Escalade, Inc. — Q1 2019 Form 10-Q
Business context and period: The filing covers the three months ended March 23, 2019; the comparable period ended March 24, 2018. Escalade is focused on sporting goods, including basketball, archery, recreation and fitness products. The results are seasonal and management cautions that the quarter is not necessarily indicative of full-year performance. Unless noted otherwise, dollar amounts below are in millions.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net sales | $32.102 | $32.149 |
| Gross margin | 26.4% | 28.0% |
| Operating income | $0.394 | $1.715 |
| Income before taxes | $0.332 | $1.491 |
| Net income | $0.267 | $1.216 |
| Diluted EPS | $0.02 | $0.08 |
| Operating cash flow | $0.248 | $3.674 |
| Capital expenditures | $0.623 | $0.206 |
Cost of products sold was $23.625 million, or 73.6% of sales, versus $23.161 million, or 72.0%. SG&A was $7.745 million (24.1% of sales), up from $6.950 million (21.6%). Amortization was $0.338 million versus $0.323 million. The effective tax rate was 19.6%, compared with 18.4%.
Cash and cash equivalents were $4.299 million at March 23, 2019, versus $2.824 million at December 29, 2018. Total assets were $150.332 million; current assets were $88.013 million and current liabilities $14.863 million. Inventories rose to $47.744 million from $39.122 million at year-end, primarily reflecting higher finished goods. Trade receivables were $31.951 million, down from $40.682 million.
Debt was $3.662 million, all classified as long-term, versus no debt at December 29, 2018 and $22.691 million at March 24, 2018. Debt equaled 2.9% of equity. Operating lease liabilities totaled $0.883 million. Financing cash flow was positive $1.850 million, including $14.200 million of debt proceeds and $10.538 million of repayments; the company paid $1.809 million in dividends. Cash increased $1.475 million during the quarter.
Material changes and management commentary
- Sales were essentially flat year over year, but gross profit declined about 5.7% to approximately $8.5 million and operating income fell substantially.
- Management attributed gross-margin pressure in part to Victory Tailgate, acquired in Q4 2018, whose operating costs weighed on results during the company’s slowest quarter. SG&A increased partly due to non-recurring costs for new basketball displayers.
- Gross sales by channel shifted: e-commerce rose to $9.934 million from $7.358 million and specialty-dealer sales to $13.601 million from $12.651 million; mass-merchant sales declined to $11.430 million from $13.089 million and international sales to $1.174 million from $2.315 million. Gross-to-net adjustments increased to $4.739 million from $3.452 million, including higher customer allowances.
- Sporting Goods segment operating income was $0.761 million versus $2.093 million; corporate operating loss was $0.367 million versus $0.378 million.
- Operating cash flow was markedly lower year over year; the filing reports $1.099 million of negative adjustments to reconcile net income to operating cash flow in 2019, versus $1.384 million of positive adjustments in 2018, but does not provide a clearer narrative attribution in the supplied text.
- The company sold its 50% Stiga joint-venture interest in May 2018 for $33.7 million, recognizing a $13.0 million gain. A new Stiga-branded product license took effect January 1, 2019. Stiga was no longer an investment on the March 2019 balance sheet.
Outlook, risks and other items
No specific earnings or revenue guidance is provided. Management says it expects adequate access to revolving credit to fund working-capital and growth needs and describes the balance sheet as strong with low long-term debt. On January 21, 2019, the company amended and restated its credit agreement, providing a senior revolving facility with maximum availability of $50.0 million and a maturity date of January 31, 2022. The agreement also provides more favorable interest-rate terms, increased borrowing-base availability, releases existing real-property mortgages, and permits up to $25.0 million of acquisitions without lender consent if no default exists.
Identified risks include competition and pricing, product demand and acceptance, new-product execution, strategic transactions and integration, key customer and supplier relationships, changes in retail and consumer buying habits, customer financial health, supply-chain disruption, cost control, economic and currency conditions, financing access and covenant compliance, technology and cybersecurity risks. The company is involved in ordinary-course litigation and does not expect existing claims to materially adversely affect its business or financial condition. Management concluded disclosure controls were effective and reported no material Q1 changes in internal control over financial reporting.
The company adopted the new lease standard on December 30, 2018; it recognized right-of-use assets and lease liabilities of approximately $0.985 million at adoption, with an immaterial balance-sheet impact. It declared and paid a quarterly dividend of $0.125 per share. The existing share-repurchase program had $2.240 million remaining at quarter-end; 2,216 shares were purchased during the quarter.
Important facts for investors to verify
- Whether the gross-margin and operating-income declines persist after the seasonal first quarter, and how Victory Tailgate costs affect subsequent periods.
- Drivers of higher customer allowances and the shift in sales across e-commerce, mass merchants, specialty dealers and international markets.
- Working-capital movements, especially the rise in finished-goods inventory, and whether operating cash flow improves.
- Actual borrowings, availability and covenant terms under the $50 million revolving facility; the filing does not state the precise unused capacity.
- Performance and economics of the Stiga licensing arrangement following the joint-venture sale.
- Progress on strategic growth initiatives, new products and acquisitions, alongside the risks management identifies.