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ATX > SEC Filings for ATX > Form 10-Q on 8-May-2013All Recent SEC Filings

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Form 10-Q for CROSS A T CO


8-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Overview

A.T. Cross Company is a designer and marketer of branded personal accessories including writing instruments, reading glasses, personal and business accessories and sunglasses.

The Company operates in competitive categories. The Company has challenged itself to build upon its unique attributes in order to develop a vibrant, diversified and forward-looking company poised for sustainable growth and long-term profit. Such attributes include: strong brand names, an over 160 year heritage, a reputation for quality and craftsmanship, a global distribution network, and a strong balance sheet. The Company established several strategic initiatives to build upon these attributes and overcome its challenges, including: becoming an innovative leader in the fine writing category, extending the Cross brand into new categories, developing avenues for diversification, streamlining its CAD operating structure and seeking additional brand assets to add scale. COG has provided the business with an avenue of diversification and added two new brands to the Company's portfolio: Costa and Native. These brands uphold the Company's reputation as an innovative leader with award-winning high-quality products. Details on how the Company's two business segments are achieving these initiatives are presented below.

In February 2013, the Company announced that it is exploring strategic alternatives for its Cross Accessory Division. The Company has not made a decision to pursue any specific transaction or any other strategic alternative, and there is no set timetable for the strategic review process.

Cross Accessory Division ("CAD")

The Company has been a manufacturer and marketer of fine quality writing instruments since 1846. Sold primarily under the Cross brand, ballpoint, fountain and Selectip rolling ball pens and mechanical pencils are offered in a variety of styles and finishes. Cross also manufactures and markets a line of FranklinCovey entry level price point refillable writing instruments. Also under the Cross brand, CAD offers a variety of personal and business accessories including leather goods, reading glasses, desk sets and stationery. The Company has license agreements with third parties to develop and sell Cross watches, cufflinks and leather products. This segment typically records its highest sales and operating income in the fourth quarter of the fiscal year.

Cross Optical Group ("COG")

The Company's COG segment consists of its wholly-owned subsidiary, Cross Optical Group, Inc. This business designs, manufactures and markets high-quality, high-performance polarized sunglasses under the brand names Costa and Native. This segment typically records its highest sales and operating income in the second quarter of the fiscal year.

Results of Operations First Quarter 2013 Compared to First Quarter 2012

In the first quarter of 2013, the Company reported net income of $1.6 million, or $0.13 per basic and diluted share, compared to net income of $1.5 million, or $0.13 per basic and $0.12 per diluted share in the first quarter of 2012.

The following chart details net sales performance:


(THOUSANDS OF DOLLARS)             THREE MONTHS ENDED
                                 MARCH 30,    MARCH 31,    PERCENTAGE
                                    2013         2012        CHANGE
Cross Accessories Division (CAD) $  20,565    $  21,929      -6.2%
Cross Optical Group (COG)           23,836       20,017      19.1%
          Consolidated Net Sales $  44,401    $  41,946       5.9%

Consolidated net sales were $44.4 million in the first quarter of 2013 compared to $41.9 million in the first quarter of 2012. The effect of foreign exchange was unfavorable to consolidated first quarter 2013 sales results by approximately 100 basis points.

CAD sales decreased 6.2% in the first quarter of 2013 compared to the first quarter of 2012. Two thirds of the decline was related to the substantially weaker Japanese Yen and decreased sales of discontinued product in the Americas.

COG sales grew by 19.1%, led by the Costa brand which increased 20.2% compared to the prior year first quarter.

The following chart details gross profit margins for both segments as well as the consolidated gross profit margins:

                                     THREE MONTHS ENDED
                                  MARCH 30,      MARCH 31,     PERCENTAGE
                                     2013          2012       POINT CHANGE
CAD                                   53.4%          54.0%       (0.6)
COG                                   58.5%          58.6%       (0.1)
Consolidated Gross Profit Margins     56.1%          56.2%       (0.1)

Consolidated gross margins were 56.1% in the first quarter, 10 basis points lower than the same period last year.

Consolidated operating expenses for the first quarter of 2013 were $22.3 million, or 50.2% of sales, as compared to $21.2 million, or 50.5% of sales a year ago; a decrease of 30 basis points. The CAD segment operating expenses were 2.1% lower than the prior year's first quarter. The COG segment's operating expenses were 15.5% higher than last year and were directly related to the higher sales volume in the first quarter of 2013.

