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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 20, 2004
Commission File Number 0-6966
ESCALADE, INCORPORATED
----------------------
(Exact name of registrant as specified in its charter)
Indiana 13-2739290
------- ----------
(State of incorporation) (I.R.S. EIN)
251 Wedcor Avenue, Wabash, Indiana 46992
---------------------------------------------
(Address of principal executive office)
260-569-7208
------------
(Registrant's Telephone Number)
Securities registered pursuant to Section 12(b) of the Act
NONE
Securities registered pursuant to section 12(g) of the Act
Common Stock, No Par Value
--------------------------
(Title of Class)
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act
Yes [X] No [ ]
The number of shares of Registrant's common stock (no par value) outstanding as
of April 6, 2004: 6,491,390
1
INDEX
Page
No.
Part I. Financial Information:
Item 1 - Financial Statements:
Consolidated Condensed Balance Sheets (Unaudited) as of March 20, 2004, March 22, 2003,
and December 27, 2003 3
Consolidated Condensed Statements of Income (Unaudited)
for the Three Months Ended March 20, 2004 and March 22, 2003 4
Consolidated Condensed Statements of Comprehensive
Income (Unaudited) for the Three Months Ended March 20, 2004 and March 22, 2003 4
Consolidated Condensed Statements of Cash Flows (Unaudited) for the Three Months Ended
March 20, 2004 and March 22, 2003 5
Notes to Consolidated Condensed Financial Statements 6
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 7
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 10
Item 4 - Controls and Procedures 10
Part II. Other Information
Item 6 - Exhibits and Reports on Form 8-K 11
Signatures 12
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ESCALADE, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
(All amounts in thousands except share information)
March 20, March 22, December
2004 2003 27, 2003
ASSETS
Current Assets:
Cash and cash equivalents $ 1,877 $ 5,392 $ 648
Receivables, less allowance of $1,803; $584; and
$1,991; respectively 32,628 23,056 45,073
Inventories 33,160 32,744 29,853
Prepaid expenses 1,846 1,384 1,611
Deferred income tax benefit 2,400 1,452 2,434
---------- ---------- -----------
TOTAL CURRENT ASSETS 71,911 64,028 79,619
Property, plant and equipment 50,528 45,138 48,844
Accumulated depreciation and amortization (33,504) (27,151) (31,307)
---------- ---------- -----------
17,024 17,987 17,537
Intangible assets 8,687 6,268 9,026
Goodwill 18,707 13,351 18,777
Other assets 8,983 6,200 9,478
---------- ---------- -----------
$ 125,312 $ 107,834 $ 134,437
========== ========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 10,582 $ 16,419 $ 21,568
Current portion of long-term debt 354 167 354
Trade accounts payable 9,778 7,497 8,139
Accrued liabilities 16,426 13,663 23,321
Income tax payable 541 1,508 1,580
-------- ---------- -----------
TOTAL CURRENT LIABILITIES 37,681 39,254 54,962
Other Liabilities:
Long-term debt 24,962 17,355 15,729
Interest rate swap agreement 1,027 -- 1,055
Deferred compensation 1,439 1,342 1,408
---------- ---------- -----------
27,428 18,697 18,192
Minority Interest -- 3,577 --
Stockholders' equity:
Preferred stock:
Authorized 1,000,000 shares; no par value, none issued
Common stock:
Authorized 10,000,000 shares; no par value, Issued and
outstanding - 6,486,868; 6,532,531; and 6,427,081;
respectively 6,487 6,533 6,427
Additional Paid in capital -- 756 --
Retained Earnings 51,731 38,716 52,609
Accumulated other comprehensive income 1,985 301 2,247
---------- ---------- -----------
60,203 46,306 61,283
---------- ---------- -----------
$ 125,312 $ 107,834 $ 134,437
========== ========== ===========
See notes to Consolidated Condensed Financial Statements.
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ESCALADE, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
(All amounts in thousands, except per share amounts)
Three Months Ended
-----------------------------------
March 20, 2004 March 22, 2003
Net Sales $35,250 $29,103
Costs, expenses and other income:
Cost of products sold 24,518 18,659
Selling, general and administrative expenses 9,240 9,932
Interest 365 448
Other expense 18 51
------- -------
34,141 29,090
Net income before income taxes and minority interest 1,109 13
Net Income in subsidiary allocated to minority interest -- 2
Provision for income taxes 511 4
------- -------
Net income $ 598 $ 7
======= =======
Per Share Data:
Basic earnings per share $ 0.09 $ 0.00
Diluted earnings per share $ 0.09 $ 0.00
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
Net income $ 598 $ 7
Unrealized gain (loss) on securities, net of tax 56 (52)
Foreign currency translation adjustment (336) 378
Unrealized gain on interest rate swap agreement net of deferred tax
expense of $10 18 --
------- -------
Comprehensive income $ 336 $ 333
======= =======
See notes to Consolidated Condensed Financial Statements.
