Escalade, Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter ended October 1, 2011; comparisons are with the quarter and nine months ended October 2, 2010, unless noted. Amounts are in U.S. dollars; financial statement amounts below are in millions except per-share data.
Business context and results
Escalade manufactures and distributes products in Sporting Goods and Information Security and Print Finishing. Third-quarter consolidated sales were nearly flat as retailers cautiously managed inventories; year-to-date sales increased 9.1%.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $28.7 | $28.6 | $97.6 | $89.5 |
| Gross margin | 28.9% | 32.2% | 32.0% | 33.1% |
| Operating income (loss) | $(0.9) | $2.4 | $3.9 | $7.2 |
| Net income (loss) | $(0.4) | $1.2 | $2.3 | $3.8 |
| Diluted EPS | $(0.03) | $0.09 | $0.17 | $0.29 |
Q3 cost of products sold rose to 71.1% of sales from 67.8%; SG&A was 30.4% of sales versus 22.6%. For the nine months, SG&A was 26.7% of sales versus 23.8%. Reported operating results include accelerated depreciation tied to the planned Oracle ERP replacement.
Segments and material changes
- Sporting Goods: Q3 revenue declined 2.6%; nine-month revenue increased 9.3%. Retail inventory caution and shipment timing weighed on the quarter. Promotions also reduced gross margin.
- Information Security and Print Finishing: Q3 revenue increased 9.1% and nine-month revenue 8.6%; excluding currency effects, each was up 5.4%. Management reported softening in government and commercial channels. A product component issue generated warranty costs of $0.4 million in Q3 and $0.455 million year to date; $0.3 million was accrued.
- Management attributed the quarterly operating loss largely to $2.2 million of accelerated depreciation on the Oracle ERP asset. It stated that, excluding this charge, operating income would have been $1.4 million for Q3 and $6.1 million year to date. A further $2.2 million depreciation charge was expected in Q4.
- The company recorded a $0.38 million pretax gain on the September sale of its Reynosa, Mexico facility, but an after-tax loss of $0.094 million due to foreign tax costs not expected to be fully offset by U.S. tax benefits. The nine-month effective tax rate was 54.8%, versus 43.6% a year earlier.
- Other income included Escalade’s 50% share of Stiga joint-venture income: $1.6 million for the nine months, versus $0.5 million. Stiga’s reported nine-month net income was $2.272 million versus a loss of $0.292 million.
Cash flow, liquidity and debt
Operating activities used $1.044 million of cash in the first nine months, versus providing $5.032 million in the prior-year period. Management cited increased inventory as a principal use of cash; inventory was $35.9 million at October 1, up from $22.9 million at December 25, 2010. Investing activities provided $2.064 million, including $3.418 million of proceeds from property sales; financing activities provided $2.178 million, including a $7.076 million increase in notes payable and $3.232 million in dividend payments.
Cash and cash equivalents were $4.433 million, with $1.2 million in time deposits. Total bank debt was $25.629 million, up 24.7% from year-end 2010 and 9.9% from October 2010. Current liabilities were $40.456 million and current assets $68.090 million. The company paid a $0.25-per-share dividend, totaling approximately $3.2 million, in September.
An April 2011 credit 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 million overdraft facility. Management said it expected adequate revolving-credit access for working-capital and growth needs and considered leverage appropriate. The filing reports no derivatives in use; management said a hypothetical 1-percentage-point interest-rate change would not significantly affect results or financial position.
Outlook, risks and other disclosures
Management expected Sporting Goods Q4 sales to exceed the prior-year Q4, while expecting Q4 growth in Information Security and Print Finishing to be below its first-nine-month growth rate. No specific consolidated earnings or revenue guidance was provided. ERP implementation was expected to finish at the last Oracle site by year-end; additional Sporting Goods site implementations were expected over 18–24 months. Estimated ERP implementation costs were $1.6 million for Sports and $0.5 million for Martin Yale Europe.
Risks identified include competition and pricing, demand and product acceptance, customer and supplier relationships, cost control, economic conditions, foreign exchange, financing availability and covenant compliance, and integration of acquired businesses. Currency movements affected reported comprehensive income: Q3 foreign currency translation was a $2.053 million loss. The company stated that ordinary-course litigation was not expected to have a material adverse effect. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported for the quarter.
Important facts for investors to verify
- Whether the anticipated Q4 Sporting Goods recovery occurred and whether weakness in government and commercial channels persisted.
- Actual ERP replacement timing, total implementation costs, and the remaining accelerated depreciation charges.
- Resolution and cash cost of the product warranty issue, including use of the $0.3 million accrual.
- Inventory reduction, operating cash flow, and borrowing needs after the reported inventory build.
- Tax consequences of the Reynosa sale and the sustainability of joint-venture contributions to other income.
- Compliance with credit agreement requirements and availability under the revolving facility.