Escalade, Inc. — 2014 Form 10-K Summary
Business context and reporting period
Fiscal 2014 was the 52 weeks ended December 27, 2014. Escalade now operates in one reportable business segment, Sporting Goods, selling products including archery equipment, basketball goals, table tennis, billiards, game tables and fitness products. In 2014 it completed the sale of its Print Finishing business (June 30) and Information Security business (October 1); those operations are presented as discontinued operations for all periods.
Key financial metrics
Amounts below are in millions except per-share data. Revenue labeled “total” includes discontinued operations; Sporting Goods is the continuing business.
| Metric | 2014 | 2013 |
|---|---|---|
| Sporting Goods net revenue | $137.975 | $132.991 |
| Total net sales, including discontinued operations | $158.840 | $163.677 |
| Gross margin, continuing operations | 29.8% | 30.1% |
| Operating income, continuing operations | $15.504 | $16.184 |
| Net income from continuing operations | $13.345 | $12.595 |
| Net loss from discontinued operations | $(1.528) | $(2.790) |
| Net income | $11.817 | $9.805 |
| Basic earnings per share | $0.85 | $0.73 |
| Cash provided by operating activities | $18.377 | $8.390 |
| Working capital | $37.105 | $37.537 |
| Total debt | $21.146 | $28.209 |
At year-end, cash and cash equivalents were $3.232 million and time deposits were $1.450 million. The current ratio rose to 2.2 from 1.9. Receivables declined to $32.150 million from $38.271 million, while inventory increased to $23.775 million from $18.941 million. Stockholders’ equity was $89.779 million, versus $87.955 million.
Material changes and unusual items
- Sporting Goods revenue increased 3.7%, but operating income for the segment declined to $18.194 million from $18.469 million. Management attributed the slightly lower gross margin partly to higher research and development spending; SG&A rose 6.9% to $22.938 million, including increased marketing.
- Discontinued operations revenue fell to $20.865 million from $30.686 million. The divestitures included a $12.945 million held-for-sale impairment, a $5.929 million disposal gain (including a $2.565 million foreign-currency translation reclassification), and a $6.099 million tax benefit. Discontinued operations recorded a net loss of $1.528 million.
- Reported total net income rose 20.5%; however, the year’s result included the divestiture and tax items. Continuing-operations income was $13.345 million. The consolidated tax provision was $0.339 million; management cited a 2.8% effective rate, while the tax provision for continuing operations was $6.438 million.
- Operating cash flow more than doubled. The cash-flow statement includes a $6.672 million adjustment for discontinued-operations activities and favorable receivables movements, so investors should assess the sustainability of cash generation.
- Escalade acquired Cue & Case Sales, a billiards-accessories business, for approximately $10.4 million in cash in October. Acquisition-related additions increased goodwill to $14.875 million.
Outlook, risks and contingencies
Management expected 2015 sales to improve versus 2014, citing new products and an expanded customer base, and estimated 2015 capital expenditures of approximately $7.0 million. It said projected operating cash flow and committed bank borrowings should fund operations, while warning that economic deterioration could pressure profitability and prompt cost reductions or infrastructure realignment. No specific earnings or revenue guidance was provided.
The revolving credit facility, with a stated maximum of $31.0 million, matures August 27, 2016; the term loan matures August 27, 2018. The facility is secured by substantially all company assets. Management reported compliance with financial covenants. Total debt declined by $7.1 million, primarily due to proceeds from the divestitures. The quarterly dividend was set at $0.10 per share in August 2014; the filing notes that future payments remain subject to the Board’s discretion and cash generation.
Key risks include dependence on major customers (Dick’s Sporting Goods represented approximately 19% of Sporting Goods revenue and 23% of year-end receivables), competitive and discretionary-spending exposure, demand forecasting and inventory risk, reliance on foreign suppliers and transportation, foreign exchange fluctuations, product warranty and liability claims, and execution of acquisitions and ERP-system implementation. The company reported ordinary-course litigation and did not expect its resolution to materially adversely affect the business or financial condition. Management and the independent auditor reported effective internal control over financial reporting; the Cue & Case acquisition was excluded from the year-end control assessment as permitted.
Important facts for investors to verify
- Reconcile continuing-business growth and margins with consolidated results and the discontinued-operations sale, impairment, disposal and tax effects.
- Review whether 2014 operating cash flow is repeatable, considering working-capital movements and discontinued-operations cash flows.
- Assess customer concentration, especially Dick’s Sporting Goods’ revenue and receivable exposure, and any changes in customer relationships.
- Monitor inventory growth, product demand, warranty reserves, and the expected returns from Cue & Case and other product investments.
- Confirm debt balances, credit-facility availability and covenant compliance, as well as the capacity to fund planned capital spending and dividends.
- Track 2015 sales performance, ERP conversion at remaining sites, and any new legal, tax, supply-chain or foreign-currency developments.