4
ESCALADE, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(All amounts in thousands)
Three Months Ended
---------------------------------------------
March 20, 2004 March 22, 2003
Operating Activities:
Net income $ 598 $ 7
Depreciation and amortization 1,298 1,182
Adjustments necessary to reconcile net income to net
cash provided by operating activities 2,298 (64)
--------- ---------
Net cash provided by operating activities 4,194 1,125
Investing Activities:
Purchase of property and equipment (435) (419)
Acquisition of majority interest in Schleicher & Co.
International AG -- (4,133)
--------- ---------
Net cash used by investing activities (435) (4,552)
Financing Activities:
Net increase (decrease) in notes payable (1,112) 5,351
Proceeds from exercise of stock options 654 170
Purchase of common stock (514) (72)
Dividends Paid (1,556) --
Foreign Currency Translation (2) --
--------- ---------
Net cash (used) provided by financing activities (2,530) 5,449
--------- ---------
Net increase in cash and cash equivalents 1,229 2,022
Cash and cash equivalents, beginning of period 648 3,370
--------- ---------
Cash and cash equivalents, end of period $ 1,877 $ 5,392
========= =========
See notes to Consolidated Condensed Financial Statements.
5
ESCALADE, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
Note A - Basis of Presentation
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 condensed
consolidated balance sheet of the Company as of December 27, 2003 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 condensed consolidated 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 2003 filed with
the Securities and Exchange Commission.
Note B - Seasonal Aspects
The results of operations for the three-month periods ended March 20, 2004 and
March 22, 2003 are not necessarily indicative of the results to be expected for
the full year.
Note C - Inventories
(All amounts in thousands) March 20, 2004 March 22, 2003 December 27, 2003
Raw materials $ 9,718 $ 8,248 $ 7,300
Work in progress 6,331 4,689 5,133
Finished goods 17,111 19,807 17,420
-------- -------- --------
$ 33,160 $ 32,744 $ 29,853
======== ======== ========
Note D - Income Taxes
The provision for income taxes was computed based on financial statement income.
Note E - Dividend Payment
On March 12, 2004, the Company paid a dividend of $0.24 per common share to all
shareholders of record on March 5, 2004. The total amount of the dividend was
$1,556 thousand and was charged against retained earnings.
Note F - Earnings Per Share
The shares used in computation of the Company's basic and diluted earnings per
common share are as follows:
3 Months Ended
-------------------------------------
All amounts in thousands March 20, 2004 March 22, 2003
------------------------ -------------- --------------
Weighted average common shares outstanding 6,455 6,511
Dilutive effect of stock options 165 121
----- -----
Weighted average common shares outstanding, assuming dilution 6,620 6,632
===== =====
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Note G - Employee Stock Option Plan
The Company has two stock-based compensation plans. The Company accounts for
these plans under the recognition and measurement principles of APB Opinion No.
25, Accounting for Stock issued to Employees, and related interpretations. The
following table illustrates the effect on net income and earnings per share if
the Company had applied the fair value provisions of FASB Statement No. 123,
Accounting for Stock-Based Compensation, to stock-based employee compensation.
Three Months Ended
--------------------------------
(In Thousands Except Per Share
Amounts) March 20, 2004 March 22, 2003
- ---------------------------------------------------- -------------- --------------
Net income, as reported $ 598 $ 7
Less: Total stock-based employee compensation cost
determined under the fair value based method, net of
income taxes
(105) (110)
----- ------
Pro forma net income $ 493 $ (103)
===== ======
Earnings per share
Basic--as reported $0.09 $ 0.00
===== ======
Basic--pro forma $0.08 $(0.02)
===== ======
Diluted--as reported $0.09 $ 0.00
===== ======
Diluted--pro forma $0.07 $(0.02)
===== ======
Note J - Segment Information
As of and for the Three Months
Ended March 20, 2004
------------------------------------------
Office -
Sporting Graphic
In thousands Goods Arts Corp. Total
- -------------------------------- -------- -------- ------ --------
Revenues from external customers
$15,689 $ 19,561 $ -- $ 35,250
Net Income (Loss) 463 341 (206) 598
Total Assets $52,628 $ 63,206 $9,478 $125,312
As of and for the Three Months
Ended March 22, 2003
------------------------------------------
Office -
Sporting Graphic
In thousands Goods Arts Corp. Total
- -------------------------------- -------- -------- ------ --------
Revenues from external customers $ 11,179 $ 17,924 $ -- $ 29,103
Net Income (Loss) (399) 497 (91) 7
Total Assets $ 46,166 $ 56,340 $5,328 $107,834
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, new product development, the continuation
7
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 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 Office Products. Within these
industries the Company has successfully built a commanding market presence in
niche markets. This strategy is heavily dependent on brand recognition and
excellent customer service. Management believes the key indicators in measuring
the success of this strategy are revenue growth and earnings growth. A key
strategic advantage is the Company's established relationships with major
retailers that allow the Company to bring new products to the market in a very
cost effective manner. In addition to strategic customer relations, the Company
has over 75 years of manufacturing experience that enable it to be a low cost
supplier.
