Escalade, Inc. — FY2018 Form 10-K
Business and period: Escalade is a single-segment sporting goods manufacturer, importer and distributor, with products spanning archery, basketball, table tennis, fitness and games. This annual report covers the 52 weeks ended December 29, 2018; it is not a standalone fourth-quarter filing. Financial amounts below are in U.S. dollars.
Financial performance
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net sales | $175.8 million | $177.3 million |
| Gross margin | 25.6% | 25.2% |
| Operating income | $13.8 million | $14.6 million |
| Net income | $20.4 million | $14.1 million |
| Diluted EPS | $1.41 | $0.98 |
| Cash from operations | $6.5 million | $13.4 million |
| Cash and equivalents at year-end | $2.8 million | $1.6 million |
| Total debt at year-end | $0 | $23.1 million |
| Current ratio | 5.3 | 4.1 |
- Sales declined 0.9%. Gross margin improved 0.4 percentage points, primarily from favorable product mix and stronger archery sales and margins. SG&A rose 4.4% to $29.8 million, increasing to 16.9% of sales from 16.1%, partly due to acquisition activity and customer-specific advertising.
- Operating income fell about 5.4%, despite the gross-margin improvement. The reported consolidated operating margin was 7.9%, versus 8.2% in 2017.
- Net income increased 45.4%, but included a $13.0 million gain from selling Escalade’s 50% Stiga investment. The effective tax rate was 22.7%, compared with 9.4% in 2017; the prior year benefited from approximately $3.0 million of tax reform-related income tax benefit.
- Operating cash flow fell by about half, to $6.5 million. Higher inventory and working-capital outflows contributed; year-end inventory rose $3.9 million to $39.1 million. Investing cash flow was $24.9 million, including $33.7 million in Stiga sale proceeds; financing cash outflow was $30.1 million, including $7.2 million of dividends and debt repayment.
- Receivables were $40.7 million, up from $39.4 million. Stockholders’ equity was $128.3 million, versus $111.7 million. The company reported no off-balance-sheet financing arrangements.
Material changes and unusual items
- On May 17, 2018, Escalade sold its 50% Stiga equity-method investment for $33.7 million, recognizing a $13.0 million gain. Proceeds were used to extinguish outstanding debt. Escalade retained North American licensing rights for Stiga-branded table tennis hobby products under a new agreement effective January 1, 2019.
- Escalade acquired Victory Tailgate in November 2018 for approximately $7.2 million, expanding its tailgating and lawn-games products. Goodwill increased to $26.4 million, principally reflecting the acquisition.
- Fourth-quarter 2018 sales were $51.0 million versus $48.7 million in fourth-quarter 2017; net income was $3.6 million versus $7.5 million. Fourth-quarter 2017 net income included the approximately $3.0 million tax benefit from U.S. tax reform.
- The company declared $7.2 million in dividends during 2018. Its stated quarterly dividend was $0.125 per share.
Outlook, liquidity and risks
- Management estimated 2019 capital expenditures of approximately $3.0 million and said projected operating cash flow and available bank borrowing were expected to fund operations. No specific revenue or earnings guidance was provided. Management cautioned that weaker economic conditions could impair profitability and said it could pursue cost reductions or realign overhead.
- A January 21, 2019 amended credit agreement increased revolving-credit availability to $50 million and extended maturity to January 31, 2022, with revised pricing and borrowing-base terms. This is borrowing capacity, not year-end cash or debt.
- Key exposures include discretionary consumer demand, intense competition, changing preferences and inventory forecasting; dependence on Amazon and Dick’s Sporting Goods; overseas sourcing, freight, tariffs and currency movements; and product warranty, safety, litigation, cybersecurity and information-system risks.
- Amazon accounted for approximately 19% of 2018 revenue and Dick’s Sporting Goods 13%. Together they represented about 38% of year-end receivables. The company’s backlog was not material and was not considered an indicator of future results.
- Existing litigation arose in the ordinary course; management did not believe its resolution would materially adversely affect the business or financial condition. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Management reported effective controls; Victory Tailgate was excluded from the internal-control audit scope as a recently acquired business.
Investor verification priorities
- Separate recurring operating performance and cash generation from the $13.0 million Stiga sale gain and the prior-year tax benefit; review the tax reconciliation and cash-flow statement.
- Assess whether gross-margin gains can persist while SG&A remains elevated and operating income is declining.
- Track inventory, receivables and operating cash flow, including collection exposure to Amazon and Dick’s Sporting Goods.
- Review Victory Tailgate’s integration and contribution, and the economics and terms of the new Stiga license.
- Confirm the $50 million credit facility’s covenants, borrowing availability and subsequent use, as well as the sustainability of the dividend amid lower operating cash flow.