Results of Operations
The following table sets forth selected financial information derived from our
interim unaudited condensed consolidated financial statements. The discussion
that follows the table should be read in conjunction with the interim unaudited
condensed consolidated financial statements. In addition, please see
Management's Discussion and Analysis of Financial Condition and Results of
Operations, our consolidated annual financial statements and related notes
included in our Annual Report on Form 10-K for the year ended December 31, 2008.

                                                   Quarter Ended                                            Three Quarters Ended
                                September 26,         September 27,                         September 26,         September 27,
($ in thousands)                     2009                  2008             % Change             2009                  2008             % Change

Net Sales                       $     40,761          $     40,265               1 %        $     96,647          $     92,807               4 %
Gross Profit                          15,721                15,787              (0 %)             37,770                37,090               2 %
Gross Profit %                          38.6 %                39.2 %        (60 bps)                39.1 %                40.0 %        (90 bps)
Selling and
Administrative Expenses               11,815                11,234               5 %              32,912                29,140              13 %
% of Net Sales                          29.0 %                27.9 %        110 bps                 34.1 %                31.4 %        270 bps
Non-Operating Income
(Expense)                               (235 )                 (54 )           335 %                (304 )                  57            (633 %)
Income Before Income
Taxes                                  3,671                 4,499             (18 %)              4,554                 8,007             (43 %)
Income Tax Provision                   1,450                 1,731             (16 %)              1,367                 3,024             (55 %)
Net Income                             2,221                 2,768             (20 %)              3,187                 4,983             (36 %)

Trade and other accounts
receivable, net                       27,931                31,960             (13 %)
Inventories                           34,549                30,769              12 %

Quarter Ended September 26, 2009 Compared to Quarter Ended September 27, 2008:
Net Sales: Net sales for the third quarter of 2009 increased 1%, to $40.8 million, from $40.3 million in the same period of 2008. Sales to the work market were $22.1 million for the third quarter of 2009, up 14% from $19.5 million for the same period of 2008. The growth in work market sales reflects continued penetration into various areas of the U.S. military. Sales to the outdoor market were $18.7 million for the third quarter of 2009, down from $20.8 million for the same period of 2008, reflecting continued softness in the overall global retail environment.
Gross Profit: Gross profit for the third quarter of 2009 was 38.6% of net sales, compared to 39.2% in the same period of 2008. The decrease in gross profit of 60 basis points ("bps") was due primarily to the impact a greater portion of the quarterly revenue coming from military delivery orders.
Selling and Administrative Expenses: Selling and administrative expenses in the third quarter of 2009 increased $0.6 million, or 5%, to $11.8 million from $11.2 million in the same period of 2008. This increase resulted primarily from expenses of $0.3 million of our subsidiary Environmentally Neutral Outdoor, Inc. ("END"), and the timing of certain marketing programs. We announced our plans to discontinue END as a standalone footwear brand in August, 2009 and to integrate the END platform of lightweight designs into the Danner brand. Non-Operating Expense: Non-operating expense in the third quarter of 2009 increased by $0.2 million compared with the same period of 2008, primarily as a result of a decrease in interest income due to lower rates in 2009 and certain property and equipment disposals related to END.
Income Tax Provision: We recognized an income tax expense at an effective rate of 39.5% for the third quarter of 2009 compared to 38.5% in the same period of 2008. The increase in the tax rate from 2008 is due to an increase in our state statutory tax rate as well as the impact of discrete items arising from the completion of our 2008 tax return in the quarter relative to our year-to-date income before income taxes.
Net Income: Net income for the third quarter of 2009 was $2.2 million, or $0.35 diluted income per common share, compared to net income of $2.8 million, or $0.43 diluted earnings per common share in the same period of 2008. The net income decrease of $0.6 million is attributable to the net sales, gross profit, expense and tax rate changes as discussed above.
Trade and Other Accounts Receivable, Net: Trade and other accounts receivable decreased $4.0 million, or 13%, as compared to the third quarter of 2008. The decrease was due to improved collections during the third quarter, a shift from preseason to at once orders which generally carry shorter payment terms, and increased sales to the U.S. military which pays more timely than other sales channels.

