Escalade, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended July 14, 2018. Financial amounts below are in U.S. dollars; figures are in millions unless noted. Escalade focuses on sporting goods, including basketball, archery, recreation and fitness products.
Financial performance
- Revenue: Q2 net sales were $48.7 million, down 9.7% from $53.9 million. First-half sales were $80.8 million, down 5.8% from $85.8 million.
- Margins and operating income: Q2 gross margin was 23.6%, versus 24.3%; operating income was $2.0 million, versus $3.3 million. First-half gross margin improved to 25.3% from 24.9%, while operating income declined to $3.7 million from $5.3 million.
- Profit and EPS: Q2 net income was $12.1 million ($0.835 diluted EPS), versus $2.1 million ($0.146). First-half net income was $13.3 million ($0.921 diluted EPS), versus $3.5 million ($0.242). The 2018 results include a $13.0 million gain on the sale of the Stiga investment.
- Cash flow: First-half operating cash flow was $6.6 million, compared with $8.9 million. Investing activities provided $33.9 million, including $33.7 million of Stiga sale proceeds. Financing activities used $26.5 million, including substantial debt repayments. Cash increased by $14.0 million to $15.6 million.
- Debt and liquidity: Debt was zero at July 14, 2018, versus $23.1 million at December 30, 2017. The company reported $35.0 million of availability under its revolving credit facility. Current assets were $90.6 million and current liabilities $16.6 million.
- Other metrics: First-half dividends declared were $0.25 per share. The first-half effective tax rate was 18.7%, versus 32.5% in 2017.
Material changes and explanations
- Management attributed lower sales to unusually cold spring weather extending into Q2 and affecting outdoor product categories. It also cited an industry-wide archery downturn and retail bankruptcies.
- Q2 gross margin declined primarily due to product mix; first-half margin improved partly because 2017 was affected by changes to the crossbow product line.
- First-half SG&A rose 5.8% to $16.1 million, and increased to 19.9% of sales from 17.7%, as sales fell. Q2 SG&A declined slightly in dollars but rose as a percentage of sales.
- On May 17, 2018, Escalade sold its 50% interest in Stiga Sports AB for $33.7 million, recording a $13.0 million gain. Proceeds were used to repay outstanding debt, including a $4.7 million term-loan balance. A new licensing agreement for Stiga-branded table-tennis hobby products in the U.S., Mexico and Canada begins January 1, 2019; the existing agreement runs through December 31, 2018.
- Mass-merchant gross sales fell to $19.6 million in Q2 from $25.4 million; specialty-dealer sales increased to $19.3 million from $17.8 million. Gross-to-net adjustments increased to $5.7 million from $5.3 million, including higher warranty adjustments.
Outlook, risks and contingencies
- The filing provides no quantitative earnings or revenue guidance. Management’s strategy emphasizes organic growth, product innovation, brand marketing and complementary acquisitions, while divesting operations that no longer fit its objectives.
- Management said the archery downturn and retail bankruptcies have masked improvements in other businesses and online distribution. Results are seasonal and interim performance is not necessarily indicative of full-year results.
- Risks identified include competition and pricing, product demand, customer and supplier relationships, retail-channel changes, supply-chain disruption, cost control, foreign-exchange movements, financing and technology or data-security risks.
- The company had no derivatives in use. It stated that a hypothetical 1% interest-rate change would not significantly affect results or financial position; foreign-currency fluctuations could affect performance.
- Ordinary-course litigation is disclosed; management does not expect existing claims to materially harm the business or financial condition. The company reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter.
- The 2017 Tax Cuts and Jobs Act tax estimate remained provisional; no adjustment was made in the first half of 2018, and the final impact could differ, potentially materially.
Key facts investors should verify
- Whether core sales, operating income and margins improve after the weather-affected quarter, particularly in outdoor and archery categories.
- How the Stiga divestiture and transition to the new licensing agreement affect recurring earnings, cash flows and product distribution after 2018.
- Whether the $35.0 million revolver availability remains adequate and what terms or covenants govern future borrowing.
- Trends in customer allowances, warranty accruals and returns, along with sales-channel performance.
- Any updates to the provisional tax estimate and the effect of currency movements or other identified risks.