Attached files
| file | filename |
|---|---|
| EX-32 - FORM 10-Q 1ST QTR 2011, EXHIBIT 32 - COSTA INC | exhibit32.htm |
| EX-31.2 - FORM 10-Q 1ST QTR 2011, EXHIBIT 31.2 - COSTA INC | exhibit31_2.htm |
| EX-31.1 - FORM 10-Q 1ST QTR 2011, EXHIBIT 31.1 - COSTA INC | exhibit31_1.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|
[X]
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
For the quarterly period ended April 2, 2011
or
|
[ ]
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the transition period from __________to __________
Commission File Number 1-6720
A. T. CROSS COMPANY
(Exact name of registrant as specified in its charter)
|
Rhode Island
(State or other jurisdiction of incorporation or organization)
|
05-0126220
(IRS Employer Identification No.)
|
|
One Albion Road, Lincoln, Rhode Island
(Address of principal executive offices)
|
02865
(Zip Code)
|
Registrant's telephone number, including area code (401) 333-1200
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.
|
X
|
Yes
|
__
|
No
|
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (S232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).
|
__
|
Yes
|
__
|
No
|
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
|
Large accelerated filer
|
__
|
Accelerated filer
|
__
|
||
|
Non-accelerated filer
|
__
|
Smaller reporting company
|
X
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
|
__
|
Yes
|
X
|
No
|
Indicate the number of shares outstanding of each of the issuer's classes of common stock as of April 30, 2011:
|
Class A common stock -
|
10,975,769 shares
|
|
|
Class B common stock -
|
1,804,800 shares
|
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
A. T. CROSS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
|
(THOUSANDS OF DOLLARS AND SHARES)
|
APRIL 2, 2011
|
JANUARY 1, 2011
|
|
|
ASSETS
|
(UNAUDITED)
|
||
|
Current Assets
|
|||
|
Cash and cash equivalents
|
$8,132
|
$16,650
|
|
|
Short-term investments
|
803
|
2,514
|
|
|
Accounts receivable, gross
|
30,894
|
30,631
|
|
|
Allowance for doubtful accounts
|
(1,044)
|
(1,069)
|
|
|
Accounts receivable, net
|
29,850
|
29,562
|
|
|
Inventories
|
37,772
|
31,320
|
|
|
Deferred income taxes
|
5,584
|
5,590
|
|
|
Other current assets
|
5,716
|
4,883
|
|
|
Total Current Assets
|
87,857
|
90,519
|
|
|
Property, plant and equipment, gross
|
105,647
|
104,949
|
|
|
Accumulated depreciation
|
(91,052)
|
(89,867)
|
|
|
Property, Plant and Equipment, Net
|
14,595
|
15,082
|
|
|
Goodwill
|
15,279
|
15,279
|
|
|
Intangibles, Net
|
9,357
|
9,458
|
|
|
Deferred Income Taxes
|
11,302
|
11,318
|
|
|
Other Assets
|
2,815
|
2,970
|
|
|
Total Assets
|
$141,205
|
$144,626
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|||
|
Current Liabilities
|
|||
|
Accounts payable, accrued expenses and other liabilities
|
$19,281
|
$19,564
|
|
|
Accrued compensation and related taxes
|
5,436
|
7,811
|
|
|
Retirement plan obligations
|
2,361
|
2,437
|
|
|
Income taxes payable
|
2,443
|
2,006
|
|
|
Total Current Liabilities
|
29,521
|
31,818
|
|
|
Long-Term Debt
|
19,221
|
19,221
|
|
|
Retirement Plan Obligations
|
14,341
|
16,274
|
|
|
Deferred Gain on Sale of Real Estate
|
2,607
|
2,737
|
|
|
Other Long-Term Liabilities
|
495
|
687
|
|
|
Accrued Warranty Costs
|
1,339
|
1,424
|
|
|
Commitments and Contingencies (Note K)
|
-
|
-
|
|
|
Total Liabilities
|
67,524
|
72,161
|
|
|
Shareholders' Equity
|
|||
|
Common stock, par value $1 per share:
|
|||
|
Class A - authorized 40,000 shares, 18,476 shares issued and
|
|||
|
10,978 shares outstanding at April 2, 2011, and 18,439 shares
|
|||
|
issued and 11,115 shares outstanding at January 1, 2011
|
18,476
|
18,439
|
|
|
Class B - authorized 4,000 shares, 1,805 shares issued and
|
|||
|
outstanding at April 2, 2011 and January 1, 2011
|
1,805
|
1,805
|
|
|
Additional paid-in capital
|
27,383
|
26,014
|
|
|
Retained earnings
|
82,372
|
81,114
|
|
|
Accumulated other comprehensive loss
|
(12,367)
|
(12,659)
|
|
|
Treasury stock, at cost
|
(43,988)
|
(42,248)
|
|
|
Total Shareholders' Equity
|
73,681
|
72,465
|
|
|
Total Liabilities and Shareholders' Equity
|
$141,205
|
$144,626
|
See notes to condensed consolidated financial statements.
