ESCALADE INC - Quarter Report: 2011 March (Form 10-Q)
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
x Quarterly report pursuant to Section 13 OR 15 (d) of the Securities Exchange Act of 1934
For the quarter ended March 19, 2011 or
o Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from _____ to _____
Commission File Number 0-6966
ESCALADE, INCORPORATED
(Exact name of registrant as specified in its charter)
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Indiana
(State of incorporation)
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13-2739290
(I.R.S. EIN)
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817 Maxwell Ave, Evansville, Indiana
(Address of principal executive office)
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47711
(Zip Code)
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812-467-4449
(Registrant’s Telephone Number)
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 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 90 days.
Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o (do not check if a smaller reporting company)
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Smaller reporting company x
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Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12 b-2 of the Exchange Act).
Yes o No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
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Class
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Outstanding at April 12, 2011
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Common, no par value
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12,836,068
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INDEX
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2
ESCALADE, INCORPORATED AND SUBSIDIARIES
(All amounts in thousands, except share information)
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March 19,
2011 |
March 20,
2010 |
December 25,
2010 |
||||||||||
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(Unaudited)
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(Unaudited)
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(Audited)
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||||||||||
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ASSETS
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||||||||||||
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Current Assets:
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||||||||||||
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Cash and cash equivalents
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$ | 1,583 | $ | 3,133 | $ | 1,536 | ||||||
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Time deposits
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1,000 | 750 | 1,250 | |||||||||
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Receivables, less allowance of $1,184; $1,566; and $1,204; respectively
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23,938 | 20,270 | 25,458 | |||||||||
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Notes receivable
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— | 227 | — | |||||||||
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Inventories
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29,080 | 23,182 | 22,888 | |||||||||
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Prepaid expenses
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1,829 | 1,372 | 1,160 | |||||||||
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Deferred income tax benefit
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1,364 | 387 | 1,502 | |||||||||
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Income tax receivable
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430 | 1,102 | 1,216 | |||||||||
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TOTAL CURRENT ASSETS
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59,224 | 50,423 | 55,010 | |||||||||
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Property, plant and equipment, net
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19,675 | 20,584 | 19,844 | |||||||||
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Intangible assets
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15,512 | 16,757 | 15,678 | |||||||||
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Goodwill
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26,024 | 25,681 | 25,397 | |||||||||
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Investments
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12,564 | 9,453 | 11,624 | |||||||||
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Deferred income tax benefit
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— | 342 | — | |||||||||
| $ | 132,999 | $ | 123,240 | $ | 127,553 | |||||||
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LIABILITIES AND STOCKHOLDERS’ EQUITY
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Current Liabilities:
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||||||||||||
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Notes payable
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$ | 13,331 | $ | 24,007 | $ | 9,407 | ||||||
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Current portion of long-term debt
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2,000 | — | 2,000 | |||||||||
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Overdraft facility
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1,322 | 780 | 1,646 | |||||||||
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Trade accounts payable
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4,739 | 2,878 | 3,751 | |||||||||
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Accrued liabilities
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12,224 | 11,348 | 14,074 | |||||||||
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Deferred compensation
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— | 1,315 | — | |||||||||
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TOTAL CURRENT LIABILITIES
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33,616 | 40,328 | 30,878 | |||||||||
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Other Liabilities:
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Long-term debt
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7,000 | — | 7,500 | |||||||||
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Deferred income tax liability
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2,105 | — | 2,145 | |||||||||
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TOTAL LIABILITIES
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42,721 | 40,328 | 40,523 | |||||||||
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Stockholders’ Equity:
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Preferred stock:
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Authorized 1,000,000 shares; no par value, none issued
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Common stock:
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Authorized 30,000,000 shares; no par value, issued and outstanding – 12,812,943; 12,692,759; and 12,780,372; shares respectively
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12,813 | 12,693 | 12,780 | |||||||||
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Retained earnings
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71,651 | 66,276 | 70,329 | |||||||||
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Accumulated other comprehensive income
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5,814 | 3,943 | 3,921 | |||||||||
| 90,278 | 82,912 | 87,030 | ||||||||||
| $ | 132,999 | $ | 123,240 | $ | 127,553 | |||||||
See notes to Consolidated Condensed Financial Statements.
