Escalade, Inc. — Q1 2012 Form 10-Q
Business context and period: Escalade manufactures and distributes products in Sporting Goods and Information Security and Print Finishing. This unaudited report covers the three months ended March 24, 2012, compared with the three months ended March 19, 2011. Amounts below are in millions of dollars unless otherwise noted.
Financial performance
- Revenue: $30.565, up 9.2% from $27.998. Sporting Goods revenue was $22.214, up 15.8%; Information Security and Print Finishing revenue was $8.351, down 5.2% (down 3.9% excluding currency effects).
- Profitability: Gross profit was $10.556; gross margin was 34.5%, down from 36.1%. Operating income rose to $2.742 from $2.067, and operating margin increased to 8.9% from 7.4%. Net income was $1.576, up from $1.203; diluted EPS was $0.12 versus $0.09.
- Expenses and taxes: Cost of products sold increased to 65.5% of sales from 63.9%. SG&A fell to 23.9% of sales from 27.6%; amortization rose to 1.7% from 1.1%. The effective tax rate increased to 42.9% from 40.0%, mainly because losses in certain foreign tax jurisdictions did not offset gains in others.
- Cash flow: Operating cash flow was $0.150, compared with cash use of $2.885 a year earlier. Capital expenditures were $0.533. Cash declined $1.240 during the quarter to $2.581.
- Debt and liquidity: Total bank debt was $20.688 at quarter-end, down 12.5% year over year and 5.7% from December 31, 2011. It comprised $11.448 of short-term notes, $2.240 of overdraft borrowings, $2.000 current long-term debt, and $5.000 long-term debt. Cash and time deposits totaled $3.081; current assets were $65.004 and current liabilities $34.370. Management said operating cash flow and revolving credit agreements were expected to provide adequate working-capital funding.
- Segments: Sporting Goods reported operating income of $3.259 versus $2.336. Information Security and Print Finishing operating income declined to $0.149 from $0.580. Corporate operating loss was $0.666 versus $0.849.
Changes, outlook and risks
- Management attributed higher operating income to sales volume and the timing of expenses: some costs incurred in Q1 2011 were expected to occur later in 2012. It cautioned that the first-quarter improvement in Sporting Goods could moderate during the rest of the year.
- Management expected Information Security and Print Finishing revenue for the remainder of 2012 to equal or exceed the prior year, and full-year gross margins to be similar to 2011. These are expectations, not quantified earnings guidance. The filing notes that quarterly results may not indicate full-year performance because of seasonality.
- Sporting Goods sales benefited from increased consumer spending and demand, as well as mild U.S. weather that helped basketball and playground sales. The other segment’s decline reflected shipments in Q1 2011 that did not recur in Q1 2012.
- Management identified risks including competition and pricing, demand and product acceptance, customer and supplier relationships, cost control, acquisition integration, financing and covenant compliance, economic conditions, and foreign-currency movements. The company reported no derivatives in use and said a hypothetical 1% interest-rate change would not significantly affect results or financial position.
- The revolving credit facility provides up to $22 million and matures July 31, 2013; the $8.5 million term loan matures May 31, 2015, with quarterly principal installments. Litigation is described as arising in the normal course; management did not expect its resolution to materially adversely affect the business or financial condition.
- The company paid a $0.07-per-share dividend in January and declared another $0.07 dividend for payment April 16, 2012. The related $0.926 million was recorded as dividends payable at quarter-end. Employee option awards were subject to shareholder approval of a plan amendment and bank approval.
Important facts for investors to verify
- Whether improved Sporting Goods demand persisted after the unusually favorable weather and whether management’s segment revenue expectations were met.
- Whether later-quarter expense timing, higher product costs, and the lower gross margin affected full-year profitability.
- Availability and terms of revolving credit, compliance with financing requirements, and the scheduled maturity and repayments of debt.
- Foreign-exchange exposure and the impact of losses in foreign tax jurisdictions on the effective tax rate.
- The timing and approvals for the declared dividend and conditional employee stock-option awards.