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ESCA > SEC Filings for ESCA > Form 10-Q on 26-Apr-2013All Recent SEC Filings

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Form 10-Q for ESCALADE INC


26-Apr-2013

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 strong market position, such as table tennis tables in the U.S. Sporting Goods segment and paper folding machines in the U.S. 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.

The Company is currently facing weak demand and increased competition in the Information Security and Print Finishing segment. The strategic focus for this segment continues to be 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 and 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 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. Management believes that key indicators in measuring the success of this strategy are revenue growth, earnings growth and the expansion of channels of distribution.

Results of Operations

Consolidated net sales for the first quarter of 2013 were 4% higher compared to the same quarter last year. Operating income for the quarter was $3.0 million compared with $2.7 million in the same quarter last year, an increase of 11%. The increase in operating profits is a direct result of increased sales volume in the Sporting Goods segment.

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

                                                   Three Months Ended
                                               March 23,        March 24,
                                                  2013            2012
Net revenue                                         100.0 %          100.0 %
Cost of products sold                                65.8 %           65.5 %
Gross margin                                         34.2 %           34.5 %
Selling, administrative and general expenses         22.9 %           23.9 %
Amortization                                          1.7 %            1.7 %
Operating income                                      9.6 %            8.9 %

Consolidated Revenue and Gross Margin

Revenues from the Sporting Goods business were up 13.7% for the first quarter of 2013 compared to the same quarter last year. The Company attributes sales increases to new product development and brand marketing which has increased consumer demand for our products. Management expects strong sales in the Sporting Goods segment 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 decreased 21.3% for the first quarter of 2013 compared with the same quarter last year. Excluding the effects of changes in the currency exchange rates, revenues decreased 21.2% for the quarter. Contributing to the decrease in revenue is a reduction in government spending in European countries along with increased competition. The Company expects challenges in this segment for the remainder of the year.

The overall gross margin ratio for the first quarter of 2013 was 34.2% compared to 34.5% for the same quarter last year. Gross margins for the Information Security and Print Finishing segment decreased to 35.3% for the first quarter of 2013 compared with 37.3% for the same quarter last year. The decrease relates to market pricing pressures. Gross margins in the Sporting Goods segment trended slightly above the same quarter prior year. Management expects overall gross margins for the full year to be similar to those experienced in 2012.

Consolidated Selling, General and Administrative Expenses

Consolidated selling, general and administrative ("SG&A") costs decreased as a percent of net sales to 22.9% for the first quarter of 2013, which is lower than the 23.9% experienced in the same quarter last year. A portion of this decrease in expense is related to the timing of certain expenses incurred in the first quarter of 2012, but which will not be incurred until later quarters in 2013. 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 both the first quarter of 2013 and the first quarter of 2012 was 42.9%. The Company continues to experience losses in certain foreign taxing jurisdictions which do not offset gains in other foreign taxing jurisdictions which negatively affects the effective tax rate.

Financial Condition and Liquidity

Total debt at the end of the first three months of 2013 was $21.8 million, a reduction of $0.7 million from December 29, 2012. The increase in long-term debt is attributable to the long-term portion of the seller-financed liability of $1.8 million for the purchase of the previously leased real estate in Rosarito, Mexico. The following schedule summarizes the Company's total debt:

                                  March 23,       December 29,       March 249,
In thousands                        2013              2012              2012

Notes payable short-term         $    12,911     $       14,618     $     11,448
Current portion long-term debt         2,546              2,000            2,000
Bank overdraft facility                1,761              2,452            2,240
Long-term debt                         4,620              3,500            5,000
Total debt                       $    21,838     $       22,570     $     20,688

As a percentage of stockholders' equity, total debt was 27%, 28% and 23% at March 23, 2013, December 29, 2012, and March 24, 2012 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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