Escalade, Inc. — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011 (53 weeks), compared with the 52-week fiscal year ended December 25, 2010. The filing is an annual report; it also provides fourth-quarter results.
Business context
Escalade operates Sporting Goods and Information Security and Print Finishing (Martin Yale Group). Sporting Goods generated 72% of 2011 sales and Martin Yale Group 28%. Dick’s Sporting Goods represented approximately 16% of consolidated revenue, creating customer concentration risk.
Financial results and liquidity
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Net sales | $134.3 million | $120.7 million |
| Gross margin | 31.1% | 30.8% |
| Operating income | $4.2 million | $8.2 million |
| Net income | $4.4 million | $6.1 million |
| Basic earnings per share | $0.35 | $0.48 |
| Cash from operations | $2.6 million | $8.9 million |
- Revenue increased 11.3%; Sporting Goods sales grew 13.0% and Martin Yale Group sales grew 7.0% (about 1 percentage point of that segment’s increase reflected currency movements).
- Consolidated operating margin fell to 3.1% from 6.8%, while gross margin improved slightly. SG&A rose 29.7% to $35.9 million and included $4.4 million of accelerated depreciation for the replaced Oracle ERP system. Excluding that expense, management reported SG&A of $31.5 million and operating margin of approximately 6.4%.
- Sporting Goods operating income rose to $10.8 million from $9.2 million; segment net income was $5.8 million. Martin Yale Group operating income fell to $0.1 million from $0.9 million, and its net loss widened to $0.9 million from $0.2 million.
- Fourth-quarter sales were $36.7 million, operating income $0.2 million, and net income $2.1 million, versus sales of $31.2 million, operating income of $1.0 million, and net income of $2.2 million in the prior-year quarter.
- Inventory increased to $29.0 million from $22.9 million. Working capital was $29.5 million and the current ratio 1.9, versus 1.8. Cash and cash equivalents were $3.8 million; time deposits were $1.0 million.
- Total bank debt was approximately $21.9 million, up from $18.9 million; debt to equity rose to 25.1% from 21.7%. The reported 2011 effective interest rate was 2.9%, down from 4.6%. The revolving facility matures July 31, 2013; the term loan matures May 31, 2015. Management said it met all financial covenants.
- Capital expenditures were $2.4 million. Cash dividends declared were $4.1 million and $3.2 million was paid during the year. Operating cash flow declined substantially, principally reflecting increased inventory and other working-capital needs.
Material changes, outlook, and risks
- Management attributed 2011 earnings pressure chiefly to the $4.4 million accelerated ERP depreciation expense. The reported $4.4 million net income was down from $6.1 million; management stated income would have increased 19.5% without the ERP depreciation effect.
- Martin Yale Group faced new-product launch inefficiencies, pricing pressure, high organizational costs, weak office-products and government channels, and economic weakness in parts of Europe. Management warned that sales could decline in 2012 and that improving the segment’s profitability would be challenging.
- Management expected 2012 sales to exceed 2011 levels, citing new products and a broader customer base. It anticipated improved Sporting Goods operating income and expected Martin Yale Group sales, product breadth, and manufacturing efficiencies to support improvement. These are forward-looking expectations, not guarantees.
- Expected 2012 capital expenditures were approximately $4.0 million, including $1.1 million to complete ERP implementation at Sporting Goods locations. ERP conversion risk includes implementation costs, staffing needs, and potential delays or difficulties consolidating financial information.
- Martin Yale Group goodwill was $13.3 million; estimated fair value exceeded carrying value by only about 5.1%. Further declines in cash flows or adverse economic conditions could reduce that cushion. No goodwill impairment was recorded in 2011.
- Other notable risks include discretionary consumer demand, intense competition and price discounting, dependence on foreign suppliers and currencies, inventory obsolescence, product warranty and liability claims, and customer concentration. A hypothetical 20% adverse Euro movement was estimated to reduce revenue 7.5% and net income 2.8%.
- The company reported no off-balance-sheet financing arrangements. It said ordinary-course litigation was not expected to have a material adverse effect. 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 2012 operating cash flow improves as inventory and working capital normalize.
- Whether Martin Yale Group returns to sustained profitability and whether its goodwill valuation assumptions remain supportable.
- Debt availability, covenant compliance, and refinancing or maturity plans before the revolving facility expires in July 2013.
- Actual results of ERP implementation, related spending, and any further unusual charges.
- Whether Sporting Goods growth continues and whether reliance on Dick’s Sporting Goods or other major customers changes.