A. T. CROSS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
|
(THOUSANDS OF DOLLARS AND SHARES,
|
THREE MONTHS ENDED
|
||
|
EXCEPT PER SHARE AMOUNTS)
|
APRIL 2, 2011
|
APRIL 3, 2010
|
|
|
Net sales
|
$39,782
|
$34,373
|
|
|
Cost of goods sold
|
16,627
|
14,854
|
|
|
Gross Profit
|
23,155
|
19,519
|
|
|
Selling, general and administrative expenses
|
18,952
|
16,700
|
|
|
Service and distribution costs
|
1,579
|
1,628
|
|
|
Research and development expenses
|
571
|
665
|
|
|
Operating Income
|
2,053
|
526
|
|
|
Interest income
|
3
|
2
|
|
|
Interest expense
|
(227)
|
(288)
|
|
|
Other income
|
34
|
9
|
|
|
Interest and Other Expense
|
(190)
|
(277)
|
|
|
Income Before Income Taxes
|
1,863
|
249
|
|
|
Income tax provision
|
605
|
75
|
|
|
Net Income
|
$1,258
|
$174
|
|
|
Net Income Per Share:
|
|||
|
Basic
|
$0.10
|
$0.01
|
|
|
Diluted
|
$0.10
|
$0.01
|
|
|
Weighted Average Shares Outstanding:
|
|||
|
Denominator for Basic Net Income Per Share
|
12,113
|
13,269
|
|
|
Effect of dilutive securities
|
778
|
86
|
|
|
Denominator for Diluted Net Income Per Share
|
12,891
|
13,355
|
|
A. T. CROSS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
|
(THOUSANDS OF DOLLARS)
|
THREE MONTHS ENDED
|
||
|
APRIL 2, 2011
|
APRIL 3, 2010
|
||
|
Net Income
|
$1,258
|
$174
|
|
|
Other Comprehensive Income (Loss), Net of Tax:
|
|||
|
Foreign currency translation adjustments
|
258
|
(585)
|
|
|
Unrealized gain on interest rate swap, net
|
87
|
41
|
|
|
Pension liability adjustment, net
|
(53)
|
33
|
|
|
Comprehensive Income (Loss)
|
$1,550
|
$(337)
|
|
See notes to condensed consolidated financial statements.
A. T. CROSS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
(THOUSANDS OF DOLLARS)
|
THREE MONTHS ENDED
|
||
|
APRIL 2, 2011
|
APRIL 3, 2010
|
||
|
Cash Provided by (Used in) Operating Activities:
|
|||
|
Net Income
|
$1,258
|
$174
|
|
|
Adjustments to reconcile net income to net cash
|
|||
|
used in operating activities:
|
|||
|
Depreciation
|
1,318
|
1,432
|
|
|
Amortization
|
131
|
246
|
|
|
Restructuring charges paid
|
-
|
(485)
|
|
|
Amortization of deferred gain
|
(130)
|
(130)
|
|
|
Provision for bad debts
|
4
|
67
|
|
|
Deferred income taxes
|
-
|
1,544
|
|
|
Provision for accrued warranty costs
|
(143)
|
227
|
|
|
Warranty costs paid
|
(76)
|
(201)
|
|
|
Stock-based compensation and directors' fees
|
473
|
716
|
|
|
Unrealized gain on short-term investments
|
(24)
|
-
|
|
|
Unrealized loss (gain) on foreign exchange contracts
|
429
|
(40)
|
|
|
Unrealized foreign currency transaction (gain) loss
|
(152)
|
70
|
|
|
Changes in operating assets and liabilities:
|
|||
|
Accounts receivable
|
(160)
|
4,159
|
|
|
Inventories
|
(6,296)
|
(5,414)
|
|
|
Other assets
|
(622)
|
(1,057)
|
|
|
Accounts payable
|
685
|
2,283
|
|
|
Other liabilities
|
(5,381)
|
(5,344)
|
|
|
Net Cash Used in Operating Activities
|
(8,686)
|
(1,753)
|
|
|
Cash Provided by (Used in) Investing Activities:
|
|||
|
Purchases of short-term investments
|
(996)
|
(2,999)
|
|
|
Sales of short-term investments
|
2,731
|
10,216
|
|
|
Additions to property, plant and equipment
|
(807)
|
(1,166)
|
|
|
Additions to trademarks and patents
|
(30)
|
(55)
|
|
|
Net Cash Provided by Investing Activities
|
898
|
5,996
|
|
|
Cash Provided by (Used in) Financing Activities:
|
|||
|
Borrowing on long-term debt
|
4,500
|
-
|
|
|
Repayment of long-term debt
|
(4,500)
|
(4,500)
|
|
|
Proceeds from sale of Class A common stock, net
|
29
|
9
|
|
|
Purchase of treasury stock
|
(836)
|
-
|
|
|
Net Cash Used in Financing Activities
|
(807)
|
(4,491)
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
77
|
(180)
|
|
|
Decrease in Cash and Cash Equivalents
|
(8,518)
|
(428)
|
|
|
Cash and cash equivalents at beginning of period
|
16,650
|
10,443
|
|
|
Cash and Cash Equivalents at End of Period
|
$8,132
|
$10,015
|
|
|
SUPPLEMENTAL INFORMATION
|
|||
|
Income taxes paid, net
|
$175
|
$136
|
|
|
Interest paid
|
$218
|
$266
|
|
See notes to condensed consolidated financial statements.
