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 19, 2005
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 5, 2005: 13,072,982
INDEX
Page
No.
Part I. Financial Information:
Item 1 - Financial Statements:
Consolidated Condensed Balance Sheets (Unaudited) as of
March 19, 2005, March 20, 2004, and December 25, 2004 3
Consolidated Condensed Statements of Income (Unaudited)
for the Three Months Ended March 19, 2005 and March 20, 2004 4
Consolidated Condensed Statements of Comprehensive
Income (Unaudited) for the Three Months Ended March 19, 2005
and March 20, 2004 4
Consolidated Condensed Statements of Cash Flows (Unaudited)
for the Three Months Ended March 19, 2005 and March 20, 2004 5
Notes to Consolidated Condensed Financial Statements 6
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 10
Item 4 - Controls and Procedures 11
Part II. Other Information
Item 6 - Exhibits 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 19, March 20, December 25,
2005 2004 2004
------------ ------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 4,872 $ 1,877 $ 3,050
Receivables, less allowance of
$2,220; $1,803; and $2,510;
respectively 31,873 32,628 44,363
Inventories 36,051 33,160 30,482
Prepaid expenses 2,960 1,846 3,011
Deferred income tax benefit 2,154 2,400 2,496
------------ ------------ ------------
TOTAL CURRENT ASSETS 77,910 71,911 83,402
Property, plant and equipment, net 15,773 17,024 16,498
Intangible assets 7,789 8,687 8,019
Goodwill 17,793 18,707 17,888
Investments 6,364 5,538 6,446
Other assets 2,987 3,445 2,846
------------ ------------ ------------
$ 128,616 $ 125,312 $ 135,099
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ -- $ 10,582 $ 11,638
Current portion of long-term debt 354 354 354
Trade accounts payable 5,513 9,778 8,034
Accrued liabilities 21,205 16,426 27,438
Income tax payable 793 541 142
------------ ------------ ------------
TOTAL CURRENT LIABILITIES 27,865 37,681 47,606
Other Liabilities:
Long-term debt 30,589 24,962 15,896
Deferred compensation 1,260 1,439 1,233
Interest rate swap agreement 302 1,027 386
------------ ------------ ------------
TOTAL LIABILITIES 60,016 65,109 65,121
Stockholders' equity:
Preferred stock:
Authorized 1,000,000 shares; no par
value, none issued
Common stock:
Authorized 30,000,000 shares; no
par value, issued and
outstanding - 13,072,982;
12,973,736; and 13,031,064;
shares respectively 13,073 12,974 13,031
Retained Earnings 51,560 45,244 52,394
Accumulated other comprehensive income 3,967 1,985 4,553
------------ ------------ ------------
68,600 60,203 69,978
------------ ------------ ------------
$ 128,616 $ 125,312 $ 135,099
============ ============ ============
See notes to Consolidated Condensed Financial Statements.
3
ESCALADE, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
(All amounts in thousands, except per share amounts)
Three Months Ended
------------------------
March 19, March 20,
2005 2004
---------- ----------
Net Sales $ 29,782 $ 34,060
Costs, expenses and other income:
Cost of products sold 20,859 24,518
Selling, general and administrative expenses 7,175 8,050
---------- ----------
Operating income 1,748 1,492
Interest expense, net (286) (365)
Other income (expense) 245 (18)
---------- ----------
Net income before income taxes 1,707 1,109
Provision for income taxes 553 511
---------- ----------
Net income $ 1,154 $ 598
========== ==========
Per Share Data:
Basic earnings per share $ 0.09 $ 0.05
Diluted earnings per share $ 0.09 $ 0.05
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Net income $ 1,154 $ 598
Unrealized gain (loss) on securities, net of
tax (22) 56
Foreign currency translation adjustment (618) (336)
Unrealized gain on interest rate swap agreement
net of deferred tax expense of $36 54 18
---------- ----------
Comprehensive income $ 568 $ 336
========== ==========
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 19, 2005 March 20, 2004
-------------- --------------
Operating Activities:
Net income $ 1,154 $ 598
Depreciation and amortization 1,184 1,298
Adjustments necessary to reconcile
net income to net cash provided
by operating activities 1,802 2,298
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Net cash provided by operating
activities 4,140 4,194
Investing Activities:
Purchase of property and equipment (266) (435)
Acquisition of assets (3,272)
Investment in affiliate (237) --
-------------- --------------
Net cash used by investing
activities (3,775) (435)
Financing Activities:
Net increase (decrease) in notes
payable 3,608 (1,112)
Proceeds from exercise of stock
options 123 654
Purchase of common stock (109) (514)
Dividends Paid (1,961) (1,556)
-------------- --------------
Net cash provided (used) by
financing activities 1,661 (2,528)
-------------- --------------
Effect of exchange rate changes on
cash (204) (2)
-------------- --------------
Net increase in cash and cash
equivalents 1,822 1,229
Cash and cash equivalents, beginning
of period 3,050 648
-------------- --------------
Cash and cash equivalents, end of
period $ 4,872 $ 1,877
============== ==============
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 25, 2004 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 2004 filed with
the Securities and Exchange Commission.
