-quality premium brands in targeted market segments, which command a higher profit margin and are less susceptible to downturns in the economy. The strategic objective of LaCrosse is to maintain its focus on premium brands and to build upon its already strong brand image through continuous product differentiation and innovation. In support of this strategic objective, LaCrosse divested its PVC (polyvinyl chloride) footwear line in August 20044, which completely transitioned them away from low-margin footwear products. In the future, LaCrosse intends to source more of its products from the Asian-Pacific region, as long as quality is not compromised, so that profit margins can be increased due to lower labor and material costs. Profit Sustainability: LaCrosse's strategy will be sufficient to generate sustainable profits into the future, only if LaCrosse is able to maintain leadership in brand image, product innovation, and product differentiation so that high profit margins are not diminished. However, the probability that market leadership will be able to be sustained in these three categories is very low as industry competition is fierce and consumers are less willing to spend money on Apparel and Footwear. Over the past two years, LaCrosse has doubled its ROE to 16.8% for the fiscal year 2004, despite a declining CPI for Apparel and Footwear. The ROE increase is mainly due to unexpected contracts with the U.S. GSA (General Services Administration), which were awarded to supply desert combat boots to U.S. troops in Iraq. GSA contracts accounted for 9.3% of net revenues in 2004 and 0.2% of net revenues in 20035. The additional revenues earned on high margin combat boots provided LaCrosse with a sufficient amount of free cash flow to pay- LaCrosse Footwear, Inc. – Equity Valuation off all its outstanding debt, thereby decreasing its net operating assets and improving its ROE. Before these GSA contracts were awarded, LaCrosse experienced negative earnings in 2002, 2001, and 2000. A healthy ROE, above the cost of equity capital, should be able to be sustained over the next couple of years, due to the lack of debt in the capital structure, the discontinuation of the lowmargin PVC footwear line, and a positive cash balance. Near-term projects will be able to be funded with cash on hand and cash from operations. However, the elimination of the GSA contracts and profit margin erosion due to increased competition will eventually cause ROE to regress to the cost of equity capital. Accounting Analysis The accounting policies that LaCrosse Footwear Inc. employs conform to GAAP and accurately reflect the underlying business of manufacturing and selling premium quality footwear. There are no accounting distortions, which require any considerable financial statement adjustments so that an accurate valuation of the company can be conducted. The major accounting policies are discussed below1. Leases: The Company leases its office space, retail store space, warehouse and manufacturing facilities under non-cancelable operating lease agreements. The rent expense for 2004 was $1.6 million. The net present value of future minimum lease payments, through the year 2009, is $3.3 million. The 6 locations that are currently being rented by the company have different lease termination dates that begin in 2006 through 2009. The Company has warehouse space in La Crosse, Wisconsin that it currently sublets 11% of available space to a third party. Under this arrangement the Company received $0.1 million in 2004 and is scheduled to receive the same payment through 2007. The company ceased manufacturing operations in a Racine, Wisconsin and currently sublets this facility until the end of its lease in 2006. The payment received from this agreement in 2004 