3
ESCALADE, INCORPORATED AND SUBSIDIARIES
(All amounts in thousands, except per share amounts)
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Three Months Ended
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March 19,
2011 |
March 20,
2010 |
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Net sales
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$ | 27,998 | $ | 25,169 | ||||
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Costs, expenses and other income:
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Cost of products sold
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17,873 | 16,616 | ||||||
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Selling, general and administrative expenses
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7,741 | 6,861 | ||||||
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Amortization
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317 | 283 | ||||||
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Operating income
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2,067 | 1,409 | ||||||
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Interest expense, net
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(184 | ) | (360 | ) | ||||
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Other income
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122 | 258 | ||||||
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Income before income taxes
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2,005 | 1,307 | ||||||
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Provision for income taxes
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802 | 505 | ||||||
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Net income
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$ | 1,203 | $ | 802 | ||||
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Per share data:
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Basic earnings per share
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$ | 0.09 | $ | 0.06 | ||||
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Diluted earnings per share
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$ | 0.09 | $ | 0.06 | ||||
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Net income
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$ | 1,203 | $ | 802 | ||||
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Foreign currency translation adjustment
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1,893 | (823 | ) | |||||
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Comprehensive income (loss)
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$ | 3,096 | $ | (21 | ) |
See notes to Consolidated Condensed Financial Statements.
4
ESCALADE, INCORPORATED AND SUBSIDIARIES
(All amounts in thousands)
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Three Months Ended
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March 19,
2011 |
March 20,
2010 |
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Operating Activities:
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Net income
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$ | 1,203 | $ | 802 | ||||
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Depreciation and amortization
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962 | 992 | ||||||
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Loss on disposal of property and equipment
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22 | — | ||||||
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Loss on disposal of Investments held for sale
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— | 7 | ||||||
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Stock-based compensation
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85 | 129 | ||||||
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Adjustments necessary to reconcile net income to net cash provided (used) by operating activities
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(5,157 | ) | 1,604 | |||||
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Net cash provided (used) by operating activities
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(2,885 | ) | 3,534 | |||||
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Investing Activities:
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Purchase of property and equipment
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(223 | ) | (54 | ) | ||||
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Proceeds from disposal of short-term time deposits
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250 | — | ||||||
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Net cash provided (used) by investing activities
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27 | (54 | ) | |||||
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Financing Activities:
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Net increase (decrease) in notes payable
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3,924 | (3,637 | ) | |||||
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Net decrease in overdraft facility
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(324 | ) | (8 | ) | ||||
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Principal payment on long-term debt
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(500 | ) | — | |||||
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Proceeds from exercise of stock options
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14 | 6 | ||||||
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Director stock compensation
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52 | 33 | ||||||
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Net cash provided (used) by financing activities
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3,166 | (3,606 | ) | |||||
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Effect of exchange rate changes on cash
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(261 | ) | 220 | |||||
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Net increase in cash and cash equivalents
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47 | 94 | ||||||
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Cash and cash equivalents, beginning of period
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1,536 | 3,039 | ||||||
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Cash and cash equivalents, end of period
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$ | 1,583 | $ | 3,133 | ||||
See notes to Consolidated Condensed Financial Statements.
5
ESCALADE, INCORPORATED AND SUBSIDIARIES
Note A – Summary of Significant Accounting Policies
Presentation of Consolidated Condensed Financial Statements – The significant accounting policies followed by the Company and its wholly owned subsidiaries for interim financial reporting are consistent with the accounting policies followed for annual financial reporting. All adjustments that are of a normal recurring nature and are in the opinion of management necessary for a fair statement of the results for the periods reported have been included in the accompanying consolidated condensed financial statements. The consolidated condensed balance sheet of the Company as of December 25, 2010 has been derived from the audited consolidated balance sheet of the Company as of that date. Certain information and note disclosures normally included in the Company’s annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 10-K annual report for 2010 filed with the Securities and Exchange Commission.
