Escalade, Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended July 14, 2012; comparisons are with periods ended July 9, 2011. Amounts are in millions except per-share data. Escalade manufactures and distributes products in Sporting Goods and Information Security and Print Finishing.
Financial performance
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Net sales | $42.029 | $40.850 | $72.594 | $68.848 |
| Gross margin | 29.4% | 31.4% | 31.5% | 33.3% |
| Operating income | $2.689 | $2.717 | $5.431 | $4.784 |
| Net income | $1.087 | $1.485 | $2.663 | $2.688 |
| Diluted EPS | $0.08 | $0.11 | $0.20 | $0.20 |
Q2 sales rose about 3%, while net income fell about 27%; first-half sales rose about 5% and operating income about 14%, but net income was roughly flat. First-half operating margin increased to 7.4% from 6.9%, while gross margin fell. SG&A declined as a share of sales, but product costs and amortization were higher as a share of sales.
Cash flow and liquidity: First-half operating cash flow was $5.158 million, versus $0.175 million a year earlier. Investing cash outflow was $1.707 million and financing cash outflow was $5.674 million, including $2.893 million of dividends paid. Cash ended at $1.615 million, down from $3.821 million at year-end 2011; time deposits were $1.200 million. Current assets were $64.989 million and current liabilities $34.105 million. Inventory increased to $35.074 million from $29.035 million at year-end; management said inventory was increased to meet customer demand.
Debt: Total bank debt was $18.671 million, down from $21.947 million at year-end 2011 and $21.825 million a year earlier. This includes short-term notes, the overdraft facility and long-term debt. The May 2012 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.
Changes, outlook and risks
- Sporting Goods revenue grew 5.7% in Q2 and 9.6% in the first half. Management expected improvement to continue, citing new product placements and brand-building.
- Information Security and Print Finishing revenue declined 4.6% in Q2 and 4.9% year to date; excluding currency effects, declines were 0.5% and 1.7%. Management described the business as fairly flat and anticipated continued international-market challenges, partly from government austerity.
- Gross margin was pressured by staff-reduction costs and one-time expenditures in Information Security and Print Finishing. Management said these expenditures were not expected to recur in subsequent quarters and that cost-saving initiatives should benefit future periods.
- The effective tax rate rose to 60.3% in Q2 and 51.6% year to date, attributed mainly to foreign-jurisdiction losses that could not offset gains elsewhere.
- Management outlined a planned quarterly dividend of $0.08 per share, or $0.32 annually, subject to ongoing Board review of financial condition, outlook, cash flow and financing needs. The filing reports dividends paid of $0.07 per share in January, $0.07 in April and $0.08 in July.
- Results are seasonal and interim results may not indicate full-year performance. Disclosed risks include competition and pricing, demand and product acceptance, customer and supplier relationships, cost control, economic conditions, foreign exchange, acquisition integration and financing/covenant compliance. No derivatives were in use; management said a hypothetical 1% interest-rate change would not significantly affect results or financial position.
- Normal-course litigation was disclosed; the company did not expect its resolution to materially adversely affect its business or financial condition. Foreign currency translation reduced first-half comprehensive income by $1.239 million.
Key facts for investors to verify
- Whether reduced gross margin and the unusual segment expenses recover as management anticipated, and how costs and margins develop in Information Security and Print Finishing.
- Whether inventory growth converts to sales and cash, given the decline in cash and substantial dividend payments.
- Revolving-credit availability, covenant compliance and the refinancing outlook ahead of the July 2013 facility maturity.
- The persistence of elevated effective taxes and foreign-exchange effects, including currency translation.
- The sustainability of the planned dividend in light of liquidity, debt repayments and the Board’s stated review policy.