was $0.1 million and will be $0.2 million in 2005 and $0.1 million in 2006. The affect of the sublet agreements is to lower the annual rent expense incurred by the Company. With total assets of $57.788 million in 2004, we feel the impact of adding back the present value of the operating leases to the Company’s balance sheet would not greatly affect asset turnover or drastically alter the Company’s balance sheet. Taxes: The Company showed a profit in 2003 of $2.630 million and showed no income tax expense as it made use of net operating loss carry-forwards to offset taxable income. In the year 2004 the Company has fully utilized its federal net operating loss carry-forwards of $3.5 million. In future periods the assumption is that the company will be profitable and not have any additional NOL carry-forwards to offset taxable income. Due to the fact that operations for the Company have become profitable and management believes that this will continue into the future the amount of deferred tax assets the company will realize has increased. For the year 2004, the EBT for the Company was $7.242 million while the tax expense recognized on the income statement was only $269,000. This equates to a 3.7% effective tax rate and is unsustainable for the future. The reason for the low tax rate relates to two points. Both are disclosed in the Company’s 10K and can be found in the footnotes. The federal statutory rate of 35% and the LaCrosse Footwear, Inc. – Equity Valuation state tax rate of 4.2% are first reduced by the benefit of the NOL carry-forwards (18% reduction in tax rate). The second reduction came from the lowering of the valuation allowance by $2.472 million for the deferred tax asset (15.9% reduction in tax rate). Management had concluded during 2004 that profitability was sustainable and so reduced the valuation allowance on the deferred tax asset to reflect the fact that future profits will result in future tax liability and so the deferred tax assets now have value in order to offset some future tax liability. The accounting treatment of a reduction in that valuation allowance is to immediately impact the tax rate applicable to EBT and so results in a lowering of income tax expense. Our forecasts for the Company will assume a tax rate that is closer to the statutory rate of 35%. SGA expense: During 2004 the Company announced the sale of assets that pertained to the PVC boot line as the Company ceased manufacturing of that product line. The facility in New Hampshire is owned by the company and is now used for distribution only. There was a charge of $0.9 million that was recorded as SG&A expense during 2004 as a result of property writedown and severance costs. This amount is not expected to reoccur in future periods. Employee stock-based compensation: The Company currently accounts for options granted to employees according to APB Opinion 25. This rule states that no compensation expense for a stock option needs to be recognized by a company if the options granted have an exercise price that is equal to the market value of the stock at the time of issuance. By the third quarter of 2005 the Company will need to account for the stock options according to FASB statement 123 which will require the Company to record the option at the grant date using the “fair value” method. This will require the Company to record the option at the grant date as an asset using a pricing model and then amortize the expense over time as compensation expense up until the expiration date. The Company has calculated the impact of this accounting rule on its 2004 results. Net Income would have been $6.587 million treating the options as expense versus the actual net income for the year of $6.973 million. Diluted EPS as reported was $1.15 and under FAS 