Escalade, Incorporated — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended October 5, 2019; comparisons are with periods ended October 6, 2018. Amounts are in millions of dollars unless otherwise noted. Escalade focuses on sporting goods, including basketball goals, archery, games and fitness products.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $45.756 | $43.955 | $133.497 | $124.788 |
| Gross margin | 21.9% | 28.0% | 23.6% | 26.3% |
| Operating income | $2.899 | $5.134 | $5.764 | $8.800 |
| Net income | $2.540 | $3.575 | $4.683 | $16.862 |
| Diluted EPS | $0.18 | $0.25 | $0.32 | $1.17 |
- Q3 sales increased 4.1%; nine-month sales increased 7.0%. Gross margin fell 6.1 percentage points in Q3 and 2.7 points year to date. Management attributed the decline to product mix, customer allowances and lower factory utilization.
- For the nine months, operating cash flow was $7.188 million, versus $4.984 million in 2018. Capital expenditures were $1.849 million; cash dividends paid were $5.423 million. Cash increased $2.402 million to $5.226 million.
- At October 5, current assets were $93.551 million and current liabilities $19.590 million. Inventory was $48.424 million, up from $39.122 million at December 29, 2018.
- Total debt was $5.356 million, compared with none at December 29, 2018; cash was $5.226 million. The company reported a $50 million senior revolving credit facility maturing January 31, 2022. Management expected adequate revolving-credit access to meet working-capital and growth needs.
- Quarterly dividend declared was $0.125 per share; nine-month dividends declared were $0.375 per share. The company repurchased 177,000 shares in Q3, with $2.182 million remaining under its repurchase program at period-end.
Material changes and notable items
- Nine-month 2018 earnings included a $13.020 million gain on the sale of Escalade’s 50% interest in Stiga Sports AB, completed in May 2018 for $33.7 million. This one-time gain explains much of the year-over-year decline in 2019 nine-month net income; 2019 had no comparable gain.
- Q3 sales growth was driven primarily by the Games category, partly offset by continuing declines in vertical-bow archery sales. For the nine months, e-commerce gross sales rose to $50.452 million from $34.060 million, while specialty-dealer and international sales declined.
- Nine-month SG&A rose 7.2% to $24.576 million, primarily due to nonrecurring basketball-displayer costs and operating costs associated with Victory Tailgate. The company also reported $0.765 million of acquisition cash outflow.
- The January 2019 credit agreement increased revolving-facility availability, extended maturity, improved interest-rate provisions, released existing real-estate mortgages and raised the acquisition-consideration limit without lender consent to $25 million, subject to no default.
- Adoption of the lease accounting standard resulted in recognition of operating lease right-of-use assets and liabilities; reported lease liabilities totaled $1.264 million at October 5, 2019.
Outlook, risks and contingencies
- The filing provides no numerical earnings or sales guidance. Management’s stated strategy is to grow sporting goods through organic growth, product development and strategic acquisitions.
- Risks highlighted include competition and product demand, customer and supplier relationships, shifting retail channels and consumer habits, supply-chain disruption, cost control, financing, and integration of acquisitions or other strategic transactions.
- Tariffs and other trade restrictions are a specific concern: imports, including from China and Mexico, may face higher costs or delays. The company warned that it may be unable to offset higher costs through pricing without affecting sales.
- The company is involved in litigation arising in the normal course of business and said it did not expect existing claims or lawsuits to have a material adverse effect. Part II reports no legal proceedings. Disclosure controls were judged effective, with no material internal-control changes reported.
- Management cautioned that interim results are seasonal and not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether gross-margin pressure persists, particularly from product mix, customer allowances and factory utilization.
- Whether e-commerce growth can continue and offset weakness in archery and other sales channels.
- How tariffs, sourcing costs and customer acceptance of price increases affect margins and demand.
- The use, borrowing costs and covenant terms of the $50 million revolving facility, alongside working-capital and inventory needs.
- Acquisition performance and integration costs, including Victory Tailgate-related expenses.
- The sustainability of dividends and share repurchases relative to operating cash flow and investment requirements.