Note B - Reclassifications
Certain reclassifications have been made to prior year financial statements to conform to the current year financial statement presentation. These reclassifications had no effect on net earnings.
Note C - Seasonal Aspects
The results of operations for the three month periods ended March 19, 2011 and March 20, 2010 are not necessarily indicative of the results to be expected for the full year.
Note D - Inventories
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In thousands
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March 19,
2011 |
March 20,
2010 |
December 25,
2010 |
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Raw materials
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$ | 8,420 | $ | 6,750 | $ | 5,973 | ||||||
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Work in progress
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3,417 | 2,969 | 2,497 | |||||||||
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Finished goods
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17,243 | 13,463 | 14,418 | |||||||||
| $ | 29,080 | $ | 23,182 | $ | 22,888 | |||||||
Note E – Equity Interest Investments
The Company has a 50% interest in a joint venture, Stiga Sports AB (Stiga). The joint venture is accounted for under the equity method of accounting. Stiga, located in Sweden, is a global sporting goods company producing table tennis equipment and game products. Financial information for Stiga reflected in the table below has been translated from local currency to U.S. dollars using exchange rates in effect at the respective period-end for balance sheet amounts, and using average exchange rates for statement of operations amounts. Certain differences exist between U.S. GAAP and local GAAP in Sweden, and the impact of these differences is not reflected in the summarized information reflected in the table below. The most significant difference relates to the accounting for goodwill for Stiga which is amortized over eight years in Sweden but is not amortized for U.S. GAAP reporting purposes. The effect on Stiga’s net assets resulting from the amortization of goodwill for the periods ended March 19, 2011 and March 20, 2010 are addbacks to Stiga’s consolidated financial information of $8.5 million and $6.0 million, respectively. These net differences are comprised of cumulative goodwill adjustments of $11.9 million offset by the related cumulative tax effect of $3.4 million as of March 19, 2011 and cumulative goodwill adjustments of $8.4 million offset by the related cumulative tax effect of $2.4 million as of March 20, 2010. The statement of operations impact of these goodwill and tax adjustments and other individually insignificant U.S. GAAP adjustments for the periods ended March 19, 2011, and March 20, 2010 are to increase Stiga’s net income by approximately $0.4 million and $0.3 million, respectively.
6
In addition, Escalade has a 50% interest in two joint ventures, Escalade International, Ltd. in the United Kingdom, and Neoteric Industries Inc. in Taiwan. Escalade International Ltd. is a sporting goods wholesaler, specializing in fitness equipment. The Company’s 50% portion of net income for Escalade International for the periods ended March 19, 2011 and March 20, 2010 was $53,735 and $58,031 respectively, and is included in other income on the Company’s statement of operations. The income and assets of Neoteric have no material impact on the Company’s financial reporting. Additional information regarding these entities is considered immaterial and has not been included in the combined totals listed below.
Summarized financial information for Stiga Sports AB balance sheets as of March 19, 2011, March 20, 2010, and December 25, 2010 and statements of operations for the periods ended March 19, 2011 and March 20, 2010 is as follows:
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In thousands
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March 19,
2011 |
March 20,
2010 |
December 25,
2010 |
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Current assets
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$ | 16,315 | $ | 11,633 | $ | 19,384 | ||||||
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Non-current assets
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11,774 | 11,667 | 11,338 | |||||||||
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Total assets
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28,089 | 23,300 | 30,722 | |||||||||
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Current liabilities
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6,089 | 5,873 | 9,599 | |||||||||
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Non-current liabilities
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9,080 | 7,801 | 8,918 | |||||||||
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Total liabilities
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15,169 | 13,674 | 18,517 | |||||||||
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Net assets
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$ | 12,920 | $ | 9,626 | $ | 12,205 | ||||||
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Three Months Ended
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March 19,
2011 |
March 20,
2010 |
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Net Sales
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$ | 4,471 | $ | 3,359 | ||||
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Gross Profit
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2,260 | 1,691 | ||||||
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Net Loss
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(194 | ) | (85 | ) | ||||
Note F – Notes Payable
On April 14, 2011, the Company entered into the Seventh Amendment to its Credit Agreement with its issuing bank, JP Morgan Chase Bank, N.A. (Chase). The Seventh Amendment amends the Credit Agreement originally dated as of April 30, 2009, and as amended had a maturity date of May 31, 2012. The Seventh Amendment now makes available to the Company a senior revolving credit facility in the maximum principal amount of up to $22 million with a maturity date of July 31, 2013 and a term loan in the principal amount of $8.5 million with a maturity date of May 31, 2015. The term loan agreement requires the Company to make repayment of the principal balance in equal installments of $0.5 million per quarter beginning in September 2010. The Credit Agreement Amendment also provides a $2 million euro overdraft facility. A portion of the credit facility not in excess of $5 million is available for the issuance of commercial or standby letters of credit to be issued by Chase.