123 would have been $1.09. Financial Analysis Time Series Analysis: Looking back at LaCrosse’s financial performance over the past five years (2000-2004) illustrates the execution of their product strategy. Sales have consistently declined between 2000 and 2003 as the company purged low margin products from its line up. Also impacting Sales was a 7.1% decline in footwear and apparel consumer price index (CPI) over the 2000 to 2004 time period2. Although sales rose sharply in 2004, the primary driver was a one-time GSA contract. Net of the GSA orders, 2004 sales were roughly on par with 2003. Cost of goods sold has steadily declined over the five-year period, consistent with the strategy to dump low margin products. The SGA to Sales ratio has remained roughly constant. As a result of this strategy, LaCrosse was able to post positive Net Income in 2003 and 2004 following three years of negative results. These financial trends are summarized in Figure 1A below. LaCrosse Footwear, Inc. – Equity Valuation Figure 1A: LaCrosse’s Historical Financial Performance LaCrosse Historical Performance 150,000 80.0% 130,000 70.0% 110,000 60.0% Sales, Net Income (x1000) 90,000 50.0% 70,000 40.0% 50,000 30.0% 30,000 20.0% 10,000 10.0% (10,000) 0.0% 2000 2001 Sales (Net) 2002 Net Income COGS/Sales 2003 SG&A/Sales 2004 Figure 1B illustrates LaCrosse’s stock price performance over the past five years. The stock price began appreciating in the second quarter of 2003 with announcement of the first GSA contract. It gained momentum with positive net income results in the third quarter and was further bolstered by the announcement of a second GSA contract. In the fourth quarter of 2004, news that LaCrosse was a potential acquisition target pushed stock price still higher. Since January 2003, the stock price has risen nearly six-fold. Figure 1B: LaCrosse’s Stock Price Performance Acquisition Target BOOT ~ $3.40 NI positive 1st GSA contract 2nd, larger GSA contract COGS/Sales, SG&A/Sales LaCrosse Footwear, Inc. – Equity Valuation Performance Relative to Peers: LaCrosse is a niche player in the highly fragmented footwear and apparel industry. Due to their small size, it was difficult to find other publicly traded companies for direct financial comparison. Three comparable firms were identified, Rocky Shoes & Boots Inc. (RCKY), Timberland Co. (TBL) and Wolverine World Wide Inc. (WWW). RCKY has roughly comparable market value as LaCrosse, whereas TBL and WWW are much larger. Table 1A shows a comparison of key financial metrics for fiscal 2004 for these four companies6, 7. Table 1A: Comparison of Key Financial Metrics for Comparable Firms 2004 Fiscal - 4/1/05 Data Current Stock Price Market Capitalization Revenue Gross Margin Net Income EPS - Diluted (ttm) Forward EPS - 2005F Book Value per share P/B Trailing P/E (ttm) Forward P/E - 2005F Beta $ $ $ $ $ $ $ BOOT 11.71 69,090,000 105,470,000 33.8% 6,970,000 1.15 0.90 7.65 1.54 10.19 13.01 1.62 $ $ $ $ $ $ $ RCKY 26.33 136,920,000 132,250,000 29.2% 8,590,000 1.74 2.68 15.20 1.75 15.14 9.82 1.035 $ $ $ $ $ $ $ TBL 70.28 2,380,000,000 1,500,000,000 49.2% 152,690,000 4.30 4.81 14.96 4.74 16.36 14.61 1.117 $ $ $ $ $ $ $ WWW 21.02 1,220,000,000 991,910,000 37.7% 65,940,000 1.10 1.24 7.92 2.71 19.04 16.95 0.736 Advanced Dupont Analysis: Advanced Dupont analysis provides a useful comparison of LaCrosse’s performance relative to its peers. Overall Return on Equity (ROE) for LaCrosse is nearly 17% and exceeds that of both RCKY and WWW. TBL appears to have superior performance across all ratios, but its results require further scrutiny. Since fourth quarter 2004 data was not yet available, TBL will be excluded from further comparisons. Net Operating Margin is very similar across the remaining companies. LaCrosse has