Escalade, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended July 12, 2014. Amounts are in thousands of dollars except per-share data. The company’s results are seasonal and interim results may not indicate full-year performance.
Business context
Escalade is shifting its focus to Sporting Goods. It sold its Print Finishing business on June 30, 2014, and plans to divest Information Security, exiting that segment. Those businesses are presented as discontinued operations. The planned sale triggered a substantial impairment charge.
Financial performance and liquidity
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Continuing-operations sales | $38,012 | $38,003 | $65,733 | $63,268 |
| Operating income | $3,932 | $6,007 | $7,255 | $9,506 |
| Income from continuing operations | $2,767 | $3,851 | $5,031 | $6,092 |
| Net income (loss), including discontinued operations | $(8,084) | $2,618 | $(5,834) | $4,242 |
| Diluted EPS | $(0.57) | $0.19 | $(0.41) | $0.31 |
- Sporting Goods sales were flat year over year in Q2 and up 4% in the first half. Q2 operating income fell 35%, primarily due to lower sales volume and unfavorable product mix in some categories, higher product-development investment, and increased business-development costs.
- Gross margin was 30.4% in Q2 versus 33.4%; first-half margin was 31.3% versus 33.6%. First-half SG&A was 18.2% of sales versus 16.6%; operating margin was 11.0% versus 15.0%.
- Discontinued operations recorded a $12,945 loss on classification as held for sale, partially offset by a $547 disposal gain. The impairment was principally associated with Information Security assets.
- Six-month cash from operations was $11,870; investing activities provided $3,794 and financing activities used $15,601. Cash and cash equivalents at period-end were $2,478 including $1,333 classified as held for sale; the continuing-operations balance sheet reports cash of $1,145.
- Total debt was $13,858 at July 12, down from $28,209 at December 28, 2013. Current assets were $67,463 and current liabilities $29,681. The company said it expected adequate revolving-credit access to support working-capital needs.
- The company paid quarterly dividends of $0.09 per share in March and June and declared a $0.10 dividend in August, payable September 21, 2014.
Changes, outlook and risks
- Management expects improved Sporting Goods sales growth for the remainder of 2014 and intends to continue strategic spending on product development and brand marketing. It provided no specific numeric earnings or revenue guidance.
- Management’s strategy is to concentrate resources on Sporting Goods, pursue product innovation and acquisitions that complement existing lines, and expand distribution. It noted that growth prospects vary by category and that some established markets are expected to track general consumer trends.
- The Information Security sale was not yet agreed with a buyer; the company warned that a delayed sale, less favorable terms, or liquidation could cause additional costs and losses. Management said it did not expect further significant losses on the held-for-sale assets.
- Other stated risks include competition and pricing, demand and product acceptance, customer and supplier relationships, cost control, economic and currency fluctuations, financing availability and covenant compliance, and execution of strategic transactions. No derivatives were in use during the quarter; management said a 1% interest-rate change would not have a significant effect.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. It said ordinary-course litigation was not expected to have a material adverse effect.
Important facts for investors to verify
- Progress, timing, and expected proceeds or costs of the planned Information Security divestiture; confirm whether a buyer or sale agreement has emerged.
- Whether the $12.9 million impairment fully reflects the expected sale or liquidation value and whether further discontinued-operation losses arise.
- Trends in Sporting Goods sales, product mix, gross margins, and the returns on increased product-development, marketing, and business-development spending.
- Debt, working-capital needs, and revolving-credit availability after the Print Finishing sale and as the company exits the remaining discontinued business.
- Effect of seasonality and the company’s stated expectation of improved second-half sales growth; the filing provides no quantified forecast.