Escalade, Inc. — Q2 2016 Form 10-Q
Business context and period: The filing covers the quarter and six months ended July 9, 2016. Escalade focuses on sporting goods, including basketball, archery, games and fitness products. Results are seasonal and interim performance is not necessarily indicative of the full year.
Financial performance
| Metric | Three months ended July 9, 2016 | Three months ended July 11, 2015 | Six months ended July 9, 2016 | Six months ended July 11, 2015 |
|---|---|---|---|---|
| Net sales | $48.463 million | $43.795 million | $83.031 million | $77.214 million |
| Gross margin | 26.2% | 30.1% | 28.6% | 31.1% |
| Operating income | $3.005 million | $4.157 million | $5.483 million | $8.444 million |
| Net income | $2.090 million | $3.222 million | $3.787 million | $6.719 million |
| Diluted EPS | $0.15 | $0.23 | $0.26 | $0.47 |
| Operating cash flow | Not presented by quarter | $4.381 million | $11.178 million |
Cash, debt and liquidity: At July 9, 2016, cash was $3.263 million, current assets were $79.201 million and current liabilities were $44.569 million. Total debt was $34.036 million, up from $23.336 million at December 26, 2015 and $12.952 million a year earlier; debt equaled 35% of stockholders’ equity. Cash increased by $1.281 million in the first half. Operating cash flow and financing inflows were outweighed by $11.083 million of investing outflows, including $9.459 million for acquisitions. The company paid $3.142 million in dividends during the half.
Changes versus the prior comparable period
- Sales rose 10.7% in Q2 and 7.5% in the first half. Management attributed growth to new products and acquisitions, partly offset by continued weakness in archery.
- Profitability weakened: first-half operating income fell about 35% and net income fell about 44%. Gross margin declined 2.5 percentage points to 28.6%; management cited lower archery sales and unfavorable product mix.
- First-half SG&A increased to 20.1% of sales from 18.3%, reflecting bad-debt expense associated with Sports Authority’s bankruptcy and increased marketing and selling costs for new products.
- Equity earnings from Stiga, the 50%-owned Swedish joint venture, decreased to $0.176 million for the half from $1.011 million. Stiga’s reported half-year sales and net income also declined.
- Notes payable and total debt increased materially from year-end, primarily to fund acquisitions.
Outlook, risks and notable items
- No specific revenue, earnings or margin guidance is provided. Management says it expects adequate revolving credit availability to support working-capital and growth needs.
- In January 2016, Escalade acquired substantially all of Triumph Sports USA’s business and assets for $10.0 million: $9.5 million cash and $0.5 million contingent on targets. Management said the acquisition was not material to reported sales, operations or assets.
- A January 2016 amended credit agreement provides a revolving facility of up to $35.0 million, maturing January 21, 2019, and a $7.5 million term loan, maturing January 21, 2021.
- Risks identified include competition and pricing, product demand and acceptance, acquisition integration, customer and supplier relationships, supply-chain disruption, cost control, economic conditions, foreign exchange, and access to financing and compliance with financing terms. The company uses no derivatives; it states a 100-basis-point interest-rate change would not have a significant effect.
- The company is involved in ordinary-course litigation and does not expect existing claims to have a material adverse effect. It reported no material changes in internal control and concluded disclosure controls were effective.
Important facts for investors to verify
- Whether archery weakness, product mix and gross-margin pressure persist, and whether new products and acquisitions offset them.
- The extent and timing of any bad-debt losses tied to Sports Authority’s bankruptcy and other customer credit exposure.
- Debt levels, borrowing availability, interest costs and compliance with the amended credit agreement as acquisition and working-capital needs evolve.
- Triumph integration and performance against the targets tied to its contingent $0.5 million purchase-price amount.
- Stiga’s operating performance and foreign-currency effects; the filing cautions that currency movements may affect results.