favorable Net Operating Asset Turnover relative to its competition. LaCrosse’s Return on Net Operating Assets (RNOA) also exceeds that of its peers. Leverage is somewhat skewed since LaCrossse paid off all of its debt in 2004. Thus ratios based upon interest expense or debt levels are not useful for comparison. Table 1B summarized the advanced Dupont analysis results. Table 1B: Advanced Dupont Results BOOT 12/31/2004 7.1% 232.9% 16.6% 9.1% 13.9% 2.7% 16.8% RCKY 12/31/2004 7.2% 161.0% 11.6% 26.6% 5.5% 6.1% 13.2% TBL 10/1/2004 10.1% 309.3% 31.3% 1.7% 6.6% 24.7% 31.7% WWW 1/1/2005 6.9% 199.9% 13.9% 11.7% 5.5% 8.4% 14.8% Net Op. Margin Net Op. Asset Turnover RNOA = NOI / NOA LEV = NFO/Avg_Com_Eq. NBC = NFE / NFO Spread = RNOA - NBC ROE = RNOA + LEV * Spread LaCrosse Footwear, Inc. – Equity Valuation The Price to Book (P/B) ratio and Trailing P/E for LaCrosse were the lowest among its peer group. The P/B ratio is an indication of the market’s confidence that the company will achieve profitable growth. Its low relative value could be interpreted as lack of confidence in the company’s ability to achieve profitable growth in the future. The P/E ratio is more an indication of growth potential. Similarly, the market shows dubious confidence in LaCrosse’s growth potential. The flip side of these low ratios is they may be an indication of an undervalued stock. The four companies in this peer group are graphed by their P/E vs. P/B in Figure 2. The result is that LaCrosse lands squarely in the “Dog” quadrant. Figure 2: Comparison based on Valuation Ratios P/E vs. P/B 40 35 30 Turnaround Price/Earnings Ratio (ttm) Star 25 20 WWW RCKY TBL 15 10 BOOT Dog 5 Harvester 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 Price/Book Ratio Forecasting Revenue: The revenue growth forecast for the year 2005 is computed after two adjustments are made to the revenue reported for 2004. First the sales recorded in 2004 for the GSA contracts are not expected to occur again in 2005 or beyond due to the uncertainty surrounding when these contracts are given to BOOT. The sales pertaining to GSA contracts in 2004 was $9.758 million. The next adjustment will be to reduce the 2004 revenue number by the amount of sales associated with the PVC line of footwear, which has been discontinued. When these two items are deducted from revenues the sales for 2004 are $90.604 million versus the as reported $105.470 million. We then apply the growth rate of 2.19% to the sales figure that excludes the GSA sales as well as the PVC sales. The overall effect is for revenues to decline by 12.2% for 2005. LaCrosse Footwear, Inc. – Equity Valuation The revenue growth rate is calculated based on the sales growth rate of 2.4% the Company experienced in 2004 compared to the growth of real GDP during the same period. The footwear segment that BOOT operates in is a very mature market with economic growth being a primary driver of footwear sales. The management discusses that its sales growth is very sensitive to economic conditions as well as employment rates. According to the CBO projections of future real GDP growth we took the ratio of 2004 GDP growth over sales growth for BOOT to arrive at a multiple of 1.73 (4.4 GDP/ 2.54 BOOT sales growth). This factor is then divided into GDP growth for the coming years to arrive at the revenue growth for the period. The growth rates for years 2006 to 2010 appear in Table 2: Table 2: Estimated Sales Growth Rates as a Function of Real GDP Growth Real GDP Growth (A) Sales Growth Factor (B) BOOT Sales Growth (A/B) 8 2006 3.7 1.73 2.14 2007 3.7 1.73 2.14 2008 3.4 1.73 1.97 2009 3.1 1.73 1.79 2010 2.9 1.73 1.68 Cost of Goods Sold: The Company is experiencing gross margin improvements for 2004 because of higher utilization related to the GSA