Escalade, Inc. — FY2019 Form 10-K
Business context and period. Escalade reported one operating segment, Sporting Goods, selling archery, basketball, table tennis, fitness and other recreation products. Fiscal 2019 was the 52 weeks ended December 28, 2019; this annual filing also reports fourth-quarter results. The filing was signed February 21, 2020.
Financial performance and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net sales | $180.5 million | $175.8 million |
| Gross margin | 23.5% | 25.6% |
| Operating income | $9.3 million | $13.8 million |
| Net income | $7.3 million | $20.4 million |
| Diluted EPS | $0.50 | $1.41 |
| Net cash from operations | $16.0 million | $6.5 million |
- Sales increased 2.7%, while cost of products sold rose to 76.5% of sales from 74.4%. Management attributed lower gross margin mainly to customer allowances, lower factory utilization, tariffs and sales mix. SG&A rose 6.1% to $31.6 million, partly reflecting Victory Tailgate costs and investment in basketball displayers.
- FY2019 net income fell 64.5%. FY2018 included a $13.0 million gain on the sale of the company’s 50% interest in Stiga; FY2019 had no comparable gain.
- Fourth-quarter 2019 sales were $47.0 million versus $51.0 million; operating income was $3.5 million versus $5.0 million, and net income was $2.6 million versus $3.6 million.
- Cash and cash equivalents were $5.9 million at year-end, receivables were $35.5 million, and inventory was $42.3 million. The current ratio was 4.8, compared with 5.3 in 2018.
- Long-term debt was zero; the balance sheet showed a $135,000 note payable. The $50 million revolving facility had no outstanding borrowings at year-end. Maximum borrowings under primary revolving lines and the overdraft facility during 2019 were $10.5 million, versus $24.2 million in 2018.
- Capital expenditures were $2.2 million. The company paid $7.2 million in dividends and spent $2.9 million on share repurchases. The stated quarterly dividend was $0.125 per share.
Material changes and notable items
- E-commerce gross sales increased to $74.0 million from $58.0 million; mass merchant sales declined to $66.4 million from $68.2 million, and specialty dealer sales declined to $53.9 million from $59.2 million.
- Amazon represented approximately 21% of 2019 revenue and 27% of year-end receivables; Dick’s Sporting Goods represented 13% of revenue and 18% of receivables. Both customers exceeded 10% of annual sales.
- The company acquired the Dura Pickleball brand in 2019 for total consideration of $900,000. It adopted the new lease accounting standard, recognizing right-of-use assets and lease liabilities.
- In November 2019, CEO David L. Fetherman announced his retirement; he agreed to remain CEO until a successor is hired and begins employment. The company was seeking a successor.
Outlook, risks and contingencies
- Management estimated 2020 capital expenditures of approximately $2.9 million and believed projected operating cash flows and committed revolving-credit availability would be sufficient for operations. If economic conditions deteriorated, it said it could pursue cost reductions and infrastructure realignment.
- The filing highlights potential supply-chain disruption from the coronavirus outbreak in China, including possible shipment delays, as well as tariffs and trade-policy uncertainty that could raise costs or reduce sales. These were forward-looking risks, not quantified impacts on FY2019 results.
- Other key risks include customer concentration, discretionary consumer demand, competition, changing product preferences, supplier dependence, foreign sourcing and currency exposure, warranty claims, cybersecurity and the CEO transition.
- Future operating lease obligations were $1.2 million; minimum purchase, royalty and license commitments were $3.7 million. The company said existing litigation was not expected to have a material adverse effect. Auditors gave unqualified opinions on the financial statements and internal controls; management and the auditor found internal control over financial reporting effective.
Investor verification priorities
- Confirm that margin and earnings pressure persists or improves, particularly as customer allowances, factory utilization, tariffs and product mix change.
- Assess customer concentration and collectability, especially the receivables exposure to Amazon and Dick’s Sporting Goods.
- Monitor the CEO succession, coronavirus-related supply and shipment developments, and tariff or trade-policy effects.
- Review the $50 million revolver’s terms and availability, capital spending, inventory levels and the sustainability of dividends and repurchases.
- Distinguish recurring earnings and cash generation from FY2018’s one-time Stiga sale gain; review the full financial statements for additional detail.