7
Note G – Income Taxes
The provision for income taxes was computed based on financial statement income. In accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 740, the Company has recorded the following changes in uncertain tax positions:
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Three Months Ended
|
||||||||
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In thousands
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March 19,
2011 |
March 20,
2010 |
||||||
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Beginning Balance
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$ | 220 | $ | 536 | ||||
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Additions for current year tax positions
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— | — | ||||||
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Additions for prior year tax positions
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— | — | ||||||
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Settlements
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— | (262 | ) | |||||
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Reductions Settlements
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— | — | ||||||
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Reductions for prior year tax positions
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— | (25 | ) | |||||
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Ending Balance
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$ | 220 | $ | 249 | ||||
Note H – Fair Values of Financial Instruments
The following methods were used to estimate the fair value of all financial instruments recognized in the accompanying balance sheets at amounts other than fair values.
Cash and Cash Equivalents and Time Deposits
Fair values of cash and cash equivalents and time deposits approximate cost due to the short period of time to maturity.
Notes Payable and Long-term Debt
The Company believes the carrying value of both short-term and long-term debt adequately reflects the fair value of these instruments.
The following table presents estimated fair values of the Company’s financial instruments in accordance with FASB ASC 480 at March 19, 2011 and March 20, 2010.
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March 19, 2011
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March 20, 2010
|
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In thousands
|
Carrying Amount
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Fair Value
|
Carrying Amount
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Fair Value
|
||||||||||||
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Financial assets
|
||||||||||||||||
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Cash and cash equivalents
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$ | 1,583 | $ | 1,583 | $ | 3,133 | $ | 3,133 | ||||||||
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Time deposits
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$ | 1,000 | $ | 1,000 | $ | 750 | $ | 750 | ||||||||
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Financial liabilities
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||||||||||||||||
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Note payable and Short-term debt
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$ | 13,331 | $ | 13,331 | $ | 24,007 | $ | 24,007 | ||||||||
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Bank overdraft facility
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$ | 1,322 | $ | 1,322 | $ | 780 | $ | 780 | ||||||||
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Current portion of Long-term debt
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$ | 2,000 | $ | 2,000 | $ | — | $ | — | ||||||||
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Long-term debt
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$ | 7,000 | $ | 7,000 | $ | — | $ | — | ||||||||
8
Note I – Stock Compensation
The fair value of stock-based compensation is recognized in accordance with the provisions of FASB ASC 718, Stock Compensation.
During the three months ended March 19, 2011 and pursuant to the 2007 Incentive Plan, in lieu of director fees, the Company awarded to certain directors 6,585 shares of common stock. In addition, the Company awarded 37,500 stock options to directors and 200,000 stock options to employees. The stock options awarded to directors vest at the end of one year and have an exercise price equal to the market price on the date of grant. Director stock options are subject to forfeiture, except for termination of services as a result of retirement, death or disability, if on the vesting date the director no longer holds a position with the Company. The 2011 stock options awarded to employees have a graded vesting of 25% per year over four years and are subject to forfeiture if on the vesting date the employee is no longer employed. The Company utilizes the Black-Scholes option pricing model to determine the fair value of stock options granted.
