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

Show all filings for CROSS A T CO

Form 10-Q for CROSS A T CO


8-Aug-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.

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 Second Quarter 2013 Compared to Second Quarter 2012

In the second quarter of 2013, the Company reported net income of $3.1 million, or $0.25 per basic and $0.24 per diluted share, compared to net income of $3.7 million, or $0.30 per basic and $0.28 per diluted share in the second quarter of 2012.

The following chart details net sales performance:

(THOUSANDS OF DOLLARS)             THREE MONTHS ENDED
                                  JUNE 29,    JUNE 30,    PERCENTAGE
                                    2013        2012        CHANGE
Cross Accessories Division (CAD) $  21,084    $ 21,321      -1.1%
Cross Optical Group (COG)           32,418      27,486      17.9%
          Consolidated Net Sales $  53,502    $ 48,807       9.6%

Consolidated net sales were $53.5 million in the second quarter of 2013 compared to $48.8 million in the second quarter of 2012. The effect of foreign exchange was unfavorable to consolidated second quarter 2013 sales results by approximately 110 basis points.

CAD sales decreased 1.1% in the second quarter of 2013 compared to the second quarter of 2012. The entire decline was related to the substantially weaker Japanese Yen as foreign exchange was unfavorable to CAD sales results by approximately 240 basis points.

COG sales grew by 17.9%, led by the Costa brand which increased 20.3% compared to the prior year second quarter.


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

                                    THREE MONTHS ENDED
                                   JUNE 29,     JUNE 30,     PERCENTAGE
                                     2013         2012      POINT CHANGE
CAD                                   56.8%         54.2%       2.6
COG                                   59.5%         59.2%       0.3
Consolidated Gross Profit Margins     58.4%         57.0%       1.4

Consolidated gross margins were 58.4% in the second quarter, 140 basis points higher than the same period last year.

Consolidated operating expenses for the second quarter of 2013 were $26.5 million, or 49.4% of sales, as compared to $22.2 million, or 45.6% of sales a year ago; an increase of 380 basis points. The CAD segment operating expenses were 17.0% higher than the prior year's second quarter. Included in CAD segment's second quarter 2013 operating expenses is a $1.4 million one-time non-cash charge related to the settlement of a defined benefit pension plan that covered certain employees of its former manufacturing facility in Ireland and $0.5 million of costs related to the pending sale of CAD division assets. The COG segment's operating expenses were 21.5% higher than last year and were largely sales volume related.

In the second quarter of 2013, the effective tax rate was 33.3%. In the second quarter of 2012, the effective tax rate was 30.9%.

Results of Operations First Six Months 2013 Compared to First Six Months 2012

In the first six months of 2013, the Company reported net income of $4.7 million, or $0.38 per basic and $0.36 per diluted share, compared to net income of $5.2 million, or $0.42 per basic and $0.40 per diluted share in the first six months of 2012.

The following chart details net sales performance:

(THOUSANDS OF DOLLARS)             SIX MONTHS ENDED
                                 JUNE 29,    JUNE 30,    PERCENTAGE
                                   2013        2012        CHANGE
Cross Accessories Division (CAD) $ 41,649    $ 43,250      -3.7%
Cross Optical Group (COG)          56,254      47,503      18.4%
          Consolidated Net Sales $ 97,903    $ 90,753       7.9%

Consolidated net sales were $97.9 million in the first six months of 2013 compared to $90.8 million in the first six months of 2012. The effect of foreign exchange was unfavorable to consolidated sales results for the first six months of 2013 by approximately 100 basis points.

CAD sales decreased 3.7% in the first six months of 2013 compared to the first six months of 2012. Approximately 60% of the decline was related to the substantially weaker Japanese Yen as foreign exchange was unfavorable to CAD sales results by approximately 220 basis points.

COG sales grew by 18.4%, led by the Costa brand which increased 20.3% compared to the prior year first six months.


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

                                     SIX MONTHS ENDED
                                   JUNE 29,     JUNE 30,     PERCENTAGE
                                     2013         2012      POINT CHANGE
CAD                                   55.1%        54.1%        1.0
COG                                   59.1%        58.9%        0.2
Consolidated Gross Profit Margins     57.4%        56.6%        0.8

Consolidated gross margin for the first six months of 2013 of 57.4% was 80 basis points higher than the first six months of 2012.

Consolidated operating expenses for the first six months of 2013 were $48.8 million, or 49.8% of sales, as compared to $43.4 million, or 47.8% of sales a year ago; an increase of 200 basis points. The CAD segment operating expenses were 7.4% higher than the prior year's first six months. Included in the CAD segment's 2013 six month period operating expenses was a $1.4 million one-time non-cash charge related to the settlement of a defined benefit pension plan that covered certain employees of its former manufacturing facility in Ireland and $0.7 million of costs related to the pending sale of CAD division assets. The COG segment's operating expenses were 18.7% higher than last year and were almost entirely related to the higher sales volume in the 2013 year-to-date period.

In the first six months of 2013, the effective tax rate was 33.6%. In the first six months of 2012, the effective tax rate was 31.2%.

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 $19.3 million at June 29, 2013 decreased $8.0 million from December 29, 2012. The most significant factors affecting the Company's cash balance are discussed in this section.

Inventory was $46.0 million at June 29, 2013, an increase of $8.0 million since December 29, 2012. CAD inventory increased $2.5 million and COG inventory levels increased by $5.5 million from year end 2012. The increase was to support anticipated higher sales volumes.

Accounts payable, accrued expenses and other liabilities was $20.9 million, a decrease of $5.5 million since December 29, 2012. CAD and COG accounts payable, accrued expenses and other liabilities decreased $2.0 million and $4.5 million, respectively.

The Company has a $40 million secured line of credit with a bank. At June 29, 2013, this credit facility had a maturity date of and amounts outstanding had to be paid by July 28, 2013. Subsequent to June 29, 2013, this credit facility was amended to extend its maturity date and date that amounts outstanding had to be paid by to December 31, 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 June 29,


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 June 29, 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:

  x
      Covenant                          Covenant                        Calculated
     Description                       Requirement                        Company
                                                                      Value June 29,
                                                                           2013
    Consolidated      Cannot be less than $37.5 million plus 50% of    $67.5 million
    Tangible Net       Net Income For Fiscal Years after 2010, or
        Worth                         $48.6 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                  0.77:1
   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 June 29, 2013, cash and short-term investments available for domestic operations was approximately $11.5 million, while cash held offshore was approximately $7.8 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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