Inventories: Our year-over-year increase in inventories of $3.8 million included $2.3 million to support the increased domestic production for our military business, $1.3 million for the planned build-up of certain core products for anticipated demand during the fall and winter seasons, and for certain other factors of $0.2 million.
First Three Quarters of 2009 Compared to the First Three Quarters of 2008:
Net Sales: Net sales for the first three quarters of 2009 increased 4%, to $96.6 million, from $92.8 million in the same period of 2008. Sales to the work market were $63.0 million for the first three quarters of 2009, up 15% from $54.7 million for the same period of 2008. The growth in work market sales reflects continued penetration into various areas of the U.S. military. Sales to the outdoor market were $33.6 million for the first three quarters of 2009, compared to $38.1 million for the same period of 2008, reflecting continued softness in the overall global retail environment.
Gross Profit: Gross profit for the first three quarters of 2009 was 39.1% of net sales, compared to 40.0% in the same period of 2008. The decrease in gross profit of 90 basis points ("bps") was primarily due to the impact of a greater portion of the year-to-date revenues coming from military delivery orders. Selling and Administrative Expenses: Selling and administrative expenses in the first three quarters of 2009 increased $3.8 million, or 13%, to $32.9 million from $29.1 million in the same period of 2008. This increase in expenses related to our European subsidiary which was started in July, 2008 ($1.2 million), expenses associated with the establishment and operation of our new Indianapolis distribution center ($1.1 million), bad debt expenses related to the bankruptcy of two significant retail customers during the first quarter ($0.3 million), the operation of END ($0.5 million) and other administrative costs ($0.7 million). Non-Operating Income (Expense): Non-operating income (expense) in the first three quarters of 2009 was $0.3 million of expense compared with $0.1 million of income in the same period of 2008, primarily as a result of a decrease in interest income due to lower rates in 2009 and certain property and equipment disposals related to END.
Income Tax Provision: We recognized an income tax expense at an effective rate of 30.0% for the first three quarters of 2009 compared to income tax expense at an effective tax rate of 37.8% in the same period of 2008. The decrease in the tax rate from 2008 is primarily due to a reduction in our reserve for uncertain tax positions as a result of the completion of an Internal Revenue Service examination in the second quarter of 2009 for the tax years 2005 through 2007 as well as the adoption of a new transfer pricing policy for our European business operations. Consistent with our lower year to date tax rate, we anticipate our effective tax rate for the full year 2009 will be less than our effective tax rate for the full year 2008.
Net Income: Net income for the first three quarters of 2009 was $3.2 million, or $0.50 diluted income per common share, compared to net income of $5.0 million, or $0.78 diluted income per common share in the same period of 2008. The net income decline of $1.8 million is attributable to the net sales, gross profit, expense and tax rate changes discussed above.

LIQUIDITY AND CAPITAL RESOURCES
Summary
We ended the third quarter of 2009 with cash and cash equivalents of $3.5 million as compared to $4.3 million in the same period in 2008 and $13.7 million as of the end of fourth quarter of 2008. In recent years, we have funded working capital requirements, capital expenditures, and acquisitions principally with cash generated from operations. In addition, we require working capital to support fluctuating accounts receivable and inventory levels caused by our seasonal business cycle. Working capital requirements are generally the lowest in the first quarter and the highest during the third quarter. We have not had outstanding borrowings against our credit line at a period end since the third quarter of 2005. We believe that our existing credit facility and anticipated future cash flows from operations will be sufficient to satisfy our working capital needs for the foreseeable future.
Operating Activities: Cash used in operating activities was $3.4 million for the first three quarters of 2009 compared with cash provided by operating activities of $1.5 million during the same period of 2008. The decline in operating cash flows was primarily related to an increase in our inventories and accounts receivable, partially offset by an increase in accounts payable.
Investing Activities: Cash used in investing activities was $5.1 million for the first three quarters of 2009 compared with $4.7 million during the same period of 2008. The increase in cash used in investing activities was primarily attributable to capital expenditures of $4.7 million which included $2.6 million related to racking, computer systems and other build-out costs in our new Indianapolis distribution center in the first half of 2009. In the same period of 2008, we paid $3.2 million to acquire inventories and operations from our former European distributor to establish our new European subsidiary. Financing Activities: Cash used in financing activities was $1.9 million for the first three quarters of 2009 compared with $7.7 million during the same period of 2008. A one-time, special dividend of $1.00 per share totaling $6.3 million was paid in March 2008. A total of $8.5 million was paid in dividends during the first three quarters of 2008. The lower dividend payments in the first three quarters of 2009 were partially offset by lower proceeds from the exercise of stock options on lower option activity during 2009 due to the current market price of our stock.
A summary of our contractual cash obligations at September 26, 2009 is as follows:

