Escalade, Inc. — Q1 2014 Form 10-Q
Business context and period. Escalade manufactures and distributes products in Sporting Goods and Information Security and Print Finishing. This unaudited report covers the three months ended March 22, 2014; comparative results are for the three months ended March 23, 2013. The company cautions that first-quarter results are not necessarily indicative of full-year performance because of seasonality.
Key financial results
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net sales | $34.074 million | $31.838 million | Up 7% |
| Gross margin | 33.3% | 34.2% | Down 0.9 percentage points |
| Operating income | $3.534 million | $3.048 million | Up 16% |
| Net income | $2.251 million | $1.624 million | Up 39% |
| Diluted EPS | $0.16 | $0.12 | Up $0.04 |
| Operating cash flow | $9.548 million | $4.431 million | Up $5.117 million |
SG&A declined to 21.3% of sales from 22.9%; operating margin rose to 10.3% from 9.6%. Cost of products sold increased to 66.7% of sales from 65.8%. The effective tax rate was 36.9%, versus 42.9%.
Sporting Goods revenue increased 9.7% to $27.721 million. Information Security and Print Finishing revenue fell 3.3% to $6.353 million. Segment operating income was $4.269 million for Sporting Goods and $0.211 million for Information Security and Print Finishing; corporate operating costs were $0.946 million.
Financial position and liquidity
- Cash and cash equivalents were $3.027 million and time deposits were $1.450 million at March 22, 2014.
- Total debt was $19.991 million, down $8.218 million from December 28, 2013. It comprised $13.871 million of short-term notes payable, $1.569 million of current long-term debt, and $4.551 million of long-term debt.
- Management attributed the debt reduction primarily to cash generated by a $12.2 million decrease in receivables since year-end. It said revolving credit was expected to be adequate for working-capital and growth needs.
- Net cash provided by operations was $9.548 million. Investing activities used $0.022 million and financing activities used $8.905 million, including $7.828 million of net notes-payable repayments and $1.244 million of dividends paid. Cash increased $0.681 million during the quarter.
- Inventories were $32.933 million, up from $28.307 million at year-end. Total liabilities were $43.543 million, compared with $54.019 million at year-end.
The company declared dividends of $0.09 per share, compared with $0.08 in the prior-year quarter. It paid approximately $1.2 million on March 20, 2014.
Changes, outlook, and risks
- Management attributed Sporting Goods growth to new product development, brand marketing, and expanded products. It expected continued segment growth for the rest of 2014, though at a lower rate in some categories.
- Information Security and Print Finishing faced weak demand and increased competition. Management expected revenue declines while consolidating products and focusing on profitable markets; cost-cutting measures helped improve the segment’s gross margin to 36.9% from 35.3%.
- Consolidated gross margin declined, primarily reflecting lower Sporting Goods margin, which fell to 32.5% from 33.9% due mainly to product mix. Management planned continued investment in product development and brand marketing.
- Key risks cited include competition and pricing, product demand and acceptance, new-product development, integration of acquired businesses, customer and supplier relationships, cost control, economic conditions, foreign-exchange movements, and access to financing and compliance with financing terms. The filing gives no quantified full-year earnings or revenue guidance.
- The company reported no derivatives in use; it stated that a hypothetical 1% interest-rate change would not significantly affect its financial position or results. Foreign-currency changes may affect operating results and translated financial statements.
- Routine-course litigation was disclosed; management did not expect existing claims to materially adversely affect the business or financial condition. No legal proceedings were listed in Part II.
- On April 22, 2014, the board amended the bylaws to provide for annual director elections beginning at the 2015 annual shareholder meeting.
Investor facts to verify
- Whether the strong operating cash flow and debt reduction persist, given the quarter’s substantial receivables decline and rising inventory.
- Whether Sporting Goods growth continues and whether its weaker product mix and gross margin improve.
- Whether Information Security and Print Finishing can stabilize revenue while sustaining cost reductions and margin gains.
- Seasonality, foreign-exchange exposure, revolving-credit availability, and the terms and capacity of the company’s financing arrangements.
- The performance and reported contribution of the 50%-owned Stiga joint venture; Escalade’s share of Stiga’s Q1 net income was $189,000, versus $69,000 a year earlier.