For the three months ended March 19, 2011 and March 20, 2010, the Company recognized stock based compensation expense of $137 thousand and $162 thousand, respectively. At March 19, 2011 and March 20, 2010, respectively, there was $1.4 million and $1.0 million in unrecognized stock-based compensation expense related to non-vested stock awards.
Note J - Segment Information
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As of and for the Three Months
Ended March 19, 2011
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In thousands
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Sporting Goods
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Information Security and Print Finishing
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Corp.
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Total
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Revenues from external customers
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$ | 19,187 | $ | 8,811 | $ | — | $ | 27,998 | ||||||||
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Operating income (loss)
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2,336 | 580 | (849 | ) | 2,067 | |||||||||||
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Net income (loss)
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1,324 | 237 | (358 | ) | 1,203 | |||||||||||
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Total assets
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$ | 70,943 | $ | 40,258 | $ | 21,798 | $ | 132,999 | ||||||||
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As of and for the Three Months
Ended March 20, 2010
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||||||||||||||||
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In thousands
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Sporting Goods
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Information Security and Print Finishing
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Corp.
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Total
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||||||||||||
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Revenues from external customers
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$ | 16,951 | $ | 8,218 | $ | — | $ | 25,169 | ||||||||
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Operating income (loss)
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2,077 | 292 | (960 | ) | 1,409 | |||||||||||
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Net income (loss)
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917 | 173 | (288 | ) | 802 | |||||||||||
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Total assets
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$ | 66,715 | $ | 38,112 | $ | 18,413 | $ | 123,240 | ||||||||
Note K – Dividend Payment
The Company has not declared a dividend to be paid in 2011.
9
Note L - Earnings Per Share
The shares used in computation of the Company’s basic and diluted earnings per common share are as follows:
|
Three Months Ended
|
||||||||
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All amounts in thousands
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March 19,
2011 |
March 20,
2010 |
||||||
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Weighted average common shares outstanding
|
12,804 | 12,685 | ||||||
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Dilutive effect of stock options and restricted stock units
|
545 | 462 | ||||||
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Weighted average common shares outstanding, assuming dilution
|
13,349 | 13,147 | ||||||
Stock options that are anti-dilutive as to earnings per share and unvested restricted stock units which have a market condition for vesting that has not been achieved are ignored in the computation of dilutive earnings per share. The number of stock options and restricted stock units that were excluded in 2011 and 2010 were 264,024 and 616,850, respectively.
Note M – New Accounting Standards
There have been no recent accounting pronouncements or changes in accounting pronouncements during the three months ended March 19, 2011, as compared to the recent accounting pronouncements described in the Company’s Annual Report on Form 10-K for the fiscal year ended December 25, 2010, that are of significance, or potential significance to the Company.
Note N – Commitments and Contingencies
In the second quarter of 2010, the Company was made aware of a potential financial obligation relating to an 8,600 square foot facility the Company is sub-leasing in Spain. At this time, Management is unable to estimate the potential exposure related to this matter, if any, but does not believe this will create a material adverse impact on our consolidated financial conditions.
The Company is involved in litigation arising in the normal course of business. The Company does not believe that the disposition or ultimate resolution of existing claims or lawsuits will have a material adverse effect on the business or financial condition of the Company.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
Forward-Looking Statements
This report contains forward-looking statements relating to present or future trends or factors that are subject to risks and uncertainties. These risks include, but are not limited to, the impact of competitive products and pricing, product demand and market acceptance, new product development, the continuation and development of key customer and supplier relationships, Escalade’s ability to control costs, general economic conditions, fluctuation in operating results, changes in the securities market, Escalade’s ability to obtain financing and to maintain compliance with the terms of such financing, and other risks detailed from time to time in Escalade’s filings with the Securities and Exchange Commission. Escalade’s future financial performance could differ materially from the expectations of Management contained herein. Escalade undertakes no obligation to release revisions to these forward-looking statements after the date of this report.
