Escalade, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended October 3, 2015. Unless noted, financial amounts are in millions of dollars; the filing presents most figures in thousands. Escalade is focused on Sporting Goods following its 2014 exit from Information Security and Print Finishing.
Financial performance
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Net sales | $34.584 | $31.599 | $111.798 | $97.332 |
| Gross margin | 27.3% | 30.5% | 29.9% | 31.1% |
| Operating income | $1.873 | $4.216 | $10.317 | $11.471 |
| Continuing-operations net income | $2.028 | $3.837 | $8.747 | $8.868 |
| Net income, including discontinued operations | $2.028 | $13.621 | $8.747 | $7.787 |
| Diluted EPS | $0.14 | $0.96 | $0.61 | $0.55 |
| Operating cash flow | Not presented quarterly | $4.853 | $9.088 |
Sporting Goods sales increased 9.4% in Q3 and 14.9% in the first nine months, with growth across most sales channels. Q3 continuing-operations net income declined about 47% year over year; nine-month continuing-operations net income was nearly flat. The prior-year Q3 and nine-month net income comparisons include gains and losses from discontinued operations, including a 2014 disposal gain and impairment charge, so reported net income is not directly comparable.
Cost of products sold was 72.7% of sales in Q3 versus 69.5% a year earlier, and 70.1% for nine months versus 68.9%. SG&A rose to 20.0% of Q3 sales from 15.4%, and to 18.8% for nine months from 17.3%. Management attributed lower gross margin to product-development investment and product mix, and higher SG&A chiefly to marketing for acquired categories and products planned for future introduction.
Cash, debt and liquidity
- At October 3, cash was $2.701 million; current assets were $79.227 million and current liabilities $48.833 million. The resulting current ratio was approximately 1.62.
- Total debt was $31.523 million, up $10.377 million from year-end 2014; notes payable rose to $27.963 million from $16.200 million. Debt was 34% of equity, compared with 24% at year-end 2014. Management said acquisition spending was the primary driver of the debt increase.
- Nine-month operating cash flow was $4.853 million. Investing activities used $11.822 million, including $10.300 million for acquisitions and $3.900 million for property and equipment. Financing activities provided $6.438 million, including an $11.764 million net increase in notes payable and $4.511 million of dividends paid. Cash declined $0.531 million from year-end.
- Management said operating cash flows and revolving bank credit fund working capital and expected adequate revolving-credit availability for growth needs. The filing gives no specific borrowing capacity or forward financial targets.
Material developments, outlook and risks
- In Q3, the company acquired Onix Sports and Goalsetter Systems for approximately $10.3 million in cash and notes, subject to working-capital adjustments; management anticipated a further $0.6 million of consideration, of which $0.2 million had been paid. Purchase-price allocations, including acquired intangibles, deferred taxes and goodwill, were not final. The acquisitions were not material to reported-period results.
- Strategy centers on organic growth, product development, brand marketing and complementary acquisitions in Sporting Goods. Management said it intended to continue product-development and marketing investment through year-end; no quantitative earnings or revenue guidance was provided.
- Key stated risks include competition and pricing, demand and product acceptance, execution and integration of acquisitions, customer and supplier relationships, supply-chain disruption, cost control, foreign-exchange movements, financing availability and covenant compliance, and general economic conditions.
- The company had no derivatives in use during the quarter. A hypothetical 1-percentage-point interest-rate change was not expected to significantly affect financial position or results, according to management. Litigation was described as arising in the normal course; management did not expect existing claims to materially harm the business or financial condition.
- Quarterly dividend was $0.11 per share; dividends declared for the first nine months totaled $0.32 per share. Disclosure controls were reported effective, with no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether Sporting Goods sales growth can translate into recovering gross and operating margins as product-development and marketing spending continues.
- Acquisition integration, final purchase-price allocations and any additional working-capital consideration for Onix and Goalsetter.
- Revolving-credit availability, borrowing terms and covenant headroom as short-term notes payable and total debt rise.
- Cash conversion and working-capital needs, particularly the increase in inventory to $40.337 million from $23.775 million at year-end 2014.
- The effect of seasonality and foreign-currency movements; the filing cautions that interim results are not necessarily indicative of full-year results.