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ESCA > SEC Filings for ESCA > Form 10-Q on 16-Nov-2012All Recent SEC Filings

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Form 10-Q for ESCALADE INC


16-Nov-2012

Quarterly Report


Item 2. 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, Escalade's ability to successfully integrate the operations of acquired assets and businesses, 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 foreign currency exchange rates, 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.

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, 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 solid state and other 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 existing 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. As part of its ongoing strategy development, the Company also routinely assesses product line profitability and category alignment. Management believes that key indicators in measuring the success of this strategy are revenue growth, earnings growth and the expansion of channels of distribution.

In 2012, Escalade's Board of Directors adopted a dividend policy under which the Company intends to pay quarterly cash dividends on its common stock. Escalade expects the initial annual rate to be $0.32 per share per year, or $0.08 per share quarterly. Escalade's Board of Directors will evaluate the Company's dividend policy on an ongoing basis after giving consideration to, among other things, the financial condition of and outlook for the Company and any particular cash flow and financing needs of the Company.

Results of Operations

Consolidated net sales for the third quarter of 2012 were 19% higher compared to the same quarter last year. For the first nine months of 2012, net sales have increased 9% over the same period prior year. Increases in sales are driven by the Sporting Goods business segment.

In the third quarter of 2012, the Company recorded a goodwill impairment loss on its Information Security and Print Finishing segment. Because of increased competition and continuing economic weakness in the European and Asian markets, operating profits and cash flows for this operating segment were lower than expected in the first nine months of 2012. Based on this continuing trend, the earnings forecast for the next five years was revised resulting in a goodwill impairment loss of $13.2 million. In addition, the Company recorded intangible asset impairment for this segment related to other intangibles of $0.2 million.

In the third quarter of 2011, the Company recorded accelerated depreciation expense related to the anticipated replacement of its Oracle ERP system which reduced operating income by $2.2 million for the quarter and year to date.

The Company's operating loss for the three and nine months ending October 6, 2012 was $(10.4) million and $(5.0) million, respectively, compared to operating income (loss) of $(0.9) million and $3.9 million for the same periods last year. Without the impact of goodwill and intangible asset impairment charges in 2012, operating income for the three and nine months of fiscal 2012 would have been $3.0 million and $8.4 million, respectively. Without the impact of accelerated depreciation in 2011, operating income for the three and nine months of fiscal 2011 would have been $1.4 million and $6.1 million, respectively.

The following schedule sets forth certain consolidated statement of operations data as a percentage of net revenue:

                                             Three Months Ended                 Nine Months Ended
                                          October           October          October          October
                                          6, 2012           1, 2011          6, 2012          1, 2011
Net revenue                                   100.0 %           100.0 %          100.0 %          100.0 %
Cost of products sold                          68.0 %            71.1 %           68.3 %           68.0 %
Gross margin                                   32.0 %            28.9 %           31.7 %           32.0 %
Selling, administrative and general
expenses                                       21.8 %            30.4 %           22.2 %           26.7 %
Goodwill and intangible asset
impairment charges                             39.1 %               -             12.5 %              -
Amortization                                    1.5 %             1.5 %            1.6 %            1.3 %
Operating income (loss)                       (30.4 )%           (3.0 )%          (4.6 )%           4.0 %

Consolidated Revenue and Gross Margin

Revenues from the Sporting Goods business were up 27.0% for the quarter and 14.7% for the first nine months of 2012, compared to the same periods prior year. Growth for the quarter was exceptionally strong due to the timing of certain product placements. Management expects full year sales to remain at double digit growth, although fourth quarter growth is expected to be less than that attained in the third quarter.

Revenues from the Information Security and Print Finishing business held steady for the third quarter of 2012 compared to prior year, although for the year to date 2012 is down 3.4% from last year. Excluding the effects of changes in the currency exchange rates, revenues increased 4.0%for the third quarter and were flat for the first nine months of fiscal 2012, compared to the same periods prior year. The Company continues to experience challenges in the international market due to competitive pricing pressures, austerity measures taken in European and other governmental channels and the continued weakening of the European economy.

The overall gross margin ratios for the three and nine month periods in 2012 were32.0% and 31.7%, respectively, compared to 28.9% and 32.0%, respectively, for same periods last year. For the quarter, gross margin percentages in the Sporting Goods segment improved over prior year due mainly to product mix. Year to date 2012 gross margin percentages in the Information Security and Print Finishing segment were down 9% compared to prior year.

Consolidated Selling, General and Administrative Expenses

Compared to the same periods last year, consolidated selling, general and administrative ("SG&A") costs decreased as a percent of net sales to 21.8% and 22.2% for the three and nine months periods in 2012; down from 30.4% and 26.7% for the three and nine months periods in 2011. In the third quarter 2011, SG&A costs included $2.2 million in accelerated depreciation expense. Without the additional depreciation expense, SG&A for the third quarter of 2011 would have been 22.7% of net sales.

Provision for Income Taxes

For 2012, the annual effective tax rate, year to date, differs from the U.S. Federal statutory rate of 34% due to state taxes of approximately 6%, valuation allowances against losses in foreign jurisdictions in which the Information Security and Print Finishing segment operates of approximately 9.3% and reductions for permanent tax benefits of approximately 0.7% generated from captive insurance earnings netted with non-deductible expenses. In addition, the goodwill and intangible asset impairment charge of $13.4 million is a permanent non-deductible expense so no tax benefit was recorded. A tax benefit of $0.2 million was recorded in respect of the impairment on the equity method investment in Escalade International, Ltd. Quarterly fluctuations in the effective tax rate are generally driven by fluctuations in losses in foreign jurisdictions. Due to anticipated higher losses in 2012 compared with 2011 generated in foreign taxing jurisdictions which do not offset gain in other taxing jurisdictions or for which no tax benefit is expected to be realized, the Company expects the effective tax rate for 2012 to be higher than in 2011.

Financial Condition and Liquidity

Total bank debt at the end of the first three quarters of 2012 was down 23.8% or $6.1 million from the same period last year, and down 11% or $2.4 million from December 31, 2011. The decrease in debt over same period prior year is due mainly to strong 2012 profits in the Sporting Goods segment. Planned increases in inventory levels have been made to better meet customer demand. The following schedule summarizes the Company's total bank debt:

                                  October 6,       December 31,       October 1,
In thousands                         2012              2011              2011

Notes payable short-term         $     11,673     $       12,700     $     15,829
Current portion long-term debt          2,000              2,000            2,000
Bank overdraft facility                 2,360              2,247            2,300
Long term debt                          3,500              5,000            5,500
Total bank debt                  $     19,533     $       21,947     $     25,629

As a percentage of stockholders' equity, total bank debt was 25%, 25% and 30% at October 6, 2012, December 31, 2011, and October 1, 2011 respectively.

The Company funds working capital requirements through operating cash flows and revolving credit agreements with its bank. Based on working capital requirements, the Company expects to have access to adequate levels of revolving credit to meet growth needs.

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