Escalade, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended October 6, 2018. Financial amounts are in millions unless otherwise noted. Escalade focuses on sporting goods, including basketball, archery, games and fitness products.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $43.955 | $42.861 | $124.788 | $128.648 |
| Gross margin | 28.0% | 26.5% | 26.3% | 25.4% |
| Operating income | $5.134 | $4.128 | $8.800 | $9.456 |
| Net income | $3.575 | $3.118 | $16.862 | $6.602 |
| Diluted EPS | $0.247 | $0.217 | $1.167 | $0.459 |
Quarterly sales increased 2.6%, which management attributed to growth in Archery and Indoor Games. Nine-month sales declined 3.0%. Gross margin improved in both periods, attributed to product mix. Q3 SG&A was essentially flat at $6.856 million; nine-month SG&A rose 4.0% to $22.927 million, or 18.3% of sales versus 17.1%.
Nine-month net income included a one-time $13.020 million gain on the sale of the Stiga investment. Excluding that gain, reported year-to-date earnings materially overstate the contribution from ongoing operations; the filing does not provide an adjusted earnings measure.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $4.984 million, down from $8.428 million. Investing activities provided $32.877 million, including $33.705 million from the Stiga sale; financing activities used $28.312 million, including $44.994 million of debt repayments and $5.410 million of dividends.
- Cash was $11.121 million at October 6, 2018, compared with $1.572 million at December 30, 2017. Current assets were $96.297 million and current liabilities $20.444 million.
- Total debt was zero, down from $23.121 million at year-end 2017. Management said the Stiga proceeds repaid outstanding bank debt, including $4.7 million on the term loan. The revolving credit facility had $35.0 million of availability; management considered it sufficient for working-capital and growth needs.
- Inventory was $45.660 million, up from $35.160 million at year-end 2017. The company declared dividends of $0.125 per share each quarter during the first nine months.
Material changes, outlook and risks
- On May 17, 2018, Escalade sold its 50% interest in Stiga Sports AB for $33.7 million, recognizing a $13.0 million gain and using proceeds to repay debt. A new Stiga license agreement for specified North American table-tennis products begins January 1, 2019.
- The effective tax rate for the first nine months was 21.4%, compared with 31.9% in 2017. The company recorded $0.6 million of tax expense related to accumulated foreign earnings and foreign tax credits and said it did not expect further adjustments for that matter.
- No specific financial guidance was provided. Management described its strategy as growing sporting goods through existing-category growth, product development and strategic acquisitions, while addressing an industry downturn in archery and retail bankruptcies. Results are seasonal and interim performance may not indicate full-year results.
- Risks cited include competition and pricing, product demand, retail and customer financial health, supply-chain disruptions, execution of acquisitions and divestitures, customer and licensing relationships, foreign-exchange movements, financing, cost control, and technology and data-security issues. The company reported no derivatives in use; a hypothetical 1% interest-rate change was not expected to have a significant effect.
- The company said ordinary-course litigation was not expected to have a material adverse effect; Part II reports no legal proceedings. Disclosure controls were concluded to be effective, with no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- How ongoing operating earnings and cash generation compare after separating the Stiga sale gain and associated debt reduction.
- Whether sales and margins can hold up given the nine-month revenue decline, archery weakness and retail pressures.
- Inventory levels, seasonal working-capital needs, and actual use and terms of the $35.0 million revolving facility.
- The economics and continuity of the Stiga licensing arrangement beginning in 2019, and any continuing effects of the divestiture.
- Future customer allowances, returns and warranty accruals, as well as foreign-currency exposure and tax estimates.