Note B - Seasonal Aspects
- --------------------------------------------------------------------------------
The results of operations for the three-month periods ended March 19, 2005 and
March 20, 2004 are not necessarily indicative of the results to be expected for
the full year.
Note C - Inventories
- --------------------------------------------------------------------------------
March 19, March 20, December 25,
(All amounts in thousands) 2005 2004 2004
------------ ------------ ------------
Raw materials $ 8,570 $ 9,718 $ 8,562
Work in progress 6,128 6,331 5,142
Finished goods 21,353 17,111 16,778
------------ ------------ ------------
$ 36,051 $ 33,160 $ 30,482
============ ============ ============
Note D - Income Taxes
- --------------------------------------------------------------------------------
The provision for income taxes was computed based on financial statement income.
Note E - Restructuring Costs
- --------------------------------------------------------------------------------
In 2004 the Company initiated a facility consolidation plan and involuntary
employee terminations in the Office Products segment in order to reduce costs
and increase the competitiveness of the Company. Under these plans no additional
costs were incurred during the quarter ended March 19, 2005. Liabilities under
these plans are as follows:
Balance at Balance at
(All amounts in December 25, Non-Cash Cash March 19,
thousands) 2004 Charges Payments 2005
------------ ------------ ------------ ------------
Severance and benefit
costs $ 1,278 $ -- $ 31 $ 1,247
Facility closure costs 170 -- 62 108
------------ ------------ ------------ ------------
$ 1,448 $ -- $ 93 $ 1,355
============ ============ ============ ============
6
Note F - Dividend Payment
- --------------------------------------------------------------------------------
On March 18, 2005, the Company paid a dividend of $0.15 per common share to all
shareholders of record on March 11, 2005. The total amount of the dividend was
approximately $2 million and was charged against retained earnings.
Note G - 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 19, 2005 March 20, 2004
-------------------------------------------------------------------------
Weighted average common shares
outstanding 13,058 12,910
Dilutive effect of stock options 174 330
-------------- --------------
Weighted average common shares
outstanding, assuming dilution 13,232 13,240
============== ==============
Note H - 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 19, 2005 March 20, 2004
-----------------------------------------------------------------------
Net income, as reported $ 1,154 $ 598
Less: Total stock-based employee
compensation cost determined under
the fair value based method, net of
income taxes (279) (105)
-------------- --------------
Pro forma net income $ 875 $ 493
============== ==============
Earnings per share
Basic--as reported $ 0.09 $ 0.05
============== ==============
Basic--pro forma $ 0.07 $ 0.04
============== ==============
Diluted--as reported $ 0.09 $ 0.05
============== ==============
Diluted--pro forma $ 0.07 $ 0.04
============== ==============
Note I - Segment Information
- --------------------------------------------------------------------------------
As of and for the Three Months
Ended March 19, 2005
-----------------------------------------------------------
Sporting Office
In thousands Goods Products Corp. Total
----------------------------------------------------------------------------------------
Revenues from external
customers $ 14,021 $ 15,761 $ -- $ 29,782
Operating income(loss) 43 2,129 (424) 1,748
Net income (loss) (111) 1,341 (76) 1,154
Total assets $ 58,979 $ 54,817 $ 14,820 $ 128,616
7
As of and for the Three Months
Ended March 20, 2004
-----------------------------------------------------------
Sporting Office
In thousands Goods Products Corp. Total
----------------------------------------------------------------------------------------
Revenues from external
customers $ 15,094 $ 18,966 $ -- $ 34,060
Operating Income(loss) 981 831 (320) 1,492
Net income (loss) 463 341 (206) 598
Total assets $ 52,628 $ 63,206 $ 9,478 $ 125,312
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
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 almost double the amount
reported in the same quarter of 2004 due to operating improvements in the Office
Products business segment. Initiatives implemented in 2004 to improve the
performance of the European operations in the Office Products business were
manifest in the first quarter in the form of higher gross margins and lower
operating costs. The Sporting Goods business recorded a net loss during the
quarter compared to a net gain in the same period of last year. Historically the
Sporting Goods business has reported net losses in the first quarter as a result
of the seasonal nature of the business.
8
The following schedule sets forth certain consolidated statement of income data
as a percentage of net revenue:
Three months ended
March 19, March 20,
2005 2004
----------------------------------------------------------------------
Net revenue 100.0% 100.0%
Cost of products sold 70.0% 72.0%
------- -------
Gross margin 30.0% 28.0%
Selling, administrative and general
expenses 24.1% 23.6%
------- -------
Operating income 5.9% 4.4%
======= =======
Consolidated Revenue and Gross Margin
Revenues for the first quarter of 2005 were 12.6% lower than the same period in
2004; Sporting Goods accounted for 25% of the decline and Office Products the
remainder.
Sporting Goods sales in the first quarter were down 7.1% compared to the same
period last year primarily related to basketball system shipments to traditional
sporting goods retailers. Customer changes in delivery terms have delayed
shipments of basketball systems to more accurately match demand at the retail
level. Market information indicates that basketball system sales at the retail
level are comparable with the prior year. Sporting Goods is actively engaged in
negotiating product placement for the 2005 fall and Christmas programs at its
major retail customers. In addition, the impact of the recent SEARS - KMart
merger has yet to be determined. Accordingly it is premature to comment on the
expected outcome for 2005. However, management is optimistic that the innovative
product offering and strong relationships with its major customers will result
in a similar level of sales volume and product mix as experienced in 2004.