A. T. CROSS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
April 2, 2011
(UNAUDITED)
NOTE A - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes required by US GAAP for financial statements. The preparation of financial statements requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. In the opinion of the Company's management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of items of a normal and recurring nature) necessary to present fairly the financial position as of April 2, 2011, and the results of operations for the three-month periods ended April 2, 2011 and April 3, 2010. The results of operations for the three-month period ended April 2, 2011 are not necessarily indicative of the results to be expected for the full year. The Company considers events or transactions that occur after the balance sheet date but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. Subsequent events have been evaluated to the date of issuance of these financial statements. These financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended January 1, 2011, which includes consolidated financial statements and notes thereto for the years ended January 1, 2011, January 2, 2010 and January 3, 2009. The Company operates on a 52/53 week fiscal year, ending on the last Saturday closest to December 31, and consists of 13 week fiscal quarters.
NOTE B - Inventory
The components of inventory are as follows:
|
(THOUSANDS OF DOLLARS)
|
APRIL 2, 2011
|
JANUARY 1, 2011
|
|
|
Finished goods
|
$21,529
|
$18,379
|
|
|
Work in process
|
5,543
|
3,229
|
|
|
Raw materials
|
10,700
|
9,712
|
|
|
$37,772
|
$31,320
|
NOTE C - Income Taxes
In the first three months of 2011 the effective tax rate was 32.5%. In the first three months of 2010 the effective tax rate was 30.1%.
NOTE D - Segment Information
The Company has two reportable business segments: Cross Accessory Division ("CAD") and Cross Optical Group ("COG"). The Company evaluates segment performance based upon operating profit or loss. Following is the segment information for the Company:
|
(THOUSANDS OF DOLLARS)
|
THREE MONTHS ENDED
|
||
|
APRIL 2, 2011
|
APRIL 3, 2010
|
||
|
Revenues from External Customers:
|
|||
|
CAD
|
$22,840
|
$20,716
|
|
|
COG
|
16,942
|
13,657
|
|
|
Total
|
$39,782
|
$34,373
|
|
|
Depreciation and Amortization:
|
|||
|
CAD
|
$1,144
|
$1,294
|
|
|
COG
|
305
|
384
|
|
|
Total
|
$1,449
|
$1,678
|
|
|
Operating Income (Loss):
|
|||
|
CAD
|
$(323)
|
$(591)
|
|
|
COG
|
2,376
|
1,117
|
|
|
Total
|
$2,053
|
$526
|
|
|
Total Interest and Other Expense:
|
$(190)
|
$(277)
|
|
|
Total Income Before Income Taxes:
|
$1,863
|
$249
|
|
|
Expenditure for Long-Lived Assets:
|
|||
|
CAD
|
$365
|
$1,019
|
|
|
COG
|
472
|
202
|
|
|
Total
|
$837
|
$1,221
|
|
|
APRIL 2, 2011
|
JANUARY 1, 2011
|
||
|
Segment Assets:
|
|||
|
CAD
|
$86,219
|
$96,472
|
|
|
COG
|
54,986
|
48,154
|
|
|
Total
|
$141,205
|
$144,626
|
|
|
Goodwill:
|
|||
|
CAD
|
$-
|
$-
|
|
|
COG
|
15,279
|
15,279
|
|
|
Total
|
$15,279
|
$15,279
|
|
NOTE E - Warranty Costs
CAD’s Cross-branded writing instruments are sold with a full warranty of unlimited duration against mechanical failure. CAD's accessories are sold with a one-year warranty against mechanical failure and defects in workmanship and timepieces are warranted for a period of two years. Costa and Native sunglasses are sold with a lifetime warranty against defects in materials and workmanship. Estimated warranty costs are accrued at the time of sale. The most significant factors in the estimation of warranty cost liabilities include the operating efficiency and related cost of the service department, unit sales and the number of units that are eventually returned for warranty repair. The current portions of accrued warranty costs were $0.4 million at April 2, 2011 and $0.6 million January 1, 2011, and were recorded in accounts payable, accrued expenses and other liabilities. The COG segment reduced their estimate of warranty liabilities in the first quarter of 2011 due to lower net cost of repair. The following chart reflects the activity in aggregate accrued warranty costs:
|
(THOUSANDS OF DOLLARS)
|
THREE MONTHS ENDED
|
||
|
APRIL 2, 2011
|
APRIL 3, 2010
|
||
|
Accrued Warranty Costs - Beginning of Period
|
$1,998
|
$1,936
|
|
|
Warranty costs paid
|
(76)
|
(201)
|
|
|
Warranty costs accrued
|
83
|
227
|
|
|
Impact of changes in estimates and assumptions
|
(226)
|
-
|
|
|
Accrued Warranty Costs - End of Period
|
$1,779
|
$1,962
|
|
NOTE F - Line of Credit
In 2010, the Company amended and restated its secured revolving line of credit with Bank of America, N.A. (the “Bank”), increasing it from $35 million to $40 million. Under the amended and restated line of credit agreement, the Bank agreed to make loans to the Company in an aggregate amount not to exceed $40.0 million, including up to $10.0 million equivalent in Eurocurrency loans denominated in pounds sterling or Euro (“Eurocurrency Loans”) and up to $30.0 million of other committed loans to the Company (“Committed Loans”) at any time. As part of the aggregate availability, the Bank may also issue up to $7.5 million in letters of credit. Subject to the limits on availability and the other terms and conditions of this credit agreement, amounts may be borrowed, repaid and reborrowed without penalty. This amended credit facility matures and amounts outstanding must be paid by July 28, 2013.