10
Overview
Escalade, Incorporated (“Escalade” or “Company”) manufactures and distributes products for two industries: Sporting Goods and Information Security and Print Finishing. Within these industries the Company has successfully built a market presence in niche markets. This strategy is heavily dependent on expanding the customer base, barriers to entry, brand recognition and excellent customer service. A key strategic advantage is the Company’s established relationships with major customers that allow the Company to bring new products to the market in a cost effective manner while maintaining a diversified product line and wide customer base. In addition to strategic customer relations, the Company has substantial manufacturing and import experience that enable it to be a low cost supplier.
A majority of the Company’s products are in markets that are experiencing low growth rates. Where the Company enjoys a commanding market position, such as table tennis tables in the Sporting Goods segment and paper folding machines in the Information Security and Print Finishing segment, revenue growth is expected to be roughly equal to general growth/decline in the economy. However, in markets that are fragmented and where the Company is not the dominant leader, such as archery in the Sporting Goods segment and data security shredders in the Information Security and Print Finishing segment, the Company anticipates growth. To enhance growth, the Company has a strategy of promoting new product innovation and development and brand marketing. In the Information Security and Print Finishing segment, the Company’s strategic focus is increasingly upon expanding its product and service offerings to assist businesses and governments with their document and information high security needs to secure sensitive customer, employee and business information and to comply with new information privacy laws, rules and regulations. The Company continues to extend the capabilities of its line of shredders to include not only the secure destruction of paper but also the secure destruction and/or de-commissioning of medical patient information, drug prescriptions and adhesive labels, pill and syrup vials, CDs, DVDs, and other forms of magnetic, optical and solid state media. The Company is further exploring opportunities to provide secure on-site and off-site document and data destruction and disposal services to meet the specific needs of its customers.
In addition, the Company will continue to investigate acquisition opportunities of companies or product lines that complement or expand the Company’s product lines. A key objective is the acquisition of product lines with barriers to entry that the Company can take to market through its established distribution channels or through new market channels. Significant synergies are achieved through assimilation of acquired product lines into the existing company structure. Management believes that key indicators in measuring the success of this strategy are revenue growth, earnings growth and the expansion of channels of distribution.
11
Results of Operations
Consolidated net sales for the first quarter of 2011 were 11% higher compared to the same quarter last year. A portion of the sales increase for the quarter was aided by the timing of shipments which are not expected to be repeated in subsequent quarters. Operating income for the quarter was $2.0 million compared with $1.4 million in the same quarter last year. The primary driver for this increase is gross margin improvements resulting from increased sales volume. The Company is experiencing pricing pressure from suppliers on certain products which may negatively impact future gross margins. The following schedule sets forth certain consolidated statement of operations data as a percentage of net revenue:
|
Three Months Ended
|
||||||||
|
March 19, 2011
|
March 20, 2010
|
|||||||
|
Net revenue
|
100.0 | % | 100.0 | % | ||||
|
Cost of products sold
|
63.9 | % | 66.0 | % | ||||
|
Gross margin
|
36.1 | % | 34.0 | % | ||||
|
Selling, administrative and general expenses
|
27.6 | % | 27.3 | % | ||||
|
Amortization
|
1.1 | % | 1.1 | % | ||||
|
Operating income
|
7.4 | % | 5.6 | % | ||||
Consolidated Revenue and Gross Margin
Revenues from the Sporting Goods business were up 13.2% for the first quarter of 2011 compared to the same quarter last year. Increases in consumer spending, new product development, expanded product placement and additional customer base are driving sales increases. Management believes improved sales in the Sporting Goods segment will continue through the remainder of the year; although the improvement may be less than that experienced in the first quarter.
Revenues from the Information Security and Print Finishing business increased 7.2% for the first quarter of 2011 compared with the same quarter last year. Excluding the effects of changes in the currency exchange rates, revenues increased 7.4% for the quarter. A portion of the increase in the first quarter is the result of the timing of certain shipments which will not be repeated in subsequent quarters.