                                                             Payments due by year:
(in thousands)                          Remaining in
Contractual Obligations     Total           2009          2010        2011        2012        2013       Thereafter

Operating leases (1)      $ 18,636       $      627     $ 2,317     $ 2,106     $ 2,129     $ 2,151      $    9,306

(1) See Part I, Item 2 - Properties in our Annual Report on Form 10-K for the year ended December 31, 2008 for a description of our leased facilities.

At September 26, 2009 and September 27, 2008, our pension plan had accumulated benefit obligations in excess of the respective plan assets and accrued pension liabilities. These obligations in excess of plan assets and accrued pension liabilities have resulted in cumulative direct charges to shareholders' equity (accumulated other comprehensive loss) net of tax of $3.6 million and $1.0 million as of September 26, 2009 and September 27, 2008, respectively. We contributed $0.6 million to our defined benefit pension plan during the first three quarters of 2009 and anticipate making no further contributions during the remainder of 2009.
From time to time we enter into purchase commitments with our suppliers under customary purchase order terms. Any significant losses implicit in these contracts would be recognized in accordance with generally accepted accounting principles. At September 26, 2009, no such losses existed.
On March 9, 2009, we entered into a new line of credit agreement with Wells Fargo Bank, N.A., which expires June 30, 2012. This line of credit agreement represents a 3-year extension of our previous line of credit agreement with Wells Fargo Bank, N.A. No amounts were outstanding under this line at September 26, 2009 or at September 27, 2008 under the former credit agreement with Wells Fargo Bank, N.A.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our significant accounting policies and estimates are summarized in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2008. There have been no significant changes in these critical accounting policies since December 31, 2008. Some of our accounting policies require us to exercise significant judgment in selecting the appropriate assumptions for calculating financial estimates. Such judgments are subject to an inherent degree of uncertainty. These judgments are based on our historical experience, known trends in our industry, terms of existing contracts and other information from outside sources, as appropriate. Actual results could differ from these estimates. ITEM 3. Quantitative and Qualitative Disclosures About Market Risk There have been no material changes in our disclosures regarding market risk since December 31, 2008. See also Item 7A in our Annual Report on Form 10-K for the year ended December 31, 2008 for further sensitivity analysis regarding our market risk related to interest rates, pension liability and foreign currencies. ITEM 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. In accordance with Rule 13a-15 of the Securities Exchange Act of 1934 (the "Exchange Act"), as of the end of the period covered by this Quarterly Report on Form 10-Q, our management evaluated, with the participation of our President and Chief Executive Officer and Executive Vice President and Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a- 15(e) and Rule 15d-15(e) under the Exchange Act). Based upon their evaluation of these disclosure controls and procedures, the President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer have concluded that the disclosure controls and procedures were effective as of the date of such evaluation in ensuring that information required to be disclosed in our Exchange Act reports is
(1) recorded, processed, summarized and reported in a timely manner, and
(2) accumulated and communicated to management, including our President and Chief Executive Officer and Executive Vice President and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
(b) Changes in internal control over financial reporting. There was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.