Escalade, Inc. — Q1 2017 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 25, 2017, compared with the three months ended March 19, 2016. Escalade focuses on sporting goods, including basketball, archery, recreation games and fitness products, and pursues growth through product development and acquisitions. Management cautions that quarterly results are seasonal and are not necessarily indicative of full-year results.
Key financial results
| Metric | Q1 2017 | Comparable 2016 | Change |
|---|---|---|---|
| Net sales | $30.812 million | $34.568 million | Down 10.9% |
| Gross margin | 26.9% | 31.9% | Down 5.0 percentage points |
| Operating income | $1.996 million | $2.478 million | Down 19.4% |
| Net income | $1.388 million | $1.697 million | Down 18.2% |
| Diluted EPS | $0.10 | $0.12 | Down $0.02 |
| Operating cash flow | $5.869 million | $1.677 million | Up $4.192 million |
SG&A was $5.930 million, or 19.2% of sales, versus $7.763 million, or 22.4% of sales. Cost of products sold increased to 73.1% of sales from 68.1%. Income before taxes was $2.037 million versus $2.422 million; the effective tax rate was 31.9% versus 29.9%. Comprehensive income was $1.937 million versus $2.378 million.
Financial position and liquidity
At March 25, 2017, cash was $2.536 million, current assets were $71.880 million and current liabilities were $15.070 million. Total debt was $24.300 million, down from $25.439 million at December 31, 2016 and $34.048 million a year earlier. Debt was 23.8% of stockholders’ equity, compared with 25.0% at year-end and 34.8% a year earlier. Total assets were $145.297 million and stockholders’ equity was $102.201 million.
Investing activities used $1.594 million, including $1.401 million for acquisitions; financing activities used $2.752 million, including $1.650 million of dividends paid. Cash increased by $1.523 million during the quarter. Operating cash flow included $2.168 million of dividends received from equity-method investments. The company says working capital is funded through operating cash flows and bank revolving credit agreements, and expects adequate revolving-credit access for growth needs.
Material changes, outlook and risks
- Management attributed the sales decline to retail bankruptcy liquidations and comparison with prior-year portable basketball pipeline fills. Lower gross margin primarily reflected higher material prices and product mix.
- SG&A declined primarily because the prior year included one-time bad-debt expense related to The Sports Authority bankruptcy and higher marketing and selling costs for products introduced in 2016.
- Two acquisitions were completed for total consideration of approximately $1.5 million. One generated a $256,000 bargain-purchase gain, included in Q1 income. The purchase-price allocation remains provisional, including inventory, intangible assets, deferred taxes and the residual gain.
- The 50%-owned Stiga joint venture reported a net loss of $105,000; Escalade recorded its $52,000 share as an equity-method loss, versus $49,000 of equity earnings in the prior-year quarter.
- No numeric financial guidance was provided. Forward-looking risks include competition and pricing, demand and product acceptance, customer and supplier relationships, retail-market changes, supply disruptions, cost control, foreign exchange, financing and integration of acquisitions. The company used no derivatives during the quarter; a hypothetical 1% interest-rate change was described as not having a significant effect.
- The company reported ordinary-course litigation but did not expect existing claims to materially adversely affect its business or financial condition. Part II reports no legal proceedings. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether lower sales and gross margin persist, particularly given management’s seasonal-results caution.
- Revolving-credit availability, terms and covenant compliance; the filing does not provide a clear value for unused credit availability.
- Final acquisition purchase-price allocations and whether the $256,000 bargain-purchase gain changes during the measurement period.
- Stiga’s operating performance and the impact of foreign-currency movements.
- Share-count discrepancy: the balance sheet reports 14,345,528 shares at March 25, while the cover page reports 14,346,528 shares outstanding at April 19, 2017.