contracts and moving out of lower margin product lines such as the PVC line. The margin improvement we forecast for 2005 is 1.5% as the gross margin improves due to the loss of the PVC line and more manufacturing of product being outsourced. The improvement of 1.5% is smaller than the 2004 improvement in margins of 3.0% due to the fact that the GSA contracts provided them with higher utilization and better margins. These orders are not expected to return in 2005 or beyond so the margin improvement is less than 2004. We forecast 0.5% improvement in 2006 and have the company achieving a gross margin of 38% in 2010 from its current 35.3%. Achieving the 38% gross margin will bring BOOT in line with the average of its competitors. Selling General and Administrative: We anticipate a twenty basis point improvement for SG&A expense in 2005, as the effects of losing the lower margin PVC business will result in lower expense. There was also a charge taken in 2004 for the closure of a manufacturing facility and so the improvement in SG&A for 2005 assumes no additional charge is taken. Interest expense: The Company was able to pay down all outstanding lines of credit during 2004. Management believes that operations will be financed through cash from operations and so no further borrowing will be necessary. We assume that interest expense will be zero going forward. Income tax expense: The Company has turned profitable and the net operating loss carry forwards have been exhausted so the company will be facing an effective tax rate that will be closer to the federal statutory tax rate of 35% and the state tax rate of 4.2%. After adjusting downward slightly for the realization of state NOL carry forwards in the future as the valuation allowance will be reduced thus reducing the effective tax rate we can assume a 37% tax rate for our forecasts. LaCrosse Footwear, Inc. – Equity Valuation PP&E and Investments: Property plant and equipment levels are expected to remain relatively constant throughout the forecasted period because no additional PP&E is expected to be acquired as LaCrosse leases facilities for manufacturing and distribution. In addition, the current levels of capital expenditures and depreciation expense, as a percentage of sales, are forecasted to remain constant. Investments are forecasted to be zero, which is the current amount on the balance sheet. LaCrosse has generated a healthy cash balance, but it is hard to predict whether or not this cash will be used in an investment opportunity. It is possible that the additional cash will be kept to endure unfavorable economic conditions. Intangibles and Other Assets: Intangibles and other assets are forecasted to remain constant. LaCrosse lists goodwill as its only intangible and it is impossible to predict whether or not goodwill will be impaired in the future. Over the past three years, LaCrosse has not impaired its goodwill. Working Capital: Working capital is projected to decrease significantly for 2005 because of the drastic decline in sales. After 2005 when sales growth begins to be positive, working capital is expected to increase annually at approximately 0.6% of sales. Operating Cash and Marketable Securities: The current level of operating cash and marketable securities as a percentage of total assets is 12.3%, which is forecasted to be reduced to a healthier 7.2% in the terminal year of our valuation. Historically, LaCrosse has a cash balance of zero. A balance of zero was not forecasted into the future because LaCrosse shows no signs of using its excess cash to acquire another company or to invest in PP&E. In addition, no shortages of cash are predicted as positive net income and cash flows from operations are forecasted. Long-Term Debt: LaCrosse has paid-off all its long-term