Escalade, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended July 13, 2013. Unless otherwise stated, amounts are in USD millions; the filing presents financial statements in thousands. Escalade manufactures and distributes products in Sporting Goods and Information Security and Print Finishing. Results are seasonal and interim performance is not necessarily indicative of full-year results.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Net sales | $46.985 | $42.029 | $78.823 | $72.594 |
| Gross margin | 33.4% | 29.4% | 33.7% | 31.5% |
| Operating income | $5.337 | $2.689 | $8.385 | $5.431 |
| Net income | $2.618 | $1.087 | $4.242 | $2.663 |
| Diluted EPS | $0.19 | $0.08 | $0.31 | $0.20 |
Sales increased 11.8% in Q2 and 8.6% year to date. Cost of products sold fell as a share of sales, while SG&A also declined as a percentage of revenue. Management attributed the gross-margin improvement partly to product mix and higher Sporting Goods volume and overhead absorption.
In Q2, Sporting Goods revenue was $38.003 million, up 20.9%; Information Security and Print Finishing revenue was $8.982 million, down 15.2%. First-half revenue was $63.268 million for Sporting Goods, up 17.9%, and $15.555 million for Information Security and Print Finishing, down 17.9%. The latter segment reported operating losses of $0.670 million in Q2 and $1.122 million for the first half.
Cash flow, liquidity and debt
- First-half operating cash flow was $5.146 million, compared with $5.158 million a year earlier. Investing used $1.827 million and financing used $4.020 million; cash declined $0.648 million to $1.896 million.
- At July 13, cash and time deposits totaled $3.846 million. Current assets were $74.493 million and current liabilities were $39.580 million. Inventory was $39.139 million, up from $30.864 million at year-end 2012.
- Total bank debt and notes payable were $22.825 million, versus $22.570 million at December 29, 2012 and $18.671 million a year earlier. Debt equaled 28% of equity. The company said working capital needs had risen to support Sporting Goods growth and expected adequate revolving-credit access.
- On July 29, after quarter-end, the revolving USD facility maturity was extended from July 31 to September 30, 2013. The company and lender were working toward a further amended agreement, which they anticipated completing before September 30.
Outlook, risks and notable items
- Management expected strong Sporting Goods sales through the rest of 2013, but anticipated continued challenges in Information Security and Print Finishing because of weak demand, reduced government spending and increased competition. No specific full-year earnings or revenue guidance was provided.
- The second-quarter tax provision included an additional $0.446 million expense from increasing the valuation allowance on foreign net operating losses. Without this adjustment, management reported the Q2 and first-half effective tax rates would have been 39.4% and 40.7%, respectively.
- During Q2, Escalade decided to cease operations and liquidate its 50%-owned Escalade International joint venture. Its first-half share of losses was $0.458 million, reducing the investment to zero; the loss included shutdown costs.
- The company purchased previously leased real estate in Mexico through seller financing. The outstanding principal was $1.9 million at July 13; the agreement calls for 16 quarterly installments and matures November 30, 2016.
- Management identified risks including competition and pricing, demand and product acceptance, customer and supplier relationships, cost control, foreign exchange, financing availability and compliance. It reported no derivatives in use and said a hypothetical 1% interest-rate change would not have a significant effect. Ordinary-course litigation was not expected to have a material adverse effect.
- Disclosure controls were concluded effective; management reported no material change in internal control over financial reporting during Q2.
Important facts for investors to verify
- Whether the company completed the anticipated credit-agreement extension before the September 30, 2013 maturity and on what terms.
- Whether Sporting Goods growth and margin improvement continued, and whether inventory levels converted into sales and cash.
- Whether weakness and operating losses in Information Security and Print Finishing persisted, and the financial consequences of the joint-venture liquidation.
- Whether foreign losses, currency movements or tax valuation allowances further affected reported earnings and effective tax rates.