Escalade, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended July 9, 2011. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted. Escalade operates in Sporting Goods and Information Security and Print Finishing.
Financial performance
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Net sales | $40.850 | $35.737 | $68.848 | $60.906 |
| Gross margin | 31.4% | 33.3% | 33.3% | 33.6% |
| Operating income | $2.717 | $3.450 | $4.784 | $4.859 |
| Net income | $1.485 | $1.862 | $2.688 | $2.664 |
| Diluted EPS | $0.11 | $0.14 | $0.20 | $0.20 |
Q2 sales increased 14%, while operating income declined 21% and net income declined 20%. First-half sales rose 13%; operating income fell about 2%, while net income was approximately flat. Q2 gross margin declined 1.9 percentage points, and first-half gross margin declined 0.3 points. SG&A was 23.5% of sales in Q2 and 25.2% for the first half, versus 22.6% and 24.5%, respectively, in 2010.
First-half operating cash flow was $0.175 million, down from $3.598 million. Capital expenditures were $0.984 million. Cash and cash equivalents were $2.224 million, with $1.000 million in time deposits, at July 9. Current assets were $61.733 million and current liabilities $34.732 million. Inventory was $32.727 million, up from $22.888 million at year-end 2010.
Total bank debt was $21.825 million, compared with $25.104 million a year earlier and $20.553 million at year-end 2010. Debt was 23% of equity. The company reported a $22 million revolving facility, an $8.5 million term loan, and a €2 million overdraft facility under its amended credit agreement.
Business trends and outlook
- Sporting Goods revenue rose 16.3% in Q2 and 15.1% in the first half, driven largely by new product distribution and customer demand. Management expected growth to continue through the rest of 2011, though at a potentially lower rate than in the first half.
- Information Security and Print Finishing revenue increased 9.3% in Q2 and 8.4% year to date; excluding currency effects, growth was 3.5% and 5.4%. Management cited economic pressure in parts of Europe, a slowing North American office channel, and nonrecurring first-quarter North American shipments as challenges.
- Management attributed margin pressure to a greater mix of lower-margin products, supplier pricing pressure, and start-up inefficiencies on new products. It said increased marketing and product-development spending was intended to support future growth.
- The effective tax rate rose to 50.5% in Q2 and 46.3% year to date, primarily due to a valuation allowance for Spanish net operating losses and foreign losses for which tax benefits were not expected. Management expected the inability to offset domestic taxable gains with foreign losses to continue affecting the tax rate.
- The company is implementing new ERP systems. Expected costs were approximately $0.5 million for Martin Yale Europe and $1.6 million for Sporting Goods sites. If it replaces the remaining Oracle system, it may accelerate depreciation on its approximately $4.8 million remaining book value over the final two quarters of 2011.
Other notable items, risks, and contingencies
- Other income was $0.513 million in Q2, versus $0.053 million a year earlier; the filing identifies equity-method income from joint ventures, including Stiga, but does not clearly reconcile all of the quarterly increase.
- On July 1, 2011, Escalade received a release from a potential obligation associated with a subleased Spain facility, except for payments under the existing lease through April 2012. The company said ordinary-course litigation was not expected to have a material adverse effect.
- Foreign exchange, competition and pricing, product demand, customer and supplier relationships, cost control, financing availability and covenant compliance are among the disclosed risks. No derivatives were in use during the quarter; management said a hypothetical 1% interest-rate change would not have a significant effect.
- The company declared no dividend for 2011. It made no share repurchases during Q2; $2.274 million remained under its repurchase authorization, subject to credit-agreement restrictions.
- Management stated that interim results may not indicate full-year results because of seasonality. Disclosure controls were concluded effective, and no material changes in internal control over financial reporting were reported.
Important facts for investors to verify
- Whether sales growth converts into improved operating income and margins, given lower-margin product mix, input-cost pressure, and higher SG&A.
- Whether inventory growth and working-capital needs continue to constrain operating cash flow and increase reliance on revolving credit.
- The expected tax-rate impact of foreign losses and the Spanish valuation allowance.
- ERP implementation costs, timing, and any accelerated depreciation related to the remaining Oracle asset.
- Segment-level performance and the contribution of currency movements and joint-venture income to reported results.