debt. The debt balance is forecasted to be zero throughout the forecast horizon because of a large cash balance, positive net income and cash from operations forecasts, and no plans for growth through acquisition. Deferred Taxes and Other Liabilities: Forecasted to remain at present amounts. Equity: Forecasted to grow at a constant rate, due to increases in retained earnings as a result of positive net income. LaCrosse does not have a history of paying out dividends, nor does it tend to issue equity as a means of financing projects. The forecast assumptions, the forecasted balance sheet, and the forecasted income statements are provided in Appendix 1 – Appendix 3. LaCrosse Footwear, Inc. – Equity Valuation Sensitivity Analysis Given the uncertainty inherent with forecasting, we performed a sensitivity analysis in eVal for the two main drivers of the stock price valuation model, cost of equity and sales growth rate. The results are shown in Table 3, with the central shaded cell indicating our nominal modeling result. Table 3: Stock Price Sensitivity Analysis to Sales Growth and Cost of Equity Stock Price Sensitivity Sales Growth 2006 & Beyond 1.0% 1.9% 3.0% 4.0% 5.0% Cost of Equity 10.0% $12.37 $12.98 $13.88 $15.02 $16.61 11.0% $11.26 $11.69 $12.31 $13.05 $14.05 12.2% $10.18 $10.41 $10.85 $11.31 $11.90 13.0% $9.60 $9.81 $10.10 $10.44 $10.86 14.0% $8.96 $9.10 $9.30 $9.52 $9.80 The baseline forecast cost of equity of 12.2% was determined using the CAPM equation. CAPM inputs include a risk-free rate of 4.12%, which was the yield on a U.S. Treasury 5-year note as of April 1, 20059, an equity beta of 1.627, and a market risk premium of 5%. The market risk premium was intentionally chosen at the low end of its historic range because the intent was to compute an optimistic cost of equity given the relatively high Beta. LaCrosse’s stock price has experienced two significant run-ups over the past two years, relative to the S&P500 benchmark, which tends to drive a high Beta. For this reason, we calculated the lower bound beta, using a regression analysis of the monthly BOOT stock returns against the monthly S&P 500 stock returns for the time period between 1/1/2000 and 6/1/2003 (Appendix 4). This modified time span analysis yielded a Beta of 1.35 and corresponding cost of equity of 10.9%. A 10% cost of equity scenario was also included since this in often used as the default value in the model. Cost of equity could easily exceed 12.2% if higher values were used for the risk free rate and the market premium. In addition to CAPM, the size model was evaluated to determine a cost of equity capital. However, the calculated discount rate of 20.9%, based on a 15.67% return in excess of the historical 5.2% risk-free rate, seemed overly aggressive for our valuation. Our valuation used a Sales growth rate of approximately 2% for 2006 and beyond. The sensitivity analysis varied this growth rate between 1% and 5%. From the sensitivity analysis, various combinations of cost of capital and growth rate can be identified which would justify the current stock price of $11.71, as shown in italic font. The conclusion is that either the stock is currently overvalued or the market has a more optimistic view of Lacrosse’s prospects than our forecast indicates. LaCrosse Footwear, Inc. – Equity Valuation Comparison to Analyst Consensus A single analyst at Sterne, Agee & Leach, covers LaCrosse10. His 12-month price target is $13.60 with a BUY rating. Adjusting our valuation date to one year in the future (4/1/06) yields a stock price 11.69. The analyst’s EPS estimates for 2005 and 2006 were $0.90 and 1.12, respectively. The EPS forecast from our model were $0.96 and $1.19, in-line but slightly higher than the analyst’s. Overall, our outlook for LaCrosse is