RESULTS OF OPERATIONS
Consolidated net income for the first quarter was $589 thousand, significantly
higher than the same period in the prior year, $7 thousand, due entirely to the
profit generated in the sporting goods segment. In contrast to the historical
trend of seasonally slow first quarter results, the sporting goods business
realized a profit of $463 thousand in the first quarter of 2004, compared to a
loss of $399 thousand for the same period in 2003. Net income in the office
product business declined 31% due to losses experienced in European operations,
which incurred additional expenses relating to the late development and delivery
of new products, operating inefficiencies in the German manufacturing operation,
and inadequate product pricing. Cost reduction programs and product pricing
increases have been initiated to remedy these deficiencies in the office product
business and management feels confident that the office product business will be
accretive in the current year.
The following schedule sets forth certain consolidated statement of income data
as a percentage of net revenue for the periods indicated:
2004 2003
----- -----
NET REVENUE 100.0% 100.0%
Cost of products sold 69.5% 64.1%
----- -----
GROSS MARGIN 30.5% 35.9%
Selling, administrative and general expenses 26.3% 34.1%
----- -----
OPERATING INCOME 4.2% 1.8%
===== =====
CONSOLIDATED REVENUE AND GROSS MARGIN
Revenues for the first quarter of 2004 were 21.1% higher than the same quarter
in 2003. Approximately 73% of this increase came from sporting goods, which
recorded a 40.3% increase in sales over the same quarter of 2003. Office product
sales were up 9.1% over the same period last year.
Approximately 25% of the growth in sporting good revenue reflects the absence of
excess inventory issues at the end of 2002 that negatively impacted the first
quarter of 2003. The 2002 West Coast Longshoreman Lockout disrupted distribution
during the 2002 Christmas Season resulting in excess inventory at major retail
customers. This resulted in lower first quarter 2003 sales to these retailers.
The remainder of the growth in the first quarter of 2004 came from increased
archery revenues directly related to the archery acquisition made during the
third quarter of 2003 and increased sales of basketball systems driven by strong
retail placement and early warm weather.
8
Although office product sales were up 9.1% over the prior year, most of this
gain results from a stronger Euro exchange rate. Excluding the effects of
foreign currency exchange rates, office product sales were up 2% due primarily
to increased placement of folding machines and paper trimmers in Europe and
increased programs in North America. Sales of data security shredder products
were up marginally over the prior year, but remain strong. Paper punch, catalog
racks, and computer desk accessories continue to decline in sales due to strong
price and program competition from importers. The Company is implementing plans
to reduce manufacturing costs to be more competitive on these product lines.
The consolidated gross margin ratio declined from 35.9% in 2003 to 30.5% in 2004
due almost entirely to product mix. In the first quarter of 2004, sporting goods
sales, which have a lower gross margin than office products, comprised 44.5% of
total sales compared to only 38.4% of total sales in 2003. The overall effect
was a net decline in gross margin rates. The gross margin on sporting goods
products increased marginally due to higher sales in archery, pool table
products and basketball systems - all a key part of the increased first quarter
sales. The gross margin in office products declined marginally due to the
foreign currency effect on products manufactured in Germany and sold in North
America.
Worldwide shortages in steel have resulted in raw material price increases on a
wide range of products in both business segments. Potentially this could have a
negative impact on the gross margins in both business segments. The impact in
the first quarter of 2004 has been negligible and the Company has initiated
efforts to mitigate the future effect. However, if this condition continues for
an extended period of time and the Company is unable to pass these cost
increases on to customers, gross margins will decline. At present it is not
possible to quantify the extent or impact on future gross margins.
CONSOLIDATED SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Consolidated selling, general and administrative expenses were 7.0% lower in the
first quarter of 2004 compared to the same period last year. As a percentage of
net revenues, the ratio declined from 34.1% in 2003 to 26.3% in 2004. The
primary factor behind this decline is the increased sales level, but
contributing to this change is a reduction in the selling, general and
administrative expenses associated with the office product business. The Company
has identified a number of cost reduction synergy opportunities relating to the
data shredder business acquired in 2003. The full extent of these cost reduction
efforts will not be realized until 2005.
