Escalade, Inc. — Q1 2018 Form 10-Q
Business context and period. Escalade is focused on sporting goods, including basketball goals, archery, games and fitness products. This report covers the three months ended March 24, 2018, compared with the three months ended March 25, 2017. Amounts below are in millions unless noted. Management cautions that first-quarter results may not indicate full-year results because of seasonality.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $32.149 | $31.866 | +0.9% |
| Gross profit / margin | $9.0 / 28.0% | $8.3 / 26.0% | Gross profit +8.5% |
| SG&A | $6.950 | $5.930 | +17.2% |
| Operating income / margin | $1.715 / 5.4% | $1.996 / 6.3% | -14.1% |
| Net income | $1.216 | $1.388 | -12.4% |
| Diluted EPS | $0.084 | $0.097 | Down $0.013 |
| Operating cash flow | $3.674 | $5.869 | -37.4% |
| Cash and equivalents at period end | $2.863 | $2.536 | +12.9% |
| Total debt at period end | $22.691 | $24.300 | Down $1.609 |
Cost of products sold declined to 72.0% of sales from 74.0%, supporting the margin improvement. Management attributed stronger gross margin to product mix and stability in archery. Higher SG&A reflected Lifeline Products acquisition-related costs, start-up costs for the Vuly trampoline distribution agreement and continued e-commerce investment. The effective tax rate was 18.4%, versus 31.9%, which the company attributed to the Tax Cuts and Jobs Act.
Investing cash outflow was $0.206 million, primarily capital expenditures; financing cash outflow was $2.177 million, including $1.801 million in dividends. Cash increased $1.291 million during the quarter. The quarterly dividend declared was $0.125 per share. Current assets were $75.227 million and current liabilities were $32.257 million at March 24, 2018.
Material changes and business developments
- Sales increased modestly. By channel, international gross sales rose to $1.903 million from $0.916 million, while “other” sales declined to $0.078 million from $0.844 million; mass merchant, specialty dealer and e-commerce sales were broadly similar.
- Stiga, the 50%-owned equity-method joint venture, reported first-quarter sales of $6.174 million and a net loss of $0.023 million. Escalade recorded $0.012 million as its share of the loss, compared with $0.052 million in Q1 2017. Management cited reduced contribution from Stiga as a business challenge.
- Debt declined from year-end, but $18.941 million was classified as current at March 24, 2018, compared with $1.250 million at December 30, 2017. Long-term debt was $3.750 million.
- Escalade adopted ASC 606 using the modified retrospective method on December 31, 2017. It reported no change to the timing of customer-sales revenue recognition; the main effect was additional disclosures.
Outlook, risks and contingencies
No specific financial guidance was provided. Management’s strategy is to grow sporting goods through organic growth, product development, channel expansion and strategic acquisitions. It said archery-industry weakness, reduced Stiga contribution and retail bankruptcies have weighed on results, while improvements in other businesses and online distribution have been partly masked.
The revolving credit facility is due within one year of the financial statements’ issuance. The company stated that it lacks liquid funds to repay the balance at maturity, intends to renew the facility on comparable terms, and believes renewal is probable. Management also noted risks involving competition and pricing, demand, customer and supplier relationships, retail changes, supply-chain disruption, cost control, foreign exchange, financing and information-system or data-security disruptions. The company had no derivatives outstanding during the quarter; it said a hypothetical 1% interest-rate change would not significantly affect results or financial position.
The company reported ordinary-course litigation and did not expect existing claims to have a material adverse effect. It had provisionally recorded a $3.0 million tax benefit in 2017 related to the Tax Cuts and Jobs Act; the final impact could differ, potentially materially, and no estimate adjustment was recorded in Q1 2018. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Facility maturity, renewal progress, borrowing terms and any related covenant requirements, given the current classification of most debt and the stated lack of repayment liquidity.
- Whether the gross-margin improvement persists and whether elevated SG&A from acquisition, Vuly start-up and e-commerce costs converts into sales and earnings growth.
- Trends in archery, Stiga’s contribution, e-commerce and international sales, and any continuing impact from retail bankruptcies.
- Final tax consequences of the 2017 Tax Act provisional estimate and any changes to related assumptions or regulatory guidance.
- Seasonal working-capital requirements, particularly inventory, which increased to $40.114 million from $35.160 million at year-end.