Escalade, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended July 11, 2015. Financial statement amounts below are in millions of dollars unless stated otherwise. The company is focused on Sporting Goods following the divestitures of its Information Security and Print Finishing businesses.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Net sales | $43.795 | $38.012 | $77.214 | $65.733 |
| Gross margin | 30.1% | 30.4% | 31.1% | 31.3% |
| Operating income | $4.157 | $3.932 | $8.444 | $7.255 |
| Continuing-operations net income | $3.222 | $2.767 | $6.719 | $5.031 |
| Diluted EPS from continuing operations | $0.23 | $0.20 | $0.47 | $0.36 |
- Sales increased 15.2% in Q2 and 17.5% in the first half, with growth across most sales channels. Operating income rose more slowly, about 5.7% for Q2 and 16.4% for the first half.
- Operating margin was 9.5% in Q2 versus 10.3% a year earlier, and 10.9% for the first half versus 11.0%. Management attributed the slight first-half gross-margin decline partly to increased product-development investment.
- Reported net income was $3.222 million for Q2 and $6.719 million for the first half. The comparable 2014 periods showed net losses of $8.084 million and $5.834 million, respectively, primarily reflecting discontinued-operation losses and a $12.945 million held-for-sale impairment. Continuing operations were profitable in both periods.
- First-half effective tax rate on continuing operations was 29.0%, versus 32.6%, attributed to greater domestic production activities deduction benefits and available foreign tax credits. Stiga, the 50%-owned equity-method joint venture, contributed $1.0 million of first-half net income to other income.
Cash flow, liquidity and debt
- First-half operating cash flow was $10.250 million, compared with $11.870 million in 2014. Capital expenditures were $2.388 million; net cash used in investing activities was $0.760 million.
- Cash and cash equivalents were $2.268 million and time deposits $0.750 million at July 11. Current assets were $67.720 million and current liabilities $26.781 million, implying working capital of approximately $40.939 million.
- Total debt was $12.952 million, down $8.194 million from year-end 2014. The company reported $9.193 million in notes payable and $3.759 million in current and long-term debt. Debt equaled 14% of stockholders’ equity, versus 24% at year-end.
- Financing activities used $10.454 million, including $7.007 million of net notes-payable repayments, $1.187 million of long-term debt principal payments and $2.956 million of cash dividends. Dividends declared were $0.21 per share for the first half.
Material developments, outlook and risks
- On July 29, 2015, after quarter-end, Escalade acquired substantially all of Onix Sports, Inc.’s business and assets, a pickleball-equipment company. The filing does not provide the purchase price or other transaction terms.
- Management’s strategy is to grow Sporting Goods through existing categories, product development and complementary acquisitions. It noted that many of its markets have low growth rates and that growth in table tennis is expected to track general consumer trends. No quantified financial guidance is provided.
- The company expects access to adequate revolving credit to support working-capital needs, but results are subject to seasonal variation and the reported interim results are not necessarily indicative of full-year performance.
- Disclosed risks include competition and pricing, demand and product acceptance, execution and integration of acquisitions, customer and supplier relationships, supply-chain disruptions, cost control, economic conditions, foreign exchange, and financing availability and covenant compliance. The company had no derivatives in use during the quarter; a hypothetical 1% interest-rate change was not expected to have a significant effect.
- Escalade stated that ordinary-course litigation was not expected to have a material adverse effect. Management concluded disclosure controls were effective and reported no material second-quarter changes in internal control over financial reporting.
Important facts for investors to verify
- Purchase price, financing, expected integration costs and anticipated contribution from the Onix Sports acquisition.
- Whether sales growth and product-development spending translate into improved gross and operating margins.
- Seasonal working-capital needs, revolving-credit availability and the pace of further debt repayment.
- The sustainability of growth across Sporting Goods channels and the contribution from Stiga and newer product categories.
- Foreign-currency exposure and any developments in litigation or other contingencies.