Escalade, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 21, 2015. Financial statement amounts below are in millions of dollars unless otherwise noted. Escalade had completed its exit from Information Security and Print Finishing and was focused on Sporting Goods; prior-year comparisons include discontinued businesses where indicated.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change / context |
|---|---|---|---|
| Net sales from continuing operations | $33.419 | $27.721 | Up 20.6%; management attributed growth to sales increases across most Sporting Goods channels. |
| Gross margin | 32.4% | 32.5% | Down 0.1 percentage point; management cited increased product-development investment. |
| Operating income | $4.287 | $3.322 | Up about 29%; operating margin rose to 12.8% from 12.0%. |
| Net income | $3.497 | $2.251 | Up about 55%; diluted EPS was $0.25 versus $0.16. |
| Operating cash flow | $2.889 | $9.548 | Down $6.659 million year over year. |
| Capital expenditures | $0.468 | $0.276 | Investing cash outflow was $0.468 million. |
SG&A increased 15.6% to $5.914 million, but declined as a share of sales to 17.7% from 18.4%. Management attributed higher spending primarily to marketing acquired categories and products planned for introduction. The effective tax rate on continuing operations fell to 28.9% from 33.8%, reflecting increased domestic production activities deduction benefits and available foreign tax credits. Other income of $0.733 million (presented as negative other expense) included Escalade’s $0.666 million share of Stiga Sports AB joint-venture income; this contributed to pretax income exceeding operating income.
Balance sheet, liquidity and debt
- At March 21, 2015, cash and cash equivalents were $1.522 million and time deposits were $1.450 million. Current assets were $67.820 million against current liabilities of $28.694 million, implying working capital of approximately $39.126 million.
- Total debt was $18.294 million, down from $21.146 million at December 27, 2014 and $19.991 million a year earlier. Debt comprised $13.742 million notes payable, $1.592 million current long-term debt and $2.960 million long-term debt.
- Cash fell $1.710 million during the quarter. Financing activities used $4.131 million, including $2.458 million net repayment of notes payable, $0.394 million of long-term debt principal payments and $1.403 million of dividends paid.
- Inventory rose to $29.981 million from $23.775 million at year-end, primarily reflecting finished goods, which increased to $21.805 million from $15.858 million.
- On April 1, 2015, after quarter-end, the company paid off a $2.7 million mortgage secured by real estate in Wabash, Indiana.
Material changes, outlook and risks
- The company’s strategic focus is now Sporting Goods following the 2014 sales of its Print Finishing and Information Security businesses. The filing reports no discontinued-operation revenue in Q1 2015, compared with $6.353 million in Q1 2014; the 2014 discontinued businesses reported a $0.014 million net loss.
- Management discussed growth through product development, brand marketing and acquisitions, but provided no specific revenue, earnings or cash-flow guidance. It cautioned that first-quarter results are not necessarily indicative of full-year results because of seasonality.
- Risks identified include competition and pricing, product demand and market acceptance, new-product execution, customer and supplier relationships, supply-chain disruption, cost control, economic conditions, foreign exchange, financing availability and integration or divestiture execution.
- The company has exposure to currency movements, including the Mexican peso and Chinese yuan in Sporting Goods and the Swedish krona through Stiga. No derivatives were in use during the quarter. Management said a hypothetical 1% interest-rate change would not have a significant effect.
- Management 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 change in internal control over financial reporting reported for the quarter.
Important facts for investors to verify
- Whether Q1 sales growth and operating-margin improvement persist, particularly given the company’s seasonality warning and the modest decline in gross margin.
- What drove the year-over-year reduction in operating cash flow and whether increased inventory converts to sales and cash.
- The sustainability and composition of the $0.733 million of other income, including Stiga’s contribution and currency translation effects.
- How the post-quarter $2.7 million mortgage payoff affected debt, available borrowing capacity and liquidity; the filing does not provide an updated post-payment debt balance.
- Execution of the Sporting Goods growth strategy and exposure to customer, supplier, foreign-exchange and acquisition-related risks.