In the first quarter of 2013, the effective tax rate was 34.0%. In the first quarter of 2012, the effective tax rate was 31.8%. The difference is primarily due to the higher level of domestic versus foreign earnings in the first quarter of 2013 versus the first quarter of 2012.

Liquidity and Sources of Capital

Historically, the Company's sources of liquidity and capital resources have been its cash and cash equivalents ("cash"), short-term investments, cash generated from operations and amounts available under the Company's line of credit. These sources have been sufficient in the past to support the Company's routine operating requirements, capital projects, contributions to the retirement plans, stock repurchase programs and debt service. The Company expects its future cash needs in 2013 will be met by these historical sources of liquidity and capital.


The Company's cash and short-term investment balance of $12.9 million at March 30, 2013 decreased $14.4 million from December 29, 2012. The most significant factors affecting the Company's cash balance are discussed in this section.

Inventory was $42.4 million at March 30, 2013, an increase of $4.4 million since December 29, 2012. CAD inventory decreased $0.6 million and COG inventory levels increased by $5.0 million from year end 2012. The increase in COG inventory was to support anticipated higher sales volumes, as COG typically records its highest sales in the second quarter.

Accounts payable, accrued expenses and other liabilities was $19.3 million, a decrease of $7.1 million since December 29, 2012. CAD and COG accounts payable, accrued expenses and other liabilities decreased $3.7 million and $3.4 million, respectively.

The Company has a $40 million secured line of credit with a bank. This credit facility matures and amounts outstanding must be paid by July 28, 2013. The Company intends to secure a new credit facility prior to July 28, 2013. Under the current agreement, the Company has the option to borrow at various interest rates depending upon the type of borrowings made and the Company's consolidated leverage ratio. At March 30, 2013, the outstanding balance of the Company's line of credit was $15.0 million, bearing an interest rate of approximately 2.0%, and the unused and available portion, according to the terms of the agreement, was $25.0 million. At December 29, 2012, the outstanding balance of the Company's line of credit was $15.0 million, bearing an interest rate of approximately 2.0%, and the unused and available portion, according to the terms of the agreement, was $25.0 million. The Company was in compliance with its various debt covenants as of March 30, 2013. The agreement requires the Company to maintain a minimum consolidated tangible net worth, computed at each year end, a maximum level of capital expenditures and a minimum ratio of adjusted EBITDA to required debt service payments over any four-quarter period, each of which is calculated in accordance with the agreement:

      Covenant                          Covenant                        Calculated
     Description                       Requirement                        Company
                                                                      Value March 30,
                                                                           2013
    Consolidated      Cannot be less than $37.5 million plus 50% of    $62.3 million
    Tangible Net       Net Income For Fiscal Years after 2010, or
        Worth                         $47.0 million
       Capital        Cannot exceed the greater of $10 million in a    $4.4 million
    Expenditures       year or $10 million plus the prior year $10
                              million cap less expenditures
    Consolidated                 Cannot exceed 2.75 to 1                  0.70:1
   Leverage Ratio

The Company believes that existing cash and cash provided by operations, supplemented as appropriate by the Company's borrowing arrangements, will be adequate to finance its foreseeable operating and capital requirements, the stock repurchase plan and contributions to the retirement plans. Should operating cash flows in 2013 not materialize as projected, the Company has a number of planned alternatives to ensure that it will have sufficient cash to meet its operating needs. These alternatives include implementation of strict cost controls on discretionary spending and delaying non-critical research and development, capital projects and completion of the stock repurchase plan.

At March 30, 2013, cash and short-term investments available for domestic operations was approximately $4.6 million, while cash held offshore was approximately $8.3 million.


Critical Accounting Policies

There have been no changes to our critical accounting policies and estimates from the information provided in Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations," included in our Form 10-K for the fiscal year ended December 29, 2012.

Forward-Looking Statements

Statements contained herein that are not historical fact are forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. In addition, words such as "believes," "anticipates," "expects," "intends," "will" and similar expressions are intended to identify forward-looking statements, including but not limited to statements related to the availability of sources of cash; anticipated compliance with laws and regulations (including but not limited to environmental laws); and anticipated sufficiency of available working capital. The Company cautions that a number of important factors could cause the Company's actual results for fiscal 2012 and beyond to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. Forward-looking statements involve a number of risks and uncertainties. For a discussion of certain of other of those risks, see "Risk Factors" in Item 1A of the Company's 2012 Annual Report on Form 10-K.

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