less optimistic than the analyst’s. The analyst’s valuation utilized a rudimentary ratio technique. Essentially, EPS were forecast for fiscal 2005 and P/E multiple of 15 was applied to these earnings. Where the 15 times P/E was derived from is a mystery. P/E was only 10.1 for 2004. The analyst cited “new revenue enhancement products and channels and the potential operation leverage that could be achieved” as the rationale for increasing the P/E multiple to 15. Unfortunately, the analyst’s methodology did not require estimation of the cost of equity. Consequently, we cannot make a comparison with our cost of equity assumption. The analyst’s report did forecast sales growth for 2005 and 2006 of -10.4% and 5%, respectively, which is considerably more optimistic than our forecast of -12.2% and 2.1%. Recommendation As of the stock market close on April 5, 2005, Lacrosse Footwear (Ticker: BOOT) was trading at $12.01. Our stock market valuation produced a per share price of $10.41, which is $1.60 lower. Based on this gap, we do not recommend a buy even though the stock screen selected BOOT as a potentially undervalued stock. The natural tendency would be to short the overvalued stock to earn a positive market return. However, we feel that the uncertainties inherently imbedded in the valuation do not warrant a short. Therefore, we recommend a hold. LaCrosse Footwear, Inc. – Equity Valuation Appendix 1: LaCrosse Footwear Forecast Assumptions LaCrosse Footwear Estimated Price/ Share Forecast Horizon Fiscal Year End Date Implied Return on Equity Income Statement Assumptions Sales Growth Cost of Goods Sold/Sales R&D/Sales SG&A/Sales Dep&Amort/Avge PP&E and Intang. Interest Expense/Avge Debt Non-Operating Income/Sales Effective Tax Rate Minority Interest/After Tax Income Other Income/Sales Ext. Items & Disc. Ops./Sales Pref. Dividends/Avge Pref. Stock Balance Sheet Assumptions: Working Capital Assumptions Ending Operating Cash/Sales Ending Receivables/Sales Ending Inventories/COGS Ending Other Current Assets/Sales Ending Accounts Payable/COGS Ending Taxes Payable/Sales Ending Other Current Liabs/Sales Other Operating Asset Assumptions Ending Net PP&E/Sales Ending Investments/Sales Ending Intangibles/Sales Ending Other Assets/Sales Other Operating Liability Assumptions Other Liabilities/Sales Deferred Taxes/Sales Financing Assumptions Current Debt/Total Assets Long-Term Debt/Total Assets Minority Interest/Total Assets Preferred Stock/Total Assets Dividend Payout Ratio $10.41 5 Years Actual 2004 16.80% Terminal 2005 12.21% 2006 14.01% Forecast 2007 2008 14.42% 14.80% 2009 15.18% 2010 15.58% 10.2% 64.7% 0.0% 26.6% 10.6% 14.4% 0.1% 3.7% 0.0% 0.0% 0.0% 0.0% -12.2% 63.2% 0.0% 26.4% 10.6% 0.0% 0.1% 37.0% 0.0% 0.0% 0.0% 0.0% 2.1% 62.7% 0.0% 26.3% 10.6% 0.0% 0.1% 37.0% 0.0% 0.0% 0.0% 0.0% 2.1% 62.5% 0.0% 26.2% 10.6% 0.0% 0.1% 37.0% 0.0% 0.0% 0.0% 0.0% 2.0% 62.4% 0.0% 26.2% 10.6% 0.0% 0.1% 37.0% 0.0% 0.0% 0.0% 0.0% 1.8% 62.2% 0.0% 26.1% 10.6% 0.0% 0.1% 37.0% 0.0% 0.0% 0.0% 0.0% 1.7% 62.0% 0.0% 26.0% 10.6% 0.0% 0.1% 37.0% 0.0% 0.0% 0.0% 0.0% 6.8% 14.8% 24.9% 2.6% 4.9% 0.0% 4.0% 3.4% 0.0% 10.2% 0.9% 6.4% 14.8% 28.0% 2.6% 4.9% 0.0% 4.0% 3.4% 0.0% 10.2% 0.9% 5.9% 14.8% 28.8% 2.6% 4.9% 0.0% 4.0% 3.4% 0.0% 10.2% 0.9% 5.4% 14.8% 29.6% 2.6% 4.9% 0.0% 4.0% 3.4% 0.0% 10.2% 0.9% 5.0% 14.8% 30.4% 2.6% 4.9% 0.0% 4.0% 3.4% 0.0% 10.2% 0.9% 4.5% 14.8% 31.2% 2.6% 4.9% 0.0% 4.0% 3.4% 0.0% 10.2% 0.9% 4.0% 14.8% 32.0% 2.6% 4.9% 0.0% 4.0% 3.4% 0.0% 10.2% 0.9% 3.5% 1.3% 0.0% 0.0% 0.0% 0.0% 0.0% 3.5% 1.3% 0.0% 0.0% 0.0% 0.0% 0.0% 3.5% 1.3% 0.0% 0.0% 0.0% 0.0% 0.0% 3.5% 1.3% 0.0% 0.0% 0.0% 0.0% 0.0% 3.5% 1.3% 0.0% 0.0% 0.0% 0.0% 0.0% 3.5% 1.3% 0.0% 0.0% 0.0% 0.0% 0.0% 3.5% 1.3% 0.0% 0.0% 0.0% 0.0% 0.0% LaCrosse Footwear, Inc. – Equity Valuation Appendix 2: LaCrosse