Escalade, Inc. — Q3 2013 Form 10-Q
Business context and period: The filing covers the quarter and nine months ended October 5, 2013. Escalade manufactures and distributes products in Sporting Goods and Information Security and Print Finishing. Amounts below are in millions unless otherwise noted.
Key financial results
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $38.482 | $34.206 | $117.305 | $106.800 |
| Gross margin | 30.0% | 32.0% | 32.5% | 31.7% |
| Operating income (loss) | $3.245 | $(10.387) | $11.630 | $(4.956) |
| Net income (loss) | $2.513 | $(11.503) | $6.755 | $(8.840) |
| Diluted EPS | $0.18 | $(0.85) | $0.50 | $(0.66) |
For the nine months, operating cash flow was $4.578, investing cash flow was $(2.991), and financing cash flow was $(2.401). Cash and cash equivalents were $1.801 at October 5, 2013, down from $2.544 at December 29, 2012. Current assets were $82.055 and current liabilities $44.193. Total debt and notes payable, as defined in MD&A, were $25.544, versus $22.570 at year-end 2012; total liabilities were $53.163 and shareholders’ equity $85.447.
Changes and operating drivers
- Consolidated sales rose 12.5% in Q3 and 9.8% year to date. Sporting Goods revenue increased 23.1% in Q3 and 19.6% year to date. Information Security and Print Finishing revenue fell 19.2% and 18.3%, respectively; management cited reduced government spending and increased competition.
- Q3 gross margin fell to 30.0% from 32.0%, principally due to lower Information Security and Print Finishing sales volume and inventory adjustments. Year-to-date margin improved to 32.5% from 31.7%. SG&A declined as a percentage of sales to 20.1% in Q3 and 21.0% year to date.
- Prior-year results included $13.362 of goodwill and intangible-asset impairment charges and a $0.382 equity-method investment impairment. Excluding the goodwill and intangible charges, management reported 2012 operating income of $3.0 for Q3 and $8.4 for the first nine months, versus $3.245 and $11.630 in 2013.
- Inventories increased to $40.656 from $30.864 at December 29, 2012. Management attributed higher debt partly to working-capital needs and a $1.8 seller-financed liability for the purchase of previously leased real estate in Mexico.
Outlook, financing, and risks
- Management expected strong Sporting Goods sales through year-end, though growth could moderate, and anticipated continued challenges in Information Security and Print Finishing. The filing provides no quantified earnings or revenue guidance.
- An amended credit agreement provides a revolving facility of up to $22.0 and a $5.0 term loan, both due August 27, 2016. The facilities are secured by substantially all company assets; term-loan principal is payable in quarterly $0.250 installments. The euro overdraft limit was reduced from €2.0 to €1.0. Management expected adequate revolving-credit access for operating and growth needs.
- Risks identified include competition and pricing, demand and market acceptance, customer and supplier relationships, cost control, economic conditions, foreign-exchange movements, and financing availability and covenant compliance. The company reported no derivatives in use; a hypothetical 1% interest-rate change was not expected to have a significant effect.
- The company decided in Q2 to cease operations and liquidate Escalade International, Ltd.; its nine-month share of losses was $0.609, reducing the investment to zero. Management said ordinary-course litigation was not expected to have a material adverse effect. Disclosure controls were judged effective, and no material changes in internal control were reported.
Investor facts to verify
- Whether Sporting Goods growth and the expected year-end performance materialized, and whether Information Security and Print Finishing losses or sales declines continued.
- Inventory levels, working-capital cash use, debt balances, and compliance with the amended credit agreement and its repurchase restrictions.
- The drivers of Q3 gross-margin pressure and the company’s foreign tax losses and valuation allowance.
- The impact and costs of liquidating Escalade International, Ltd., and the performance of the Stiga joint venture.