Escalade, Inc. — FY2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023. This is an annual report, not a standalone fourth-quarter report. Escalade operates in one reportable business segment, Sporting Goods, selling products including archery equipment, basketball goals, billiards, table tennis, pickleball, fitness and outdoor recreation products.
Financial performance and liquidity
| Metric | FY2023 | FY2022 | Change |
|---|---|---|---|
| Net sales | $263.6 million | $313.8 million | Down 16.0% |
| Gross margin | 23.4% | 23.5% | Down 0.1 percentage point |
| Operating income | $17.8 million | $26.3 million | Down 32.3%; operating margin 6.8% vs. 8.4% |
| Net income | $9.8 million | $18.0 million | Down 45.4% |
| Diluted EPS | $0.71 | $1.31 | Down $0.60 |
| Net cash from operations | $48.3 million | $8.6 million | Up $39.8 million |
| Year-end total debt | $50.9 million | $94.9 million | Down $44.0 million |
- Gross profit was $61.8 million. SG&A declined 7.3% to $41.5 million, but rose to 15.7% of sales from 14.3%. Interest expense increased to $5.3 million from $3.8 million. The effective income tax rate was 21.3%, compared with 20.5%.
- Operating cash flow benefited substantially from working-capital changes, particularly a $29.4 million reduction in inventory; receivables also fell by $6.9 million. Investing cash flow was negative $1.9 million, and financing cash flow was negative $50.3 million. Cash declined to $16,000 from $4.0 million.
- Inventory fell to $92.5 million from $121.9 million, and receivables to $50.0 million from $57.4 million. The current ratio was 4.4, versus 4.8. The filing reports $66.8 million available under the revolving facility at year-end.
- Debt comprised $18.2 million drawn on the revolving facility and a $32.7 million term loan. The year-end revolver rate was 8.54%; the term loan rate was 2.97%. The company reported compliance with debt covenants at December 31, 2023.
Changes and business developments
- Sales declined across multiple categories as demand eased from pandemic-era peaks; management said demand remained above pre-pandemic levels and that market share increased in several key categories.
- Lower production and inventory levels reduced overhead absorption, while inventory handling and storage costs continued to weigh on gross margin. Management said the company reduced inventory to more normalized levels during 2023.
- The company ceased manufacturing and distribution operations at its Rosarito, Mexico location during 2023 and moved inventory to U.S. facilities and third-party logistics warehouses. The balance sheet still reports $2.7 million of assets held for sale.
- The company made no acquisitions in 2023; the $35.8 million Brunswick Billiards asset acquisition occurred in January 2022.
- Net sales declined 16.0% in 2023 after being essentially flat in 2022. Net income declined in both years: 45.4% in 2023 and 26.3% in 2022.
Outlook, risks and unusual items
- No specific 2024 revenue or earnings guidance is provided. Management expects projected 2024 operating cash flow and committed borrowing availability to be sufficient for operations, and estimates capital expenditures of approximately $4.0 million. It cautions that weaker economic conditions could impair profitability and says it may pursue cost reductions or realign infrastructure.
- Material risks include further normalization of post-pandemic demand, discretionary consumer spending, inflation and interest rates, inventory forecasting, supply-chain and freight disruption, tariffs and foreign sourcing, customer concentration, and competition. Two customers represented approximately 20% and 11% of 2023 revenue; one customer represented approximately 29% of year-end receivables.
- Management concluded disclosure controls and internal control over financial reporting were ineffective at year-end due to material weaknesses involving IT general controls, period-end close and review, control documentation and design, and the broader control framework. The independent auditor issued an adverse opinion on internal control effectiveness, while giving an unqualified opinion on the financial statements. Remediation work is underway, with no assurance given as to completion timing.
- The auditor identified customer allowance accruals as a critical audit matter, citing manual calculations, numerous customer contracts and changing terms. The filing states that $4.1 million was accrued for these allowances at year-end.
- The filing reports correction of an immaterial prior-period equity presentation error: common stock and retained earnings were reclassified to reflect the stock’s no-par-value status. It states the correction did not affect total assets, liabilities, equity, net income or cash flows and did not require restatement of prior filings.
- The company disclosed earlier product recalls involving a 2021 table tennis table and certain 2022 wall-mounted basketball goals. It says related claims and ordinary-course litigation are not expected to have a material adverse effect; the filing does not quantify potential future recall or litigation costs.
- The quarterly dividend was $0.15 per share; $6.2 million of dividends were paid in 2023. No shares were repurchased during 2023 under the company’s repurchase program.
Important facts for investors to verify
- Whether sales, margins and earnings stabilize as pandemic-era demand recedes, and whether inventory reductions can be sustained without further margin pressure.
- Progress and independent validation of remediation of the material weaknesses in financial reporting controls.
- Debt covenant headroom, borrowing costs and liquidity, particularly given the $16,000 year-end cash balance and floating-rate revolver.
- Exposure to the two major customers and the customer representing 29% of receivables, including subsequent collections and any changes in customer credit quality.
- Status and expected proceeds or carrying-value changes for the Mexico assets held for sale, and any remaining costs associated with ceasing operations there.
- Whether customer allowance estimates, product returns and warranty reserves remain adequate; the filing reports returns of $8.4 million in 2023 versus $5.3 million in 2022.