The interest rate for the Committed Loans will be, at the Company's option, either (i) the London Interbank Offered Rate (“LIBOR”) plus an applicable margin or (ii) the higher of the federal funds rate plus 50 basis points or the Bank's prime rate plus an applicable margin. The interest rate for any Eurocurrency Loans will be an interest settlement rate for deposits in pounds sterling or Euro plus an applicable margin. The applicable margin for LIBOR and Eurocurrency loans will be an amount between 1.75% and 2.25%, and the applicable margin for federal funds or the Bank's prime rate will be an amount between 0.25% and 0.75%, which will vary from time to time based upon the Company's consolidated leverage ratio.
Under the line of credit agreement, the Company has agreed to comply with certain affirmative and negative covenants. The most restrictive covenant requires the Company to maintain a maximum ratio of consolidated funded indebtedness to consolidated adjusted EBITDA over any four-quarter period. The agreement requires the Company to maintain a minimum consolidated tangible net worth, computed at each year end, a maximum level of capital expenditures, each of which is calculated in accordance with the agreement. Amounts due under the credit agreement are guaranteed by certain domestic and foreign subsidiaries of the Company. Amounts due are also secured by a pledge of the assets of the Company and those of certain of its domestic subsidiaries.
At April 2, 2011 and at January 1, 2011, the outstanding balance of the Company's amended line of credit was $19.2 million, bearing an interest rate of approximately 2.0%, and the unused and available portion, according to the terms of the amended agreement, was $20.8 million.
NOTE G - Employee Benefit Plans
The following table illustrates the components of net periodic benefit cost:
|
(THOUSANDS OF DOLLARS)
|
THREE MONTHS ENDED
|
||
|
APRIL 2, 2011
|
APRIL 3, 2010
|
||
|
Service cost
|
$12
|
$11
|
|
|
Interest cost
|
554
|
560
|
|
|
Expected return on plan assets
|
(559)
|
(567)
|
|
|
Amortization of unrecognized loss
|
239
|
117
|
|
|
Amortization of prior service cost
|
3
|
3
|
|
|
Net Periodic Benefit Cost
|
$249
|
$124
|
|
The Company contributed $2.0 million to its defined benefit pension plans in the first quarter of 2011. The Company expects to contribute $6.1 million to its defined benefit pension plans in 2011, $2.1 million to meet minimum required contributions and $4.0 million as an additional voluntary contribution. With this additional voluntary contribution, the Company expects its defined benefit pension plans will be approximately 90% funded by the end of fiscal 2012. The Company expects to contribute $0.8 million to its defined contribution retirement plans and $0.2 million to its excess benefit plan in 2011.
NOTE H - Goodwill and Other Intangible Assets
Goodwill and indefinite-lived intangible assets are not amortized but are subject to annual impairment tests, more frequently if events or circumstances occur that would indicate a potential decline in their fair value. The Company has identified two reporting units, consisting of the CAD and COG segments. The Company performs the assessments annually during the fourth quarter or on an interim basis if potential impairment indicators arise. The fair value of the reporting unit's goodwill is determined using established income and market valuation approaches and the fair value of other indefinite-lived intangible assets, consisting of two COG segment trade names, is determined using a forward relief from royalty method. For further discussion about impairment analysis, see the "Impairment Analysis" section of 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 January 1, 2011.
