Escalade, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 23, 2013; comparative period ended March 24, 2012. Amounts below are in millions of dollars unless otherwise noted. Escalade manufactures and distributes products in Sporting Goods and Information Security and Print Finishing. Management cautions that first-quarter results are seasonal and are not necessarily indicative of full-year performance.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $31.838 | $30.565 | Up 4% |
| Gross margin | 34.2% | 34.5% | Down 0.3 percentage points |
| Operating income | $3.048 | $2.742 | Up 11%; margin 9.6% vs. 8.9% |
| Income before taxes | $2.843 | $2.760 | Up 3% |
| Net income | $1.624 | $1.576 | Up 3% |
| Diluted EPS | $0.12 | $0.12 | Unchanged |
| Cash from operations | $4.431 | $0.150 | Increased |
Cost of products sold rose to 65.8% of sales from 65.5%. SG&A declined to 22.9% of sales from 23.9%; management attributes part of the improvement to expense timing. Interest expense was $0.167 million versus $0.154 million. The tax rate was 42.9% in both periods.
Segments and material changes
- Sporting Goods: Revenue increased 13.7% to $25.265 million; operating income rose to $4.225 million from $3.259 million. Management cited new products and brand marketing, and expects strong sales for the rest of the year, though growth may moderate from Q1.
- Information Security and Print Finishing: Revenue fell 21.3% to $6.573 million, or 21.2% excluding currency effects. Operating results shifted to a $0.452 million loss from $0.149 million income. Gross margin declined to 35.3% from 37.3%, reflecting pricing pressure. Management expects continued challenges, citing weaker European government spending and increased competition.
- Management expects full-year gross margins to be similar to 2012. No specific earnings or revenue guidance was provided.
Cash, liquidity and debt
Cash and cash equivalents were $1.913 million at March 23, 2013, down from $2.544 million at year-end; time deposits were $1.950 million. Operating cash flow of $4.431 million was offset by $0.930 million of investing outflows and $4.039 million of financing outflows, including $1.084 million in cash dividends. Inventory increased to $36.894 million from $30.864 million at year-end.
Total debt was $21.838 million, down $0.732 million from December 29, 2012, and equal to 27% of stockholders’ equity. Current liabilities were $36.785 million. Management says working capital is funded by operating cash flows and revolving credit, and expects adequate revolving-credit access to meet growth needs.
During Q1, the company entered into a seller-financed purchase of its previously leased Mexico property, with a $2.3 million note reported in supplemental cash-flow information and an outstanding balance of $2.2 million at quarter-end. On April 2, 2013, after quarter-end, Escalade amended its bank credit agreement: the amendment provides a revolving facility of up to $22 million maturing July 31, 2013, an $8.5 million term loan maturing May 31, 2015, and a €2.0 million overdraft facility. It also permits up to $2.5 million of seller financing for the Mexico property.
Other risks, contingencies and notable items
- Foreign-currency translation reduced comprehensive income by $0.078 million in Q1 2013, versus a $0.585 million gain in Q1 2012. The company reports exposure to foreign exchange and variable interest rates; no derivatives were in use during the quarter.
- The 50%-owned Stiga joint venture contributed $0.069 million of company-attributable income, down from $0.188 million. Escalade International contributed a $0.109 million loss, compared with a $0.020 million loss a year earlier.
- Escalade paid a quarterly dividend of $0.08 per common share on March 20, 2013, totaling approximately $1.1 million; no dividend was declared in the prior-year quarter.
- The company is involved in ordinary-course litigation and does not expect existing claims to materially harm its business or financial condition. Management reported disclosure controls were effective and no material change in internal controls during the quarter.
- Forward-looking risks include competition and pricing, product demand, customer and supplier relationships, cost control, economic conditions, foreign exchange, financing availability and covenant compliance, and integration of acquisitions.
Key facts for investors to verify
- Whether the July 31, 2013 revolving-facility maturity was subsequently extended or refinanced, and the company’s ongoing covenant compliance and borrowing availability.
- Whether the Information Security and Print Finishing segment’s revenue, margins and operating losses continued to weaken.
- Whether the substantial inventory increase converted into sales and cash, given the seasonality noted by management.
- Repayment terms and balance of the Mexico seller-financed property obligation, and its effect on liquidity and debt.
- How foreign-currency movements and results from equity-method joint ventures affected subsequent earnings and comprehensive income.