FINANCIAL CONDITION AND LIQUIDITY
The financial condition of the Company remains strong. The current ratio, a
basic measure of liquidity (current assets divided by current liabilities),
increased from 1.6 as of March 22, 2003 and 1.4 at December 27, 2003, to 1.9 as
of March 20, 2004. This increase reflects an increase in current assets,
primarily higher accounts receivable balances related to the higher sales
volume, and a decrease in current liabilities, primarily the conversion of
short-term debt into long-term debt. The following schedule summarizes the
Company's total debt:
March 20, March 22, December 27,
In thousands 2004 2003 2003
- ------------------------------ --------- --------- ------------
Notes payable short-term $ 10,582 $16,419 $ 21,568
Current portion long-term debt 354 167 354
Long term debt 24,962 17,355 15,729
-------- ------- --------
Total debt $ 35,898 $33,941 $ 37,651
======== ======= ========
Total debt at March 20, 2004 increased $1,957 thousand over the balance at March
22, 2003 as a result of the acquisitions in 2003, but decreased $1,753 thousand
from the balance at December 27, 2003 reflecting the continued strong cash flow
from operations. As a percentage of stockholders' equity, total debt has
decreased from 73% at March 22, 2003, to 61% at December 27, 2003 and 60% at
March 20, 2004.
During the first quarter of 2004, operations generated $4.2 million in cash
9
compared to $1.1 million in 2003. Cash was provided by net income adjusted for
non-cash related items. Approximately $13 million of the cash generated in the
first quarter of 2004 came from collections of accounts receivable. This was
partially offset by reductions in accrued liabilities and an increase in
inventories.
The Company's working capital requirements are primarily funded from operating
cash flows and revolving credit agreements with its banks. The Company's
relationship with its primary lending bank remains strong and the Company
expects to have access to the same level of revolving credit that was available
in 2003. In addition, the Company believes it can quickly reach agreement to
increase available credit should the need arise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to financial market risks, including changes in currency
exchange rates, interest rates and marketable equity security prices. To
mitigate these risks, the Company utilizes derivative financial instruments,
among other strategies. At the present time, the only derivative financial
instrument used by the company is an interest rate swap. The Company does not
use derivative financial instruments for speculative purposes.
A substantial majority of revenue, expense and capital purchasing activities are
transacted in U.S. dollars. However, the Company's foreign subsidiaries enter
into transactions in other currencies, primarily the Euro. 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 programs reduce, but do not entirely
eliminate, the impact of currency exchange rate changes. Presently the Company
does not employ currency exchange hedging financial instruments, but has
adjusted transaction and cash flows to mitigate adverse currency fluctuations.
Historical trends in currency exchanges indicate that it is reasonably possible
that adverse changes in exchange rates of 20% for the Euro could be experienced
in the near term. Such adverse changes would not have resulted in a material
impact on income before taxes for the three months ended March 20, 2004.
A substantial portion of the Company's debt is based on U.S. prime and LIBOR
interest rates. In an effort to lock-in current low rates and mitigate the risk
of unfavorable interest rate fluctuations the Company has entered an interest
rate swap agreement. This agreement effectively converted a portion of its
variable rate debt into fixed rate debt.
An adverse movement of equity market prices would have an impact on the
Company's long-term marketable equity securities that are included in other
assets on the consolidated balance sheet. At March 20, 2004 the aggregate book
value of long-term marketable equity securities was $1.4 million. Due to the
unpredictable nature of the equity market the Company has not employed any hedge
programs relative to these investments.
ITEM 4. CONTROLS AND PROCEDURES
The Company 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
investment in certain unconsolidated entities. As the Company does not control
10
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 has 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.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect the internal controls subsequent
to the date the Company completed its evaluation. Therefore, no corrective
actions were taken.
PART II. OTHER INFORMATION
Item 1, 2, 3, 4, and 5 Not Required.
Item 6. Exhibits and Reports on Form 8-K
(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.
(b) Reports on Form 8-K
1. On February 13, 2004, Escalade filed a report on Form 8-K
relating to its financial information for the quarter and year
ended December 27, 2004 and forward-looking statements as
presented in the shareholder message and press release dated
February 13, 2004.
11
SIGNATURE
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 6, 2004 C. W. (Bill) Reed
-------------------------------------
C. W. (Bill) Reed
President and Chief Executive Officer
Date: April 6, 2004 Terry D. Frandsen
-------------------------------------
Terry D. Frandsen
Vice President and
Chief Financial Officer
12