Office Products sales were down 16.9% in the first quarter compared with the
same quarter last year due to product rationalization and shipping delays in the
data shredder product. The product that is being rationalized consists of
non-core products not manufactured by the Company which have inherently low
gross margins. These product lines were carefully scrutinized at the end of 2004
and inventory reserves established for quantities expected to become excess due
to the rationalization plans. The Company's primary data shredder manufacture in
China failed to perform according to contractual obligations resulting in a
temporary disruption in a few low-end data shredder products. This resulted in
both lost business for the quarter and shipping delays. The Company has remedied
the problem by replacing the supplier and those data shredder products affected
are now shipping as planned. Management does not expect to recover the shredder
business lost in the first quarter, nor does it expect to replace the
rationalized non-core products. Accordingly, management expects 2005 sales in
Office Products to be less than 2004.
The consolidated gross margin ratio increased during the first quarter compared
to the prior year as a direct result of cost reductions instituted in the Office
Products business segment. First quarter gross margins in the Sporting Goods
business declined relative to the same quarter last year due to a change in
product mix (lower sales of basketball systems). The gross margin in Office
Products increased significantly in the first quarter compared to last year as
cost reductions instituted in 2004 were fully realized. Comparable to the
results achieved in the first quarter, management anticipates a better overall
gross margin for the Company in 2005.
Management anticipates that raw material prices for steel and resin will
continue to rise during 2005. To the extent that these costs cannot be passed on
to customers through price increases, the gross margins in both business
segments will be negatively impacted. At present it is not possible to quantify
the extent or impact on future gross margins.
9
Consolidated Selling, General and Administrative Expenses
Consolidated selling, general and administrative expenses declined 11% compared
to the same period last year as a direct result of cost cutting efforts in the
Office Products business that were initiated in the latter half of 2004. The
Company believes that additional cost reduction synergies are possible as
European distribution in the Office Products business is consolidated. However,
these cost reductions will come at a much slower pace than those already
achieved and are not expected to materialize until 2006.
Financial Condition and Liquidity
The financial condition of the Company continues to be very strong. During the
first quarter the Company increased its total debt to accommodate the purchase
of certain assets from Child Life Inc., a manufacturer of premium residential
play systems. The largest component of the acquisition was finished products
which substantially accounts for the increase in consolidated inventory balances
compared to the same period last year.
The following schedule summarizes the Company's total debt:
March 19, March 20, December 25,
In thousands 2005 2004 2004
- --------------------------------------------------------------------------------
Notes payable short-term $ -- $ 10,582 $ 11,638
Current portion long-term debt 354 354 354
Long term debt 30,589 24,962 15,896
------------ ------------ ------------
Total debt $ 30,943 $ 35,898 $ 27,888
============ ============ ============
As a percentage of stockholders' equity, total debt has decreased from 59.6% at
March 20, 2004, to 45.1% at March 19, 2005.
During the first quarter of 2005, operations generated $4.1 million in cash;
comparable to the amount generated in the same period last year. A portion of
these funds was used to pay a cash dividend to shareholders of approximately $2
million.
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 2004. 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 19, 2005.
10
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 19, 2005 the aggregate book
value of long-term marketable equity securities was $1.8 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
Evaluation of Disclosure Controls and Procedures
Escalade 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
investments in certain unconsolidated entities. As the Company does not control
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 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.
Changes in Internal Control over Financial Reporting
Management of the Company has evaluated, with the participation of the Company's
Chief Executive Officer and Chief Financial Officer, changes in the Company's
internal controls over financial reporting (as defined in Rule 13a-15(f) and
15d-15(f) of the Exchange Act) during the first quarter of 2005. In connection
with this evaluation and the evaluation performed in the fourth quarter of 2004,
the Company identified deficiencies in internal controls over financial
reporting relating to the Company's subsidiary in France. The Company continued
remediation efforts begun in the fourth quarter of 2004, to eliminate the
deficiencies identified. This will be accomplished by eliminating the accounting
department in France and transferring those functions to the Company's German
subsidiary. As of the end of the period covered by this report, the Company had
not fully completed these actions and remediation efforts are ongoing.
Other than the changes identified above, there have been no changes to the
Company's internal control over financial reporting that occurred since the
beginning of the Company's first quarter of 2005 that have materially affected,
or are reasonably likely to materially affect, the Company's internal control
over financial reporting.
11
PART II. OTHER INFORMATION
Item 1, 2, 3, 4, and 5 Not Required.
Item 6. Exhibits
(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.
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 5, 2005 /s/ C. W. (BILL) REED
-------------- -------------------------------------
C. W. (Bill) Reed
President and Chief Executive Officer
Date: April 5, 2005 /s/ TERRY D. FRANDSEN
-------------- -------------------------------------
Terry D. Frandsen
Vice President and
Chief Financial Officer
12