Escalade, Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 26, 2015 (52 weeks). The company now reports one operating segment, Sporting Goods, after selling its Print Finishing and Information Security businesses in 2014; those businesses are presented as discontinued operations.
Financial performance
| Metric | 2015 | 2014 |
|---|---|---|
| Sporting Goods revenue | $155.5 million | $138.0 million |
| Total reported net sales | $155.5 million | $158.8 million |
| Operating income | $12.8 million | $15.5 million |
| Net income | $11.6 million | $11.8 million |
| Basic EPS | $0.82 | $0.85 |
| Operating cash flow | $15.5 million | $19.3 million |
| Cash and cash equivalents | $2.0 million | $3.2 million |
| Total debt | $23.3 million | $21.1 million |
| Working capital | $34.5 million | $37.1 million |
| Current ratio | 1.9 | 2.2 |
Sporting Goods revenue increased 12.7%, with growth across most channels. Total sales fell 2.1% because 2014 included revenue from the businesses subsequently divested; the segment comparison is more representative of ongoing operations. Gross margin declined to 28.0% from 29.8%, primarily due to lower archery sales and margins. Operating margin was 8.2%, versus 11.3%. Management attributed higher selling, general and administrative costs—up 21.1% to $27.8 million—to marketing in acquired categories and preparation for new products. Other income, including affiliate earnings, decreased to $3.3 million from $4.7 million, partly reflecting foreign exchange effects on the Stiga joint venture.
Fourth-quarter 2015 net sales were $43.7 million, operating income was $2.5 million, and net income was $2.9 million. The filing’s 2014 quarterly results include significant discontinued-operation and divestiture effects, limiting direct net-income comparisons.
Cash, debt and capital allocation
Operating cash flow was $15.5 million; investing activities used $14.3 million, including $10.7 million for acquisitions and $5.1 million for capital expenditures. Financing activities used $2.4 million, including $6.1 million of dividends. Receivables rose to $39.0 million from $32.2 million and inventory to $25.9 million from $23.8 million. Debt increased primarily to fund acquisitions; the reported effective interest rate was 2.6%.
In January 2016, Escalade amended its credit agreement, increasing available revolving capacity to $35 million and the term loan to $7.5 million, and extending maturities to 2019 and 2021, respectively. The company’s quarterly dividend was $0.11 per share in 2015; future payments remain at the board’s discretion.
Outlook, transactions and risks
Management expected 2016 sales to improve, citing new products, acquisitions and a broader customer base, and forecast approximately $4.5 million in 2016 capital expenditures. It stated that projected operating cash flow and committed borrowing capacity should be sufficient for operations, while warning that weaker economic conditions could impair profitability and prompt cost reductions.
2015 acquisitions included Onix Sports and Goalsetter. On January 21, 2016, the company acquired substantially all of Triumph Sports USA’s business for an estimated $10.0 million, including contingent consideration; purchase-price allocation was not final at filing. Goodwill was $20.0 million at year-end, and the company reported no goodwill impairment.
Key risks include dependence on major customers and customer credit, competitive and discretionary-spending exposure, foreign suppliers and supply-chain disruption, currency movements, product warranty or liability claims, and reliance on acquisitions and successful integration. One customer represented about 18% of 2015 revenue and 27% of year-end receivables. The company disclosed approximately $3.5 million of receivables from customers about which it had concerns. Litigation in the ordinary course was not expected by management to have a material adverse effect. The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting; management also assessed controls as effective.
Important facts for investors to verify
- Whether Sporting Goods growth and management’s 2016 growth expectations materialized, and whether margins recovered from the 2015 decline.
- Customer concentration, collection performance on the $3.5 million of questioned receivables, and the 27% receivables exposure to one customer.
- Acquisition integration, returns and final purchase accounting for Triumph, including contingent consideration and goodwill/intangible valuations.
- Liquidity and covenant headroom under the January 2016 credit agreement, given higher debt and acquisition funding needs.
- Cash conversion and working-capital trends, particularly receivables and inventory growth relative to sales.
- Stiga’s contribution and foreign-currency exposure; its reported results are summarized in the filing, and separate joint-venture financial statements were to be filed by amendment.