Escalade, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended October 1, 2016; comparisons are with periods ended October 3, 2015. Unless otherwise noted, financial amounts are in millions; the filing reports amounts in thousands.
Business context
Escalade is focused on growing its Sporting Goods business through existing product categories, product development and acquisitions. The company acquired substantially all assets of Triumph Sports USA on January 21, 2016, expanding its indoor and outdoor games offerings. Results are seasonal and interim performance is not necessarily indicative of full-year results.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $38.8 | $34.6 | $121.8 | $111.8 |
| Gross margin | 26.5% | 27.3% | 27.9% | 29.9% |
| Operating income | $5.3 | $1.9 | $10.8 | $10.3 |
| Net income | $4.2 | $2.0 | $8.0 | $8.7 |
| Diluted EPS | $0.30 | $0.14 | $0.56 | $0.61 |
- Q3 sales increased 12.2%; nine-month sales rose 9.0%, primarily reflecting acquisitions and new products, partly offset by continued archery declines.
- Gross margin fell 0.8 percentage points in Q3 and 2.0 points year to date. Management attributed the year-to-date decline to weaker archery sales and unfavorable product mix.
- Nine-month operating income increased 4.8%, while net income declined 8.2%. Lower equity-method earnings from Stiga, higher interest expense and a lower foreign-currency impact contributed to the comparison; the filing does not provide a full numerical reconciliation.
- Q3 operating results included an approximately $1.9 million gain on sale of the Wabash, Indiana facility. SG&A was also affected by bad-debt expense related to Sports Authority’s bankruptcy and increased marketing and selling expenses for new products.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $1.9 million, down from $5.8 million. Investing used $9.7 million, including $9.7 million for acquisitions; financing provided $10.1 million.
- Cash increased to $4.3 million from $2.0 million at December 26, 2015. Current assets were $89.7 million and current liabilities $52.2 million at quarter-end.
- Total debt was $37.4 million, up $14.1 million from year-end and $5.9 million year over year. Debt was 37% of stockholders’ equity, versus 24% at year-end 2015.
- The January 2016 amended credit agreement provides a revolving facility of up to $35 million maturing January 21, 2019, and a $7.5 million term loan maturing January 21, 2021. Management expected adequate revolving-credit access for working-capital and growth needs.
- The company paid quarterly dividends of $0.11 per share during each of the first three quarters. Nine-month cash dividends paid were $4.7 million.
Outlook, risks and other items
- No quantified earnings or revenue guidance is provided. Management’s stated strategy is to grow Sporting Goods through organic growth, innovation and complementary acquisitions.
- Risks identified include competition and pricing, demand and product acceptance, acquisition integration, customer and supplier relationships, supply-chain disruption, cost control, economic conditions, foreign exchange and access to financing or compliance with financing terms.
- Management said pending ordinary-course litigation was not expected to have a material adverse effect. No legal proceedings were reported in Part II.
- The company reported no derivatives in use and stated that a hypothetical 1% interest-rate change would not significantly affect financial position or results. Foreign-currency movements remain a risk.
- Disclosure controls were concluded to be effective; no material changes in internal control over financial reporting were reported during the period.
Most important facts for investors to verify
- Whether sales growth and new product launches can offset continued archery weakness and the decline in gross margin.
- How much of the improvement in Q3 operating income reflects the one-time property-sale gain, and the company’s earnings excluding that gain.
- Whether working-capital needs, acquisition spending and debt levels remain manageable given low year-to-date operating cash flow.
- The performance and integration of the Triumph acquisition, and any contingent purchase-price payment tied to targets.
- Stiga’s contribution to earnings: equity-method earnings fell to $0.7 million for nine months from $2.1 million, while its reported net income also declined.