At April 2, 2011 and January 1, 2011, the approximate $15.3 million carrying value of goodwill, $11.9 million of which is expected to be tax deductible, related entirely to the COG segment. Other intangibles consisted of the following:
|
(THOUSANDS OF DOLLARS)
|
APRIL 2, 2011
|
JANUARY 1, 2011
|
|||||
|
GROSS CARRYING AMOUNT
|
ACCUMULATED AMORTIZATION
|
OTHER INTANGIBLES, NET
|
GROSS CARRYING AMOUNT
|
ACCUMULATED AMORTIZATION
|
OTHER INTANGIBLES, NET
|
||
|
Amortized:
|
|||||||
|
Trademarks
|
$9,196
|
$8,851
|
$345
|
$9,201
|
$8,805
|
$396
|
|
|
Patents
|
3,396
|
3,159
|
237
|
3,361
|
3,124
|
237
|
|
|
Customer relationships
|
3,170
|
1,295
|
1,875
|
3,170
|
1,245
|
1,925
|
|
|
$15,762
|
$13,305
|
2,457
|
$15,732
|
$13,174
|
2,558
|
||
|
Not Amortized:
|
|||||||
|
Trade names
|
6,900
|
6,900
|
|||||
|
Intangibles, Net
|
$9,357
|
$9,458
|
|||||
Amortization expense for the three month period ended April 2, 2011 was approximately $0.1 million. The estimated future amortization expense for other intangibles remaining as of April 2, 2011 is as follows:
|
(THOUSANDS OF DOLLARS)
|
2011
|
2012
|
2013
|
2014
|
2015
|
THEREAFTER
|
|||||
|
$573
|
$640
|
$584
|
$527
|
$133
|
$-
|
NOTE I - Financial Instruments
The Company is exposed to market risks arising from adverse changes in foreign exchange and interest rates. In the normal course of business, the Company manages these risks through a variety of strategies, including the use of derivatives. Certain derivatives are designated as cash flow hedges and qualify for hedge accounting treatment, while others do not qualify and are marked to market through earnings. Gains or losses from derivatives used to manage foreign exchange are classified as selling, general and administrative expenses.
For cash flow hedges, changes in fair value are deferred in accumulated other comprehensive loss within shareholders' equity until the underlying hedged item is recognized in net income. For fair value hedges, changes in fair value are recognized immediately in earnings, consistent with the underlying hedged item. Hedging transactions are limited to an underlying exposure. As a result, any change in the value of the derivative instruments would be substantially offset by an opposite change in the value of the underlying hedged items. Hedging ineffectiveness and a net earnings impact occur when the change in the value of the hedge does not offset the change in the value of the underlying hedged item. Ineffectiveness of the Company's hedges is not material. If the derivative instrument is terminated, the Company continues to defer the related gain or loss and include it as a component of the cost of the underlying hedged item. Upon determination that the underlying hedged item will not be part of an actual transaction, the Company recognizes the related gain or loss in the statement of income immediately.
The Company also uses derivatives that do not qualify for hedge accounting treatment. The Company accounts for such derivatives at market value with the resulting gains and losses reflected in the statements of income.
The Company enters into arrangements with individual counterparties that it believes are creditworthy and generally settles such arrangements on a net basis. In addition, the Company performs a quarterly assessment of counterparty credit risk, including a review of credit ratings, credit default swap rates and potential nonperformance of the counterparty. Based on the most recent quarterly assessment of counterparty credit risk, the Company considers this risk to be low.
Foreign Exchange
The Company enters into derivatives, primarily forward foreign exchange contracts with terms of no more than one year, to manage risk associated with exposure to certain foreign currency denominated balance sheet positions, primarily intercompany accounts receivable. Gains or losses resulting from the translation of certain foreign currency balance sheet positions are recognized in the statement of income as incurred. Foreign currency derivatives had a total notional value of $27.0 million as of April 2, 2011 and $28.5 million as of January 1, 2011. Gains and losses on the derivatives were generally offset by changes in U.S. dollar value of the underlying hedged items.
Interest Rates
In the third quarter of 2010, the Company entered into a forward interest rate swap agreement with an initial notional amount of $15.0 million and a term of three years. This swap effectively fixes the interest rate on a portion of the Company’s line of credit at approximately 1.2%. The item being hedged is the first interest payment to be made on $15.0 million of principal expected to occur each month beginning March 31, 2011. The Company measures hedge ineffectiveness using the “hypothetical” derivative method. This swap has been designated a cash flow hedge and the effect of the mark-to-market valuation is recorded as an adjustment, net of tax, to accumulated other comprehensive loss. From inception to April 2, 2011, the effect of the mark-to-market valuation, net of tax, was not material and was included as a component of accumulated other comprehensive loss.
