Escalade, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended October 4, 2014. Unless noted otherwise, financial amounts below are in millions; the filing generally presents amounts in thousands. Results of Information Security and Print Finishing are classified as discontinued operations.
Business context and results
Escalade completed its exit from Information Security and Print Finishing with the October 1, 2014 sale of Information Security; Print Finishing was sold June 30. The company is now focused on Sporting Goods, including archery, team and individual sports, and games. Sporting Goods net sales were essentially flat in Q3 and increased 3% for the first nine months.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales from continuing operations | $31.599 | $31.559 | $97.332 | $94.827 |
| Operating income | $4.216 | $3.987 | $11.471 | $13.493 |
| Continuing-operations net income | $3.837 | $3.375 | $8.868 | $9.467 |
| Net income, including discontinued operations | $13.621 | $2.513 | $7.787 | $6.755 |
| Diluted EPS | $0.96 | $0.18 | $0.55 | $0.50 |
Financial position, cash flow, and margins
- Margins: Continuing-operations gross margin was 30.5% in Q3, unchanged year over year; for nine months it was 31.1%, down from 32.6%. Nine-month operating margin was 11.8%, versus 14.2% a year earlier. Management attributed lower gross margin to weaker sales in higher-margin categories and increased product-development investment; higher SG&A as a share of sales reflected marketing and business-development spending.
- Cash flow: Nine-month operating cash flow was $9.088 million, compared with $4.578 million. Investing activities provided $3.125 million, including discontinued-operations proceeds; financing activities used $10.057 million. Cash and cash equivalents declined $1.548 million to $0.798 million. The period-end cash-flow statement amount excludes time deposits, which were $2.450 million.
- Debt and liquidity: Total debt was $20.577 million at October 4, down from $28.209 million at December 28, 2013. Cash and time deposits totaled $3.248 million. Current assets were $78.611 million and current liabilities $34.169 million; the filing provides no separate management liquidity ratio. Notes payable were $15.631 million, with $4.946 million of current and long-term debt combined.
- Other: Nine-month dividends declared were $0.19 per share. A quarterly $0.10 dividend was declared November 6 for payment December 19, 2014. The company’s 50% share of Stiga Sports AB earnings was $2.2 million for the nine-month period and was recorded in other income.
Material changes and unusual items
- The divestitures generated a $9.4 million loss on disposal of assets, a $2.6 million foreign-currency translation reclassification benefit, and a $6.1 million tax benefit. The tax benefit included approximately $4.6 million from favorable treatment and release of previously reserved tax attributes. Q3 discontinued-operations income was $9.784 million, substantially reflecting disposal and tax effects; nine-month discontinued-operations loss was $1.081 million.
- A $12.945 million impairment/loss on classification as held for sale was recorded in the first half of 2014 for Information Security assets. The filing says the estimate relied on significant unobservable inputs and management judgment.
- On October 22, after quarter-end, Escalade acquired substantially all of Cue & Case Sales’ business and assets for $10.4 million cash. On October 27, it purchased an Evansville facility for $0.650 million. These transactions followed the reporting date.
- Accumulated other comprehensive income/loss shifted from $4.919 million income at year-end 2013 to a $1.045 million loss at October 4, 2014, reflecting foreign-currency effects and the divestiture reclassification.
Outlook, risks, and contingencies
Management expected sales growth for the remainder of 2014 to exceed the first-nine-month trend, excluding the Cue & Case acquisition. It planned to continue investing in product development, marketing, and brand building, and described growth through existing products and strategic acquisitions as priorities. Management noted that many markets served have low growth, while fragmented categories such as archery may offer growth opportunities. The filing provides no quantified earnings or revenue guidance.
Risks identified include competition and pricing, demand and product acceptance, product development, customer and supplier relationships, execution and integration of acquisitions and divestitures, cost control, economic conditions, foreign-exchange movements, operating variability, and access to financing and compliance with loan terms. The company had no derivatives in use; management said a hypothetical 1% interest-rate change would not significantly affect results or financial position. Ordinary-course litigation was disclosed, with management stating it did not expect existing claims to have a material adverse effect. Disclosure controls were concluded effective, with no material change in internal control reported.
Most important facts for investors to verify
- Final proceeds, liabilities retained, and any remaining obligations or tax exposures from the Information Security and Print Finishing divestitures.
- The extent to which reported earnings and tax benefits from discontinued operations are nonrecurring, and the basis for the $12.945 million held-for-sale impairment.
- Post-quarter funding and integration of Cue & Case and the facility purchase, including effects on debt and liquidity.
- Whether Sporting Goods sales growth improves as management expected, and whether gross-margin pressure and increased marketing and development costs persist.
- Working-capital needs, borrowing availability and covenants under the amended credit agreement, and exposure to foreign-currency fluctuations.