Escalade, Inc. — Q2 2017 Form 10-Q Summary
Reporting period: Second quarter and six months ended July 15, 2017; comparisons are to the periods ended July 9, 2016. Unless stated otherwise, amounts are in millions of dollars. Escalade focuses on sporting goods, including basketball, archery, recreation games and fitness products. The filing reports Sporting Goods and Corporate segments.
Financial performance
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Net sales | $52.393 | $48.463 | $83.205 | $83.031 |
| Gross margin | 25.0% | 26.2% | 25.7% | 28.6% |
| Operating income | $3.332 | $3.005 | $5.328 | $5.483 |
| Net income | $2.096 | $2.090 | $3.484 | $3.787 |
| Diluted EPS | $0.15 | $0.15 | $0.24 | $0.26 |
- Q2 sales rose 8.1%, which management attributed largely to growth in fitness and basketball. First-half sales were up 0.2%.
- Gross margin fell 1.2 percentage points in Q2 and 2.9 points in the first half. Management cited pressure from the archery category during a crossbow product-line transition.
- Q2 operating income increased 10.9% and net income was nearly flat. First-half operating income declined 2.8% and net income declined 8.0%.
- SG&A was $9.257 million in Q2, up 3.9%; first-half SG&A was $15.187 million, down 8.9%. Amortization also declined versus 2016.
- First-half effective tax rate was 32.5%, versus 29.5%; management attributed the lower prior-year rate primarily to captive-insurance benefits.
Cash flow, balance sheet and capital
- First-half operating cash flow was $8.881 million, versus $4.381 million in 2016. Cash increased $1.267 million to $2.280 million. Investing activities used $2.779 million; financing activities used $4.835 million.
- At July 15, 2017, current assets were $75.802 million and current liabilities $18.574 million, yielding working capital of approximately $57.228 million and a current ratio of about 4.1.
- Total debt was $23.686 million, down $1.753 million from year-end 2016 and $10.350 million year over year. Debt was 22.8% of stockholders’ equity. The filing says working capital is funded by operating cash flow and bank revolving credit, and management expects adequate revolving-credit access; facility availability is not quantified in the provided text.
- Dividends declared were $0.115 per share in Q2 and $0.23 per share for the first half. Cash dividends paid in the first half totaled $3.302 million.
Changes, outlook and notable items
- Management described a strategy of growing Sporting Goods through existing-category growth, product development and acquisitions, while divesting or discontinuing operations that no longer fit its objectives. No quantified earnings or sales guidance is provided.
- Two acquisitions were completed in the first half for total consideration of $1.5 million, including $1.4 million cash and a note for the remainder. They were described as individually and collectively immaterial. One generated a $256,000 bargain-purchase gain, included in first-half income.
- Results are seasonal and management cautioned that interim performance is not necessarily indicative of full-year results.
- Risks identified include competition and pricing, product demand and acceptance, customer and supplier relationships, retail and consumer changes, supply-chain disruption, cost control, acquisition integration, foreign-exchange movements, economic conditions, and financing availability and covenant compliance.
- The company reported no derivatives in use during the quarter. A hypothetical 1% interest-rate change was not expected to have a significant effect; foreign-currency movements may affect results.
- Management concluded disclosure controls were effective and reported no material changes in internal control over financial reporting. The company said ordinary-course litigation was not expected to have a material adverse effect.
Important facts for investors to verify
- Whether the archery/crossbow transition and related gross-margin pressure persist, and how the product-category sales mix develops.
- Cash conversion and working-capital needs, given the seasonal nature of results and the relatively low cash balance.
- Revolving-credit availability, terms and covenant headroom; the provided filing text does not state the available borrowing capacity.
- Acquisition performance and integration, including the assumptions behind the bargain-purchase valuation.
- Foreign-exchange exposure, particularly currencies associated with operations and the Stiga joint venture.