Escalade, Inc. — FY2016 Form 10-K
Business and period: Sporting-goods manufacturer, importer and distributor, reporting for the 53 weeks ended December 31, 2016; comparison year ended December 26, 2015 had 52 weeks. The company reports one continuing operating segment, Sporting Goods. Its Information Security and Print Finishing businesses were sold in 2014 and are classified as discontinued operations.
Financial performance
| Metric | FY2016 | FY2015 |
|---|---|---|
| Net sales | $167.7 million | $155.5 million |
| Gross profit / margin | $44.3 million / 26.4% | $43.5 million / 28.0% |
| Operating income / margin | $14.6 million / 8.7% | $12.8 million / 8.2% |
| Net income | $11.5 million | $11.6 million |
| Basic EPS | $0.81 | $0.82 |
| Cash provided by operations | $12.2 million | $15.5 million |
| Capital expenditures | $2.7 million | $5.1 million |
| Cash and cash equivalents, year-end | $1.0 million | $2.0 million |
| Total debt, year-end | $25.4 million | $23.3 million |
- Sales grew 7.8%, largely from acquisitions and new products. Gross margin declined 1.6 percentage points, primarily from unfavorable product mix and weaker archery sales and margins.
- Operating income increased despite lower gross margin, aided in part by a $1.9 million gain on sale of Wabash, Indiana property. The filing also identifies bad-debt expense associated with customer bankruptcy filings; the cash-flow statement reports a $1.8 million provision for doubtful accounts.
- Other income, including equity earnings, declined to $1.8 million from $3.3 million. Equity-method earnings, primarily associated with 50%-owned Stiga, were $1.7 million versus $3.0 million.
- Working capital was $57.2 million, up from $54.2 million; current ratio was 4.1 versus 3.9. Receivables decreased to $35.9 million from $39.0 million, while inventory increased to $33.8 million from $25.9 million.
- Debt increased by $2.1 million year over year. The company reported a 2.5% effective borrowing rate for 2016. Its January 2016 credit agreement provides a $35 million revolving facility and a $7.5 million term loan; year-end revolving borrowings were $19.2 million and term-loan debt was $6.3 million. Facilities are secured by substantially all company assets.
Material changes and quarterly results
- FY2016 included the acquisition of Triumph Sports USA for approximately $10.0 million, mostly paid in cash. The company said this broadened its indoor and outdoor games offerings. Acquisitions also contributed to higher goodwill and intangible assets.
- Fourth-quarter sales were $45.8 million and net income was $3.5 million, compared with $43.7 million and $2.9 million in fourth-quarter 2015.
- The company sold its Wabash, Indiana land and building for approximately $2.1 million, recognizing a $1.9 million operating gain.
- Operating cash flow fell by $3.3 million, while acquisitions used $9.7 million in investing cash. Dividends paid were $6.3 million. Year-end cash declined by $1.0 million.
Outlook, risks and contingencies
- Management estimated 2017 capital expenditures of approximately $3.5 million and said projected operating cash flows and committed borrowing availability should fund operations. No specific revenue or earnings guidance was provided.
- Management cautioned that economic deterioration could harm 2017 profitability and said it may pursue cost reductions or infrastructure realignment if needed.
- Customer concentration is material: Dick’s Sporting Goods represented approximately 18% of 2016 revenue and Amazon approximately 13%. Together, the two customers represented about 42% of year-end receivables. The company disclosed approximately $1.8 million of net receivables from customers about which it had concerns.
- Key risks include discretionary consumer demand, competition and pricing, customer concentration and credit losses, inventory forecasting and obsolescence, overseas sourcing and transportation, tariffs and trade-policy changes, foreign exchange, product warranty or liability claims, and reliance on key suppliers.
- Existing litigation arises in the ordinary course; management did not expect its resolution to materially adversely affect the business or financial condition. The filing reports no off-balance-sheet financing arrangements and no material capital-expenditure commitments at year-end.
- The company paid quarterly dividends of $0.11 per share in 2016 and stated that future dividends remain at the board’s discretion. Management reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Whether sales growth from acquired businesses and new products can persist, particularly as archery sales and margins remain under pressure.
- Whether the increase in inventory and customer-credit exposure leads to further markdowns, bad-debt provisions or cash-flow pressure.
- How the Wabash property gain and other unusual items affect comparisons of recurring operating performance.
- Debt availability, covenant compliance, refinancing exposure and the concentration of scheduled debt maturities, including the large 2019 maturity.
- Stiga’s declining sales and earnings contribution, and the assumptions supporting the carrying value of goodwill and acquired intangible assets.
- The company’s actual performance against its 2017 capital-spending and liquidity expectations; formal earnings guidance was not provided.