Escalade, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 19, 2016. The company notes that its first-quarter results are seasonal and are not necessarily indicative of full-year results. Unless otherwise noted, financial figures below are in U.S. dollars.
Business context
Escalade focuses on sporting goods, including basketball, archery, recreation games, and fitness products. Its strategy emphasizes organic growth, product development, and acquisitions. In January 2016, it acquired substantially all of Triumph Sports USA’s business and assets, expanding its indoor and outdoor games offerings.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $34.568 million | $33.419 million | Up 3.4% |
| Gross margin | 31.9% | 32.4% | Down 0.5 percentage points |
| Operating income | $2.478 million | $4.287 million | Down 42.2% |
| Net income | $1.697 million | $3.497 million | Down 51.5% |
| Diluted EPS | $0.12 | $0.25 | Down $0.13 |
| Operating cash flow | $1.677 million | $2.889 million | Down $1.212 million |
Cost of products sold was 68.1% of sales, compared with 67.6% a year earlier. SG&A rose 31.3% to $7.763 million, or 22.4% of sales versus 17.7%. The filing attributes the increase primarily to bad-debt expense related to Sports Authority’s bankruptcy filing and increased marketing and selling costs for new products. Equity earnings from Stiga, the company’s 50%-owned joint venture, fell to $49,000 from $667,000.
Balance sheet, debt, and liquidity
- At March 19, 2016, cash was $3.260 million and total current assets were $78.024 million; current liabilities were $44.064 million.
- Total debt was $34.048 million, versus $23.336 million at December 26, 2015 and $18.294 million at March 21, 2015. Debt was 35% of stockholders’ equity, compared with 24% at year-end 2015.
- Cash and cash equivalents increased by $1.278 million during the quarter. Investing activities used $9.812 million, including $9.459 million for acquisitions; financing activities provided $9.413 million.
- The January 2016 amended credit agreement provides a senior revolving facility of up to $35 million and a $7.5 million term loan. The revolver matures January 21, 2019, and the term loan January 21, 2021. The filing does not state the undrawn revolver availability.
Material changes, outlook, and risks
- Sales growth reflected new products and acquisitions, partly offset by continued declines in archery.
- The Triumph acquisition had a $10.0 million purchase price: $9.5 million paid in cash and $0.5 million contingent on targets. Identified acquired assets included $6.3 million of intangible assets and $1.4 million of goodwill. Management said the acquisition was not material to quarterly results and did not present pro forma results.
- Management expects access to adequate revolving credit for working-capital and growth needs, but provides no earnings or revenue guidance.
- Risks identified include competition and pricing, demand and product acceptance, new-product development, acquisition integration, customer and supplier relationships, supply-chain disruption, cost control, foreign-exchange movements, and financing availability and covenant compliance.
- The company reported no derivatives in use. It stated that a hypothetical 1% interest-rate change would not significantly affect its financial position or results. Normal-course litigation was disclosed; management did not expect existing claims to have a material adverse effect.
- The quarterly dividend declared was $0.11 per share. A dividend of approximately $1.6 million was paid on March 21, 2016.
Key facts for investors to verify
- Whether Sports Authority-related receivable exposure or other bad-debt costs increase beyond the quarter’s reported SG&A impact.
- Whether new products and the Triumph acquisition offset continued weakness in archery, and whether acquisition integration achieves expected benefits.
- Actual borrowing availability, future debt levels, and compliance with the amended credit agreement as working-capital needs change.
- Stiga’s subsequent performance and the factors behind its lower reported earnings.
- How the seasonal first quarter compares with subsequent periods; the filing cautions that quarterly results may not predict full-year performance.