Escalade, Inc. — 2012 Form 10-K Summary
Business context and reporting period
Escalade manufactures and sells sporting goods and information security and print-finishing products. Fiscal 2012 was 52 weeks and ended December 29, 2012; fiscal 2011 was 53 weeks and ended December 31, 2011. Sporting Goods accounted for 76% of 2012 sales and Information Security and Print Finishing (Martin Yale Group) for 24%.
Financial performance and liquidity
| Metric | 2012 | 2011 |
|---|---|---|
| Net sales | $147.6 million | $134.3 million |
| Gross margin | 30.1% | 31.1% |
| Operating income (loss) | $(2.6) million | $4.2 million |
| Net income (loss) | $(4.9) million | $4.4 million |
| Basic EPS | $(0.37) | $0.35 |
| Cash from operations | $6.6 million | $2.6 million |
| Cash and cash equivalents | $2.5 million | $3.8 million |
| Working capital | $32.7 million | $29.5 million |
| Total bank debt | $22.6 million | $21.9 million |
Sales rose 9.9% year over year. Sporting Goods sales increased 16.1% to $112.6 million; segment operating income was $13.8 million. Martin Yale sales fell 6.1% to $35.0 million; its operating loss was $14.6 million, including $13.4 million of goodwill and intangible-asset impairment charges. Excluding those charges, Martin Yale still recorded an operating loss of about $1.2 million.
Reported gross margin declined by 1.0 percentage point. Sporting Goods margin improved to 29.0% from 28.2%, while Martin Yale margin fell approximately 5.1 percentage points, reflecting legacy quality problems, competition and weaker demand. SG&A was $31.4 million, down from $35.9 million; 2011 included $4.4 million of accelerated depreciation related to the Oracle ERP replacement. The 2012 tax provision was $4.4 million despite a pretax loss, primarily because the impairment was not tax deductible.
Cash from operations increased to $6.6 million, while investing activities used $3.9 million and financing activities used $3.8 million. Receivables increased to $33.5 million from $26.9 million and inventory to $30.9 million from $29.0 million. The current ratio was 1.9 in both years. The company paid $5.1 million in cash dividends during 2012 and established an intended quarterly dividend of $0.08 per share.
Material changes and unusual items
- Martin Yale recorded a $13.2 million goodwill impairment and a $0.2 million intangible-asset impairment in the third quarter, eliminating its recorded goodwill. The impairment followed lower-than-expected operating results and cash flows, along with continued weakness in European and Asian markets.
- Escalade recorded a $0.4 million impairment of its Escalade International equity-method investment ($0.2 million net of tax), following customer losses and weaker performance.
- The company acquired Cajun Archery assets for $0.6 million and North American rigid-air technology patent rights for $0.65 million.
- Fourth-quarter 2012 sales were $40.8 million, operating income $2.4 million, net income $3.9 million and basic EPS $0.29. In fourth-quarter 2011, the corresponding figures were $36.7 million, $0.2 million, $2.1 million and $0.17.
Outlook, risks and contingencies
Management expected overall sales to improve in 2013, citing new products and a broader customer base, and anticipated further Sporting Goods operating-income improvement if sales grew. It expected approximately $5.5 million of 2013 capital expenditures, including $0.6 million for ERP implementation and $2.4 million to acquire currently leased Rosarito, Mexico property. Management said projected operating cash flow and lender commitments should fund operations, but warned that worsening economic conditions could impair profitability and prompt additional cost reductions.
The $22 million revolving credit facility matures July 31, 2013; management had begun preliminary renewal discussions. The company reported compliance with its financial covenants. Significant risks include Martin Yale’s continuing losses and quality issues, dependence on a Sporting Goods customer representing 18% of consolidated revenue, economic and consumer-demand weakness, inventory and receivables exposure, reliance on third-party and foreign suppliers, foreign-exchange movements, and execution of the ongoing ERP conversion. A hypothetical 20% adverse euro movement was estimated to reduce 2012 net income by 37%. Approximately 16 union-covered employees were under a contract expiring April 30, 2013.
Management concluded that disclosure controls and internal control over financial reporting were effective at year-end. The company reported ordinary-course litigation but did not expect its resolution to materially affect its business or financial condition. No off-balance-sheet financing arrangements were reported.
Most important facts for investors to verify
- Whether the July 2013 revolving-credit facility was renewed on acceptable terms and whether covenant headroom remained adequate.
- Whether Martin Yale’s quality, cost and sales initiatives produced sustainable improvement, and whether its impairment assumptions remain supportable.
- Whether the major Sporting Goods customer’s orders and the rise in receivables converted into cash as expected.
- The durability of cash generation and the ability to fund dividends, debt service and planned capital spending amid working-capital needs.
- The performance and carrying value of equity-method investments, including the contribution of investment income to reported earnings.