Escalade, Inc. — 2013 Form 10-K
Business context and period. This annual report covers the 52-week fiscal year ended December 28, 2013, with comparison to the 52-week year ended December 29, 2012. Escalade operates in Sporting Goods and Information Security and Print Finishing. Sporting Goods represented 81% of 2013 sales; Information Security and Print Finishing represented 19%.
Financial performance
Amounts are in millions of dollars, except per-share data.
| Metric | 2013 | 2012 |
|---|---|---|
| Net sales | $163.7 | $147.6 |
| Gross margin | 30.7% | 30.1% |
| Operating income (loss) | $14.5 | ($2.6) |
| Net income (loss) | $9.8 | ($4.9) |
| Basic earnings (loss) per share | $0.73 | ($0.37) |
| Cash provided by operating activities | $8.4 | $6.1 |
- Sales increased 10.9%. Sporting Goods revenue rose 18.1% to $133.0 million; segment operating income increased to $18.5 million from $14.2 million. Management attributed the improvement to broader channel growth, product mix, production efficiencies, and improved factory absorption.
- Information Security and Print Finishing revenue fell 12.3% to $30.7 million. The segment recorded an operating loss of $1.7 million and net loss of $2.8 million. Its 2012 results included a $13.4 million goodwill and intangible-asset impairment; excluding that impairment, the segment’s net loss worsened by $0.5 million in 2013.
- 2013 operating results included $2.9 million of other income, principally equity-method investment income. The effective tax rate was 41.2%, elevated mainly by valuation allowances for foreign losses.
- Fourth-quarter sales were $46.4 million, operating income $2.9 million, and net income $3.1 million, versus $40.8 million, $2.4 million, and $3.9 million, respectively, in 2012.
Liquidity, debt and capital allocation
- Working capital was $37.5 million, up from $32.7 million; the current ratio was unchanged at 1.9. Cash and cash equivalents were $2.3 million, with $1.7 million in time deposits. Inventory declined to $28.3 million from $30.9 million.
- Total notes payable and long-term debt increased to $28.2 million from $22.6 million. Debt-to-equity rose to 32.1% from 28.1%. The company reported compliance with its credit covenants and a 3.4% effective interest rate for 2013.
- The revolving facility’s maximum commitment was increased to $31.0 million; $19.0 million was outstanding at year-end. The term loan matures in 2018, and the revolving facility matures in 2016. Debt is secured by substantially all company assets.
- Investing cash outflow was $8.7 million, including $6.5 million for acquisitions; financing cash outflow was $0.4 million. Dividends paid were $4.6 million. The stated quarterly dividend was $0.09 per share, or $0.36 annualized.
Changes, outlook and risks
- In November 2013, Escalade acquired substantially all of DMI Sports’ indoor-games and accessories business for $6.1 million, expanding its Sporting Goods products. The acquisition contributed to higher working-capital needs and debt.
- Management expected 2014 sales to improve over 2013, citing new products, a broader customer base, and the DMI acquisition. It forecast approximately $3.7 million of capital expenditures, including $0.8 million for continued ERP implementation. Management said operating cash flow and committed bank borrowings were expected to fund operations, but warned that economic deterioration could impair profitability.
- Management continued to assess the strategic fit and profitability of Information Security and Print Finishing amid falling demand, intense competition, and weakness in office-products and government channels. No specific earnings or sales guidance was provided.
- Key risks include reliance on Dick’s Sporting Goods, which represented 16% of consolidated revenue; customer receivable concentration; competitive and discretionary-demand exposure; foreign sourcing and currency fluctuations; and execution of ERP conversion. The company reported no material off-balance-sheet financing arrangements.
- The company reported ordinary-course litigation that it did not expect to materially affect its business or financial condition. A $2.7 million letter of credit supports a mortgage. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not provide an internal-control attestation.
Important facts for investors to verify
- Whether Sporting Goods growth and margins can continue, and the acquired DMI business’s contribution to results and cash needs.
- Whether Information Security and Print Finishing can stabilize sales and reduce operating losses, or whether further strategic action is likely.
- Receivables growth and collection quality: receivables rose to $43.8 million from $33.5 million, while two customers represented 34% of year-end receivables.
- Debt levels, covenant headroom, and refinancing exposure as the revolving facility approaches its 2016 maturity.
- Whether the 2014 sales outlook, planned capital spending, dividend, and ERP implementation are supported by operating cash generation.