Escalade, Inc. — Q3 2017 Form 10-Q
Business and period: Escalade focuses on sporting goods, including basketball, archery, table tennis, recreation and fitness products. This filing covers the quarter and nine months ended October 7, 2017; comparisons are with periods ended October 1, 2016. Financial amounts below are in USD millions unless noted. Results are seasonal and interim results may not indicate full-year performance.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $41.892 | $38.793 | $125.097 | $121.824 |
| Gross margin | 27.1% | 26.5% | 26.2% | 27.9% |
| Operating income | $4.128 | $5.329 | $9.456 | $10.812 |
| Net income | $3.118 | $4.243 | $6.602 | $8.030 |
| Diluted EPS | $0.22 | $0.30 | $0.46 | $0.56 |
- Sales rose 8.0% in Q3 and 2.7% for the nine months. Management attributed quarterly growth to basketball, table tennis and archery.
- Q3 gross margin improved, which management attributed to favorable sales mix; the nine-month margin declined year over year.
- Operating income declined 22.5% in Q3 and 12.5% year to date; net income declined 26.5% and 17.8%, respectively. Q3 SG&A increased 49.8% to $6.866 million, while nine-month SG&A rose 3.7% to $22.053 million.
- The nine-month effective tax rate was 31.9%, versus 27.6% in 2016; the filing attributes the lower prior-year rate primarily to captive-insurance benefits.
- Stiga, the 50%-owned equity-method joint venture, contributed $0.615 million of earnings in Q3 versus $0.573 million; nine-month contribution was $0.639 million versus $0.749 million.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $8.428 million, up from $1.912 million. Investing cash use was $3.695 million; financing cash use was $4.100 million, including $4.954 million of cash dividends. Cash increased $0.633 million from year-end to $1.646 million.
- At October 7, 2017, current assets were $82.810 million and current liabilities $22.012 million. Receivables were $34.774 million and inventory $42.392 million; inventory was up from $33.802 million at December 31, 2016.
- Total debt was $26.038 million, including $1.300 million current and $24.738 million long-term, up $0.599 million from year-end but down from $37.404 million a year earlier. Debt was 24.5% of equity, versus 37.2% a year earlier.
- Management said working capital is funded through operating cash flow and revolving credit and expects adequate revolving-credit access for growth needs. The filing does not provide a specific liquidity forecast.
- Quarterly dividends declared were $0.115 per share; three dividends of that amount were paid during the nine-month period.
Changes, outlook and risks
- Management cited industry-wide weakness in archery, reduced contribution from Stiga, and retail-industry bankruptcies, which it said had masked improvements in other existing and acquired businesses. It also noted lower receivables and inventory in Q3 and lower debt than a year earlier.
- Two acquisitions during the nine months involved $1.5 million of consideration ($1.4 million cash and a note for the balance). One resulted in a $0.256 million bargain-purchase gain. The acquisitions were not material, individually or together, according to the filing.
- Q3 2016 SG&A benefited from a $1.9 million gain on a property sale and was affected by $0.4 million of one-time expenses, for a net benefit of approximately $1.5 million; this affects the year-over-year expense comparison.
- No quantified earnings or revenue guidance was provided. Forward-looking risks include competition and pricing, demand and product acceptance, execution of acquisitions and integration, customer and supplier relationships, retail and consumer changes, supply-chain disruption, cost control, economic conditions, foreign exchange, and financing availability and covenant compliance.
- The company reported no derivatives in use during the quarter. It cited variable-rate LIBOR debt and foreign-currency exposure, including Mexican peso, Chinese yuan and Swedish krona; management said a hypothetical 1% interest-rate change would not have a significant effect.
- Routine-course litigation was disclosed; management did not expect existing claims to materially adversely affect the business or financial condition. Disclosure controls were judged effective, and no material changes in internal control were reported.
Important facts for investors to verify
- Whether sales growth can offset weaker nine-month gross margin and lower operating and net income.
- How much of the Q3 SG&A comparison reflects the prior-year property-sale gain and other one-time items.
- Inventory levels, seasonal working-capital needs, cash generation and availability under revolving credit.
- Debt trends, interest-rate terms and any financing covenant requirements.
- Archery-market conditions, Stiga’s contribution, and execution and integration of acquisitions.
- Future dividend sustainability and progress under the repurchase program; no shares were repurchased during Q3, and approximately $2.274 million remained authorized.