The overall gross margin ratio for the first quarter of 2011 was 36.1% compared to 34.0% for the same quarter last year. Management expects gross margins for the remainder of 2011 to be slightly higher than those experienced in the prior year.
Consolidated Selling, General and Administrative Expenses
Compared to the same quarter last year, consolidated selling, general and administrative (“SG&A”) costs increased as a percent of net sales to 27.6%, which is slightly higher than the 27.3% experienced in the same quarter last year. The Company will continue to focus on strategic investments in product development and brand marketing throughout the year.
Provision for Income Taxes
The effective tax rate in the first quarter of 2011 was 40.0% compared with 38.6% for the same quarter last year. The increase in the current year tax rate is due mainly to losses generated in foreign taxing districts for which no tax benefit is expected to be realized.
Financial Condition and Liquidity
Total funded debt at the end of the first three months of 2011 was down $1.2 million or 0.5% from the same quarter last year, and up $3.1 million or 15.0% from the latest year end. The increase in debt is driven by a build-up of inventory to support customer orders from an increased customer base. The following schedule summarizes the Company’s total bank debt:
|
In thousands
|
March 19,
2011
|
March 20,
2010
|
December 25,
2010 |
|||||||||
|
Notes payable short-term
|
$ | 13,331 | $ | 24,007 | $ | 9,407 | ||||||
|
Current portion long-term debt
|
2,000 | — | 2,000 | |||||||||
|
Bank overdraft facility
|
1,322 | 780 | 1,646 | |||||||||
|
Long term debt
|
7,000 | — | 7,500 | |||||||||
|
Total bank debt
|
$ | 23,653 | $ | 24,787 | $ | 20,553 | ||||||
12
The Company is maintaining a healthy debt to equity ratio. As a percentage of stockholders’ equity, total bank debt was 26%, 30% and 24% at March 19, 2011, March 20, 2010 and December 25, 2010, respectively.
During the first three months of 2011, operating activities used $2.9 million in cash primarily due to increases in inventory and a reduction in accrued liabilities.
The Company funds working capital requirements through operating cash flows and revolving credit agreements with its bank. As a result of the successful reduction of existing outstanding debt during the prior year, the Company was able to again reduce its borrowing capacity commitment. The Company successfully completed negotiations with JP Morgan Chase Bank, N.A., its primary lender, regarding an amendment to its Senior Secured Revolving Credit Facility and finalized the agreement on April 14, 2011. Based on working capital requirements, the Company expects to have access to adequate levels of revolving credit to meet growth needs.
The Company is continuing to market the Reynosa facility through a national broker and is pursuing all viable offers of purchase or lease. There has been increased interest from potential buyers over the past few months. Implementation of a new ERP system was completed at the Wabash, Indiana facility as of the end of 2010 and the Company anticipates initiating roll-outs of additional implementations for its Martin Yale International sites and certain of its Sports sites in 2011. Should the Company decide to abandon the Oracle system at its one remaining location, the remaining book value of the Oracle system of approximately $5.0 million ($3.0 million, net of tax) would be expensed over the estimated remaining economic life of the system.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
The Company is exposed to financial market risks, including changes in currency exchange rates and interest rates. The Company attempts to minimize these risks through regular operating and financing activities and, when considered appropriate, through the use of derivative financial instruments. During the quarter there were no derivatives in use. The Company does not purchase, hold or sell derivative financial instruments for trading or speculative purposes.
Interest Rates
The Company’s exposure to market-rate risk for changes in interest rates relates primarily to its revolving variable rate bank debt which is based on LIBOR interest rates and its overdraft facility which is based on EURIBOR interest rates. A hypothetical 1% or 100 basis point change in interest rates would not have a significant effect on our consolidated financial position or results of operation.
Foreign Currency
The Company conducts business in various countries around the world and is therefore subject to risks associated with fluctuating foreign exchange rates. This revenue is generated from the operations of the Company’s subsidiaries in their respective countries and surrounding geographic areas and is primarily denominated in each subsidiary’s local functional currency. These subsidiaries incur most of their expenses (other than inter-company expenses) in their local functional currency and include the Euro, Great Britain Pound Sterling, Mexican Peso, Chinese Yuan, Swedish Krona and South African Rand.
