Escalade, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended July 13, 2019. Unless noted otherwise, dollar amounts below are in millions; the filing presents financial statements in thousands.
Business context and financial highlights
Escalade focuses on sporting goods, including basketball goals, archery, indoor and outdoor recreation, and fitness products. Management’s strategy emphasizes organic growth, product development, and complementary acquisitions. Results are seasonal and the filing cautions that interim results are not necessarily indicative of full-year performance.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $55.639 | $48.684 | $87.741 | $80.833 |
| Gross margin | 23.3% | 23.6% | 24.4% | 25.3% |
| Operating income | $2.471 | $1.951 | $2.865 | $3.666 |
| Net income | $1.876 | $12.071 | $2.143 | $13.287 |
| Diluted EPS | $0.13 | $0.84 | $0.15 | $0.92 |
Cash flow, liquidity and debt
- Six-month operating cash flow was $0.193 million, versus $6.644 million in the prior-year period. Investing cash outflow was $2.138 million, including $1.377 million of capital expenditures and $0.765 million for acquisitions.
- Financing activities provided $3.719 million; the company reported $4.598 million cash at July 13, 2019, up from $2.824 million at December 29, 2018.
- Current assets were $92.456 million and current liabilities $15.748 million. Inventory was $47.984 million, up from $39.122 million at year-end 2018.
- Total debt was $7.528 million, comprising $7.393 million long-term debt and a $0.135 million note payable; debt was zero at December 29, 2018 and July 14, 2018. The company reported debt at 5.9% of stockholders’ equity.
- A January 2019 amended credit agreement provides a $50 million senior revolving facility maturing January 31, 2022. Management said it expects adequate revolving-credit access for working-capital and growth needs.
Material changes and management commentary
- Q2 sales rose 14.3% year over year; first-half sales rose 8.5%. Management attributed growth primarily to expanded distribution at major customers and more normal weather supporting outdoor categories, which offset weakness in other categories.
- Gross margin declined year over year in both periods, attributed to product mix and, for the first half, increased customer allowances. Q2 operating income increased, while first-half operating income declined.
- SG&A increased 10.1% in Q2 and 10.7% for the first half. Management cited Victory Tailgate operating costs and, for the first half, non-recurring costs related to new basketball displayers.
- E-commerce gross sales were $24.806 million in Q2 versus $12.988 million a year earlier, and $34.740 million for the first half versus $20.346 million. Gross sales by channel are before returns, warranties, and customer allowances.
- Prior-year earnings included a $13.020 million gain on the sale of Escalade’s 50% interest in Stiga Sports AB, completed in May 2018 for $33.7 million. This one-time gain explains much of the year-over-year net-income decline. The company now holds licensing rights for Stiga-branded table-tennis hobby products in the U.S., Mexico, and Canada.
- Victory Tailgate was acquired in Q4 2018. The company also adopted lease accounting effective December 30, 2018, recognizing operating-lease right-of-use assets and liabilities; management described the balance-sheet impact as immaterial.
Outlook, risks and contingencies
The filing provides no quantified revenue or earnings guidance. Management identifies competition and pricing, demand and product acceptance, new-product execution, acquisition integration, customer and supplier relationships, retail-channel and consumer-behavior shifts, supply-chain disruption, cost control, foreign exchange, financing availability and covenant compliance, and information-system and data-security risks as factors that could cause results to differ materially. The company reports ordinary-course litigation and does not expect its resolution to materially adversely affect its business or financial condition. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether sales growth, particularly in e-commerce and outdoor products, continues beyond the seasonally important second quarter.
- Whether customer allowances, product mix, and other gross-to-net adjustments continue to pressure gross margins.
- Why operating cash flow was low despite higher sales, and whether inventory growth converts to sales and cash.
- Current revolver borrowings, availability, interest terms, and covenant headroom under the amended credit agreement.
- Victory Tailgate’s contribution and integration costs, and the performance of recent acquisitions and product investments.
- The sustainability of earnings after excluding the prior-year Stiga divestiture gain from comparisons.