Escalade, Incorporated — FY 2017 Form 10-K
Business context and period. Escalade is a sporting-goods company selling basketball, archery, table-tennis, fitness, and recreation products through retail, specialty, dealer, and online channels. The filing covers the 52-week fiscal year ended December 30, 2017; FY 2016 was 53 weeks. The company acquired Lifeline Products in 2017 and reports one operating segment, Sporting Goods.
Financial performance
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Net sales | $177.3 million | $171.7 million |
| Gross margin | 25.2% | 25.8% |
| Operating income | $14.6 million | $14.6 million |
| Net income | $14.1 million | $11.5 million |
| Basic EPS | $0.98 | $0.81 |
| Cash from operations | $13.4 million | $12.2 million |
| Cash and equivalents at year-end | $1.6 million | $1.0 million |
| Total debt at year-end | $23.1 million | $25.4 million |
| Working capital | $60.7 million | $57.2 million |
Revenue increased 3.3%, driven largely by acquisitions and new products. Gross margin declined due to unfavorable product mix and continued weakness in archery. The current ratio was 4.1, unchanged year over year. Receivables rose to $39.4 million from $35.9 million and inventory to $35.2 million from $33.8 million.
Quarter four 2017 sales were $48.7 million, operating income $5.1 million, and net income $7.5 million; the quarter’s net income included approximately $3.0 million of tax benefits from U.S. tax reform. The filing does not provide a clear quarterly cash-flow value.
Changes, outlook, and notable items
- Net income increased 22.3%, principally reflecting a 9.4% effective tax rate versus 26.1% in 2016. The Tax Cuts and Jobs Act produced an estimated $3.0 million net tax benefit; its components were provisional and could be adjusted in 2018.
- Consolidated operating income was essentially flat. FY 2016 included a $1.9 million gain on sale of the Wabash property, partially offset by $0.4 million of one-time expenses.
- Debt declined $2.3 million; management said it continued to reduce long-term debt. The revolving facility permits borrowings up to $35 million and matures January 21, 2019. Management said it expects renewal on comparable terms, but also disclosed it lacks liquid funds to repay the balance at maturity.
- Management expects projected 2018 operating cash flow and committed borrowing capacity to fund operations, and estimates 2018 capital expenditures of approximately $3.1 million. No specific revenue or earnings guidance was provided. It warned that weaker economic conditions could impair profitability and prompt cost reductions.
- Key risks include customer concentration (Amazon represented 18% and Dick’s Sporting Goods 17% of 2017 revenue; together they held 47% of year-end receivables), retail bankruptcies, archery weakness, sourcing and freight disruption, foreign-exchange and tariff exposure, product warranty and liability claims, and competition.
- Cash dividends were $0.46 per share for 2017, including quarterly payments of $0.115. The board may change or discontinue dividends.
- The company revised the presentation of shipping fees in prior periods, increasing both sales and cost of goods sold without affecting operating income, net income, or EPS. A $0.256 million bargain-purchase gain was recorded in 2017.
Important facts for investors to verify
- Progress on renewal of the revolving credit facility before its January 2019 maturity, borrowing availability, and compliance with facility covenants.
- Whether customer concentration and the higher receivables balance lead to collection losses or reduced orders.
- Whether gross-margin pressure, especially in archery, improves and whether acquired businesses contribute sustainable growth.
- Finalization of the provisional tax-reform accounting and the resulting 2018 tax rate and cash-tax effects.
- Cash conversion, inventory levels, and the sustainability of dividends alongside acquisition and debt-reduction needs.
The auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.