The geographic areas outside the United States in which the Company operates are generally not considered to be highly inflationary. Nonetheless, the Company’s foreign operations are sensitive to fluctuations in currency exchange rates arising from, among other things, certain inter-company transactions that are denominated in currencies other than the respective functional currency. Operating results as well as assets and liabilities are also subject to the effect of foreign currency translation when the operating results, assets and liabilities of our foreign subsidiaries are translated into U.S. dollars in our consolidated financial statements.
13
The Company and its subsidiaries conduct substantially all their business in their respective functional currencies to avoid the effects of cross-border transactions. To protect against reductions in value and the volatility of future cash flows caused by changes in currency exchange rates, the Company carefully considers the use of transaction and balance sheet hedging programs such as matching assets and liabilities in the same currency. Such programs reduce, but do not entirely eliminate the impact of currency exchange rate changes. The Company has evaluated the use of currency exchange hedging financial instruments but has determined that it would not use such instruments under the current circumstances. Changes in currency exchange rates may be volatile and could affect the Company’s performance.
|
CONTROLS AND PROCEDURES
|
Evaluation of Disclosure Controls and Procedures
Escalade maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based closely on the definition of “disclosure controls and procedures” in Rule 13a-14(c). In designing and evaluating the disclosure controls and procedures, Management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and Management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Also, the Company has investments in certain unconsolidated entities. As the Company does not control or manage these entities, its disclosure controls and procedures with respect to such entities are necessarily substantially more limited than those it maintains with respect to its consolidated subsidiaries.
The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
Management of the Company has evaluated, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, changes in the Company’s internal controls over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the first quarter of 2011.
14
There have been no changes to the Company’s internal control over financial reporting that occurred since the beginning of the Company’s first quarter of 2011 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
|
Not Required.
|
|
(c) ISSUER PURCHASES OF EQUITY SECURITIES
|
|
Period
|
(a) Total Number of Shares (or Units) Purchased
|
(b) Average Price Paid per Share (or Unit)
|
(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs
|
(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
|
|
Shares purchases prior to 12/26/2010 under the current repurchase program.
|
982,916
|
$8.84
|
982,916
|
$ 2,273,939
|
|
First quarter purchases:
|
||||
|
12/26/2010–01/22/2011
|
None
|
None
|
No Change
|
No Change
|
|
01/23/2011-02/19/2011
|
None
|
None
|
No Change
|
No Change
|
|
02/20/2011-03/19/2011
|
None
|
None
|
No Change
|
No Change
|
|
Total share purchases under the current program
|
982,916
|
$8.84
|
982,916
|
$ 2,273,939
|
The Company has one stock repurchase program which was established in February 2003 by the Board of Directors and which authorized management to expend up to $3,000,000 to repurchase shares on the open market as well as in private negotiated transactions. The repurchase plan has no termination date. There have been no share repurchases that were not part of a publicly announced program. In February 2008, the Board of Directors increased the remaining amount on this plan to its original level of $3,000,000. Although authorized by the Board, the Company has agreed to certain restrictions on the repurchase of shares as part of the April 30, 2009 Credit Agreement terms. The Seventh Amendment contained no changes in these restrictions.
|
(a)
|
Exhibits
|
|
Number
|
Description
|
|
31.1
|
Chief Executive Officer Rule 13a-14(a)/15d-14(a) Certification.
|
|
31.2
|
Chief Financial Officer Rule 13a-14(a)/15d-14(a) Certification.
|
|
32.1
|
Chief Executive Officer Section 1350 Certification.
|
|
32.2
|
Chief Financial Officer Section 1350 Certification.
|
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.
|
ESCALADE, INCORPORATED
|
||
|
Date: April 21, 2011
|
/s/ Deborah Meinert
|
|
|
Vice President and Chief Financial Officer
|
||
|
(On behalf of the registrant and in her
|
||
|
capacities as Principal Financial Officer
|
||
|
and Principal Accounting Officer)
|
16