Fair Value Measurements
The fair value framework requires the categorization of assets and liabilities into three levels based upon the assumptions (inputs) used to price the assets or liabilities. Level 1 provides the most reliable measure of fair value, whereas Level 3 generally requires significant management judgment. The three levels are defined as follows:
|
Level 1
|
Unadjusted quoted prices in active markets for identical assets and liabilities.
|
|
Level 2
|
Observable inputs other than those included in Level 1. For example, quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets.
|
|
Level 3
|
Unobservable inputs reflecting management's own assumptions about the inputs used in pricing the asset or liability.
|
The fair values of our financial assets and liabilities are categorized as follows:
|
(THOUSANDS OF DOLLARS)
|
APRIL 2, 2011
|
JANUARY 1, 2011
|
|||||||
|
LEVEL 1
|
LEVEL 2
|
LEVEL 3
|
TOTAL
|
LEVEL 1
|
LEVEL 2
|
LEVEL 3
|
TOTAL
|
||
|
Assets:
|
|||||||||
|
Money market funds (A)
|
$103
|
$-
|
$-
|
$103
|
$7,003
|
$-
|
$-
|
$7,003
|
|
|
Short-term investments (B)
|
803
|
-
|
-
|
803
|
2,514
|
-
|
-
|
2,514
|
|
|
Derivatives not designated as
|
|||||||||
|
hedging instruments:
|
|||||||||
|
Foreign exchange contracts (C)
|
-
|
25
|
-
|
25
|
-
|
-
|
-
|
-
|
|
|
$906
|
$25
|
$-
|
$931
|
$9,517
|
$-
|
$-
|
$9,517
|
||
|
(THOUSANDS OF DOLLARS)
|
APRIL 2, 2011
|
JANUARY 1, 2011
|
|||||||
|
LEVEL 1
|
LEVEL 2
|
LEVEL 3
|
TOTAL
|
LEVEL 1
|
LEVEL 2
|
LEVEL 3
|
TOTAL
|
||
|
Liabilities
|
|||||||||
|
Derivatives designated as
|
|||||||||
|
hedging instruments:
|
|||||||||
|
Interest rate swaps (D)
|
$-
|
$50
|
$-
|
$50
|
$-
|
$184
|
$-
|
$184
|
|
|
Derivatives not designated as
|
|||||||||
|
hedging instruments:
|
|||||||||
|
Foreign exchange contracts (C)
|
-
|
454
|
-
|
454
|
-
|
154
|
-
|
154
|
|
|
$-
|
$504
|
$-
|
$504
|
$-
|
$338
|
$-
|
$338
|
||
|
(A)
|
Value is based on quoted market prices of identical instruments, fair value is included in cash and cash equivalents
|
|
(B)
|
Value is based on quoted market prices of identical instruments
|
|
(C)
|
Value is based on the present value of the forward rates less the contract rate multiplied by the notional amount, fair value is included in other current assets or accounts payable, accrued expenses and other liabilities
|
|
(D)
|
Value is derived from a discounted cash flow analysis based on the terms of the contract and the interest rate curve, fair value is included in accounts payable, accrued expenses and other liabilities
|
Accounts receivable are recorded at net realizable value, which approximates fair value. Accounts payable, included in accounts payable, accrued expenses and other current liabilities, are recorded at historical cost, which approximates fair value due to the short-term nature of the liabilities. Long-term debt is recorded at historical cost, which approximates fair value due to the variable interest rate.
The effective portion of the pre-tax gains (losses) on our derivative instruments for the three month periods ended April 2, 2010 and April 3, 2011 are categorized in the following table:
|
(THOUSANDS OF DOLLARS)
|
THREE MONTHS ENDED
|
||
|
APRIL 2, 2011
|
APRIL 3, 2010
|
||
|
Fair Value / Non-designated Hedges:
|
|||
|
Foreign exchange contracts (A)
|
$(429)
|
$40
|
|
|
Cash Flow Hedges:
|
|||
|
Effective portion recognized in other
|
|||
|
comprehensive income:
|
|||
|
Interest rate swaps
|
$261
|
$191
|
|
|
Effective portion reclassified from other
|
|||
|
comprehensive income:
|
|||
|
Interest rate swaps (B)
|
$(127)
|
$(128)
|
|
|
(A)
|
Included in selling, general and administrative expenses
|
|
(B)
|
Included in interest expense
|
NOTE J - Short-Term Investments
At April 2, 2011, the Company had short-term investments of $0.8 million classified as trading securities. Realized and unrealized gains or losses on these short-term investments are included in other income. The amount of unrealized gain on these short-term investments was $24,000 at April 2, 2011.
NOTE K - Commitments and Contingencies
The Company was named as one of approximately ninety defendants in a contribution suit brought by CCL/Unilever relating to the J.M. Mills Landfill Site (the “Site”), which is part of the Peterson/Puritan Superfund Site in Cumberland, Rhode Island. These complaints alleged that the Company was liable under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") for contribution for Site investigation costs. The Company has reached settlement of the case and paid a settlement amount of approximately $0.2 million in 2010.
The Company expects that the Federal Environmental Protection Agency ("EPA") will select a remedy for the Site in 2011. At that time, the EPA will initiate an administrative process (the "Special Notice Process") pursuant to CERCLA whereby the EPA will request that those entities that the EPA contends arranged for the disposal of hazardous materials at the Site (the PRPs), undertake the selected remedy at the Site. The EPA contends that the Company is a PRP at the Site. During the Special Notice Process, the Company and the other PRPs will engage in negotiations with the EPA regarding the remedy, and among themselves regarding the contribution of each PRP to overall remediation costs. Neither the cost of the remedy nor the identity of all PRPs is known at this time. Therefore it is not possible to assess the outcome of the Special Notice Process as it may relate to the Company's contribution to remediation costs.