Footwear Forecasted Balance Sheet LaCrosse Footwear Estimated Price/ Share Forecast Horizon $10.41 5 Years Terminal Balance Sheet Operating Cash and Market. Sec. Receivables Inventories Other Current Assets Total Current Assets PP&E (Net) Investments Intangibles Other Assets Total Assets Current Debt Accounts Payable Income Taxes Payable Other Current Liabilities Total Current Liabilities Long-Term Debt Other Liabilities Deferred Taxes Minority Interest Total Liabilities Preferred Stock Paid in Common Capital (Net) Retained Earnings Total Common Equity Total Liabilities and Equity Statement of Retained Earnings Beg. Retained Earnings +Net Income -Common Dividends +/-Clean Surplus Plug (Ignore) =End. Retained Earnings Actual 2004 7149 15613 16962 2792 42516 3557 0 10753 962 57788 0 3348 0 4179 7527 0 3708 1402 0 12637 0 20777 24374 45151 57788 2005 5927 13708 16387 2451 38473 3123 0 9441 845 51882 0 2871 0 3669 6540 0 3256 1204 0 11000 0 11256 29626 40882 51882 2006 5599 14002 17080 2504 39184 3190 0 9643 863 52880 0 2909 0 3748 6657 0 3325 1286 0 11268 0 6207 35405 41612 52880 Forecast 2007 2008 5256 14301 17880 2557 39994 3258 0 9850 881 53983 0 2963 0 3828 6791 0 3396 1372 0 11559 0 961 41462 42423 53983 4886 14582 18670 2608 40745 3322 0 10043 898 55008 0 3013 0 3903 6916 0 3463 1458 0 11836 0 -4624 47796 43172 55008 2009 4492 14843 19450 2654 41439 3381 0 10222 915 55957 0 3058 0 3973 7031 0 3525 1544 0 12100 0 -10546 54403 43857 55957 2010 4078 15090 20225 2699 42091 3438 0 10393 930 56852 0 3100 0 4039 7139 0 3584 1631 0 12354 0 -16786 61284 44498 56852 17401 6973 0 0 24374 24374 5252 0 0 29626 29626 5779 0 0 35405 35405 6057 0 0 41462 41462 6334 0 0 47796 47796 6607 0 0 54403 54403 6881 0 0 61284 LaCrosse Footwear, Inc. – Equity Valuation Appendix 3: LaCrosse Footwear Forecasted Income Statement Common Shares Outstanding Estimated Price/Share=$10.41 Fiscal Year End (MM/DD/YYYY) Income Statement Sales (Net) Cost of Goods Sold Gross Profit R&D Expense SG&A Expense EBITDA Depreciation & Amortization EBIT Interest Expense Non-Operating Income (Loss) EBT Income Taxes Minority Interest in Earnings Other Income (Loss) Net Income Before Ext. Items Ext. Items & Disc. Ops. Preferred Dividends Net Income (available to common) 105470 -68251 37219 0 -28008 9211 -1571 7640 -543 145 7242 -269 0 0 6973 0 0 6973 92603 -58525 34078 0 -24447 9631 -1421 8209 0 127 8337 -3085 0 0 5252 0 0 5252 94584 59304 35280 0 24895 10385 -1343 9042 0 130 9172 -3394 0 0 5779 0 0 5779 96608 60404 36204 0 25350 10854 -1372 9482 0 133 9615 -3558 0 0 6057 0 0 6057 98502 61416 37086 0 25768 11318 -1400 9918 0 135 10053 -3720 0 0 6334 0 0 6334 100265 -62340 37925 0 -26149 11776 -1426 10350 0 138 10488 -3880 0 0 6607 0 0 6607 101940 -63203 38737 0 -26504 12233 -1451 10782 0 140 10922 -4041 0 0 6881 0 0 6881 Actual 2004 5,875.17 (000's) Terminal 2005 2006 Forecast 2007 2008 2009 2010 Appendix 4: Lower Bound Beta Estimate based on Regression Analysis BOOT Stock Return vs. S&P 500, 1/1/2000 - 6/1/2003 1 0.8 0.6 0.4 0.2 0 -0.2 0 -0.4 y = 1.3476x + 0.0313 R2 = 0.1064 -0.15 -0.1 -0.05 0.05 0.1 0.15 LaCrosse Footwear, Inc. – Equity Valuation Endnotes/ References Lacrosse Footwear 2004 Annual Report. 2 US Bureau of Labor Statistics (http://www.bls.gov). Marie Driscoll, Apparel and Footwear Industry Survey, Standard & Poor’s, March 10, 2005. 3 4 LaCrosse Footwear Announces Plan to End Manufacturing and Sales of PVC Boots, PR Newswire. New York: Aug 23, 2004. 5 LaCrosse website (http://www.lacrosse-outdoors.com/). FACTSET, accessed through the Tozzi Finance Center Yahoo! Finance (http://finance.yahoo.com/). Congressional Budget Office (http://www.cbo.gov/). Bloomberg.com (http://www.bloomberg.com/markets/rates/index.html). Sterne, Agee and Leach. Analyst Report. 6 7 8 9 10