Although revenues declined, consolidated net income for the three months and nine months ended October 1, 2005, increased 25.9% and 28.8%, respectively. The primary factor in achieving increased profitability has been the turn-around in the Office Products business; a direct result of the restructuring efforts initiated during 2004. Compared to the same periods last year, net income attributed to the Sporting Goods business declined 19% for the quarter to $4.3 million from $5.3 million last year. For the nine month period, net income for the Sporting Goods business decline 22.7%. Management attributed the declines to lower sales volume.
As discussed below, management anticipates the Sporting Goods business to end 2005 with lower sales than were achieved in 2004. Consequently, net income from the Sporting Goods segment is expected to be lower for fiscal 2005 compared to fiscal 2004. Management expects this decline in profits from the Sporting Goods business to be offset by increased profits from the Office Products business such that consolidated net income for fiscal 2005 will be better than fiscal 2004.
Consolidated Revenue and Gross Margin
Consolidated net revenues for the three months and nine months ended October 1, 2005 declined 15.5% and 12.7%, respectively, compared to the same periods in 2004. Both business segments experienced lower sales volumes.
Sporting Goods sales are very seasonal with the third quarter traditionally the strongest. Net sales for the third quarter were $49.7 million, down 16.5% from last year's $59.6 million. For the nine month period, sales were down 11.5%. The primary factor for the decline is lower sales to the company's largest customer, Sears. Sales to Sears were lower because of a decision by Sears to eliminate an arcade product introduced in 2004 that represented roughly $7 million in sales to Sears in 2004, and an aggressive inventory control and pricing adjustment program initiated by Sears in 2005 under which Sears increased retail pricing on certain products and substantially curtailed advertising campaigns. For the nine months ended October 1, 2005, the impact of these two factors has been a decline in sales to Sears of roughly $12.5 million compared to the same period last year. The company continues to have a very good relationship with Sears, but it is not possible at this time to assess the impact of Sears' new marketing strategies on the company's future sales volume to Sears. Based on results year-to-date, the company anticipates fiscal 2005 sales to Sears will be down $14 million to $18 million compared to fiscal 2004. The company expects the fourth quarter to be comparable, or slightly down compared to the same period last year. Consequently, Sporting Goods sales for fiscal year 2005 are expected to be lower than fiscal 2004.
Office Products sales were down 11.5% and 14.9% in the three months and nine months ended October 1, 2005, respectively, compared with the same periods last year.
The consolidated gross margin ratio for the three months and nine months ended October 1, 2005, was better than the same period last year as a result of improved gross margins in the Office Products business; one of the results of the restructuring activities initiated in 2004. Gross margin ratios in the Sporting Goods business were down 1% for the nine months ended October 1, 2005 as a result of product mix.
Consolidated Selling, General, and Administrative Expenses
Consolidated selling, general, and administrative expenses for the three months ended October 1, 2005 were relatively unchanged from the same period last year. However, they were down roughly $1.3 million for the nine months ended October 1, 2005 compared to the same period last year as a result of the lower sales volume in the Sporting Goods Business. As a percentage of net sales, selling, general, and administrative costs increased for the three months and nine months ended October 1, 2005, compared to the same periods in 2004 due to the lower sales volume. Management continues to seek out ways to reduce these costs in each business segment. The company believes that additional cost reduction synergies are possible as European distribution and administration in the Office Products business is consolidated, but results from these activities are not expected to materialize until 2006.
Total debt increased 30.4% during the nine months ended October 1, 2005 as a direct result of the seasonal buildup of inventory and accounts receivable in the Sporting Goods Business. Total debt at October 1, 2005 is lower than the same period last year as a direct result of cash flow from operations and the absence of any sizable acquisitions. As a percentage of stockholders' equity, total debt has decreased from 68% at October 2, 2004, to 50% at October 1, 2005 reflecting the company's ability to generate strong cash flow.
During the nine months ended October 1, 2005, operations generated $2.7 million in cash compared to consuming $5.4 million for the same time period in 2004. The primary reason for the increase is higher net income and lower inventory and accounts receivable levels in 2005 as compared to 2004.
Total cash used by investing activities during the nine months ended October 1, 2005 totaled $8.3 million. Approximately $3.2 million was expended to acquire certain assets of Child Life, Inc., a manufacturer of premium residential play systems. The balance, approximately $5.2 million, was expended for property and equipment. The largest component of this is the addition of a new manufacturing plant in Reynosa, Mexico which is expected to be operational at the end of the first quarter of 2006. The company anticipates spending an additional $4.0 million to complete this project.
The company's working capital requirements are primarily funded from operating cash flows and revolving credit agreements with its banks. The company's relationship with its primary lending bank remains strong and the company expects to have access to the same level of revolving credit that was available in 2004. In addition, the company believes it can quickly reach agreements to increase available credit should the need arise.
ESCALADE, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
(All amounts in thousands, except per share amounts)
----------------------------------- ---------------------
Three Months Ended Nine Months Ended
--------------------------- ---------------------------
October 1, October 2, October 1, October 2,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Net sales $ 63,557 $ 75,203 $ 140,890 $ 161,377
Costs, expenses and other
income:
Cost of products sold 46,148 56,738 99,355 118,381
Selling, general and
administrative expenses 8,935 8,934 27,414 28,670
Restructuring costs -- 1,412 -- 1,412
Goodwill impairment loss -- 1,312 -- 1,312
------------ ------------ ------------ ------------
Operating income 8,474 6,807 14,121 11,602
Interest expense, net 345 489 1,125 1,427
Other expense (income) (225) (245) (632) (546)
------------ ------------ ------------ ------------
Income before income taxes 8,354 6,563 13,628 10,721
Provision for income taxes 2,902 2,233 4,767 3,840
------------ ------------ ------------ ------------
Net income $ 5,452 $ 4,330 $ 8,861 $ 6,881
============ ============ ============ ============
Per share data:
Basic earnings per share $ 0.42 $ 0.33 $ 0.68 $ 0.53
Diluted earnings per share $ 0.41 $ 0.33 $ 0.67 $ 0.52
Cash dividend declared -- -- $ 0.15 $ 0.13
As of and for the Nine Months
Ended October 1, 2005
---------------------------------------------------------
Sporting Office
In thousands Goods Products Corp. Total
------------ ------------ ------------ ------------
Revenues from external customers $ 92,326 $ 48,564 $ -- $ 140,890
Operating income (loss) 10,116 5,617 (1,612) 14,121
Net income (loss) 5,747 3,325 (211) 8,861
Total assets $ 88,702 $ 44,489 $ 12,261 $ 145,452
As of and for the Nine Months
Ended October 2, 2004
---------------------------------------------------------
Sporting Office
In thousands Goods Products Corp. Total
------------ ------------ ------------ ------------
Revenues from external customers $ 104,328 $ 57,049 $ -- $ 161,377
Operating income (loss) 12,568 948 (1,914) 11,602
Net income (loss) 7,434 (125) (428) 6,881
Total assets $ 86,108 $ 59,565 $ 11,432 $ 157,105