The Pension Benefit Guaranty Corporation (“PBGC”) has asserted that it believes that the Company has had a triggering event under Section 4062(e) of ERISA, which, had such an event occurred, would lead to an acceleration of funding contributions to the Company’s defined benefit plan in the amount of $11.9 million. The PBGC has indicated that such contributions, if required, could be satisfied over a period of several years via a variety of funding alternatives. Specifically, during 2010, the PBGC has asserted that the Company closed a facility in the USA when it completed the transfer of a significant portion of its manufacturing operations offshore. The Company maintains that the facility did not close, and therefore no triggering event occurred. Currently, the Company employs approximately 170 employees in the facility at issue. Notwithstanding the foregoing, the Company intends to ensure that its defined benefit plan remains viable and healthy and intends to continue to make all legally required contributions under the plan. Ongoing discussions continue between the Company and PBGC. The Company further believes that it has sufficient liquidity to meet any required contributions to the Plan, up to and including the $11.9 million.
The Company is involved in various other litigation and legal matters that have arisen in the ordinary course of business. To its knowledge, management believes that the ultimate resolution of any of those existing matters will not have a material adverse effect on the Company's consolidated financial position or results of operations.
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 has been operating in a difficult economic environment in mature as well as 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.
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, ball-point, 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, watches, desk sets, cufflinks, and stationery. 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 2011 Compared to First Quarter 2010
In the first quarter of 2011, the Company reported net income of $1.3 million, or $0.10 per basic and diluted share, compared to net income of $0.2 million, or $0.01 per basic and diluted share in the first quarter of 2010.
The following chart details net sales performance:
|
(THOUSANDS OF DOLLARS)
|
THREE MONTHS ENDED
|
PERCENTAGE
|
|||
|
APRIL 2, 2011
|
APRIL 3, 2010
|
CHANGE
|
|||
|
Cross Accessories Division (CAD)
|
$22,840
|
$20,716
|
10.3%
|
||
|
Cross Optical Group (COG)
|
16,942
|
13,657
|
24.1%
|
||
|
Consolidated Net Sales
|
$39,782
|
$34,373
|
15.7%
|
||
Consolidated net sales were $39.8 million in the first quarter of 2011 compared to $34.4 million in the first quarter of 2010. The effect of foreign exchange was favorable to consolidated first quarter 2011 sales results by approximately $0.4 million, or 1.2 percentage points.
CAD sales increased 10.3% in the first quarter of 2011 compared to the first quarter of 2010. This growth was across every region and among Distributors and Retailers as they are seeing positive sell through this year compared to last. Business Gift Channel sales also improved as businesses are reinstating gift programs that were put on hold during the recession. COG grew by 24.1%, led by the Costa brand which increased 30.4% 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:
|
(THOUSANDS OF DOLLARS)
|
THREE MONTHS ENDED
|
PERCENTAGE
|
|||
|
APRIL 2, 2011
|
APRIL 3, 2010
|
POINT CHANGE
|
|||
|
CAD
|
57.1%
|
57.7%
|
(0.6)
|
||
|
COG
|
59.7%
|
55.5%
|
4.2
|
||
|
Consolidated Gross Profit Margins
|
58.2%
|
56.8%
|
1.4
|
||
Consolidated gross margins were 58.2% in the first quarter, 140 basis points higher than the same period last year. CAD gross margins declined in the first quarter of 2011 to 57.1%, 60 basis points lower than 2010. COG margins in the first quarter of 2011 were 59.7% up from last year by 420 basis points as both Costa and Native brands grew their gross margin.
Consolidated operating expenses for the first quarter of 2011 were $21.1 million, or 53.0% of sales, as compared to $19.0 million, or 55.3% of sales a year ago; a decrease of 230 basis points. The CAD segment operating expenses were 6.6% higher than the prior year’s first quarter. The COG segment’s operating expenses were 19.8% higher than last year. These increases were directly related to the higher sales volume.
In the first three months of 2011, the effective tax rate was 32.5%. In the first three months of 2010, the effective tax rate was 30.1%.
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, restructuring programs, contributions to the retirement plans, stock repurchase programs and debt service. The Company expects its future cash needs in 2011 will be met by these historical sources of liquidity and capital.
The Company's cash and short-term investment balance of $8.9 million at April 2, 2011 decreased $10.2 million from January 1, 2011. The most significant factors affecting the Company's cash balance are discussed in this section.
Inventory was $37.8 million at April 2, 2011, an increase of $6.5 million since January 1, 2011. CAD inventory increased $3.3 million and COG inventory levels increased by $3.2 million from year end 2010. The increase in CAD segment inventory was largely due to product cost inflation. The increase in COG inventory was to support anticipated higher sales volumes, as COG typically records its highest sales in the second quarter.
Accrued compensation and related taxes was $5.4 million at April 2, 2011, a decrease of $2.4 million since January 1, 2011.
The Company contributed $2.0 million to its defined benefit pension plans in the first quarter of 2011. The Company expects to contribute $6.1 million to its defined benefit pension plans in 2011, $2.1 million to meet minimum required contributions and $4.0 million as an additional voluntary contribution. With this additional voluntary contribution, the Company expects its defined benefit pension plans will be approximately 90% funded by the end of fiscal 2012. The Company expects to contribute $0.8 million to its defined contribution retirement plans and $0.2 million to its excess benefit plan in 2011.
As part of the acquisition of Native Eyewear, the Company assumed the liability of future payments associated with a "settlement in lieu of future royalties." The payments are $0.2 million annually each January through 2012.
The Company has a $40 million secured line of credit with a bank. Under this 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 April 2, 2011 and January 1, 2011, the Company had $19.2 million outstanding on this line of credit, bearing an interest rate of 2.0%, and the unused and available portion was $20.8 million. The Company was in compliance with its various debt covenants as of April 2, 2011. 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
Description
|
Covenant
Requirement
|
Calculated Company
Value April 2, 2011
|
|||
|
Consolidated
Tangible Net Worth
|
Cannot be less than $37.5 million plus 50% of Net Income For Fiscal Years after 2010
|
$49 million
|
|||
|
Capital Expenditures
|
Cannot exceed the greater of $10 million in a year or $10 million plus prior year expenditures less the $10 million cap
|
$0.8 million
|
|||
|
Consolidated
Leverage Ratio
|
Cannot exceed 2.75 to 1
|
0.95:1
|
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 2011 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 April 2, 2011, cash and short-term investments available for domestic operations was approximately $4.5 million, while cash held offshore was approximately $4.4 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 January 1, 2011.
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," "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 2011 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 2010 Annual Report on Form 10-K.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Refer to the Company's Annual Report on Form 10-K for the fiscal year ended January 1, 2011 for a complete discussion of the Company's market risk. There have been no material changes to the market risk information included in the Company's 2010 Annual Report on Form 10-K.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer have evaluated our disclosure controls and procedures as of April 2, 2011 and have concluded that these disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities and Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. These disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file or submit is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the first quarter of 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Refer to Item 3 in the Company's Form 10-K Annual Report for the fiscal year ended January 1, 2011 for a complete discussion of the Company's legal proceedings. No material developments have occurred in the Legal Proceedings described in such Item 3.
The Company is involved in various other litigation and legal matters that have arisen in the ordinary course of business. To its knowledge, management believes that the ultimate resolution of any of those existing matters will not have a material adverse effect on the Company's consolidated financial position or results of operations.
Item 1A. Risk Factors.
Natural disasters in certain regions, such as the recent tsunami and earthquake in Japan, could adversely affect our supply chain or customer base, which in turn, could have a negative impact on our business, the cost and demand for our products, and our results of operations.
Refer to Item 1A in the Company's Form 10-K Annual Report for the fiscal year ended January 1, 2011 for a complete discussion of the risk factors which could materially affect the Company's business, financial condition or future results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Issuer Purchases of Equity Securities:
|
TOTAL NUMBER OF SHARES PURCHASED
|
AVERAGE PRICE PAID PER SHARE
|
TOTAL NUMBER OF SHARES PURCHASED AS PART OF PUBLICLY ANNOUNCED PLANS OR PROGRAMS
|
MAXIMUM NUMBER OF SHARES THAT MAY YET BE PURCHASED UNDER THE PLANS OR PROGRAMS
|
||||
|
January 2, 2011 - January 29, 2011
|
-
|
-
|
-
|
502,366
|
|||
|
January 30, 2011 - February 26, 2011
|
75,584
|
$10.11
|
-
|
502,366
|
|||
|
February 27, 2011 - April 2, 2011
|
7,166
|
$10.00
|
7,166
|
495,200
|
|||
|
82,750
|
$10.10
|
7,166
|
In 2008, the Company's Board of Directors authorized management to repurchase up to 1.0 million shares of the Company's outstanding Class A common stock, depending on market conditions. Cumulatively, through April 2, 2011, the Company purchased approximately 0.5 million shares under this plan for approximately $1.9 million at an average price per share of $3.60.
Item 3. Defaults Upon Senior Securities.
None
Item 4. (Removed and Reserved)
Item 5. Other Information.
None
Item 6. Exhibits.
|
Exhibit 31.1
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
Exhibit 31.2
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
Exhibit 32
|
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
SIGNATURES
Pursuant to the requirement 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.
|
A. T. CROSS COMPANY
|
|
|
Date: May 13, 2011
|
By: DAVID G. WHALEN
David G. Whalen
Chief Executive Officer
|
|
Date: May 13, 2011
|
By: KEVIN F. MAHONEY
Kevin F. Mahoney
Senior Vice President, Finance and
Chief Financial Officer
|