Escalade, Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 26, 2020 (52 weeks); comparisons are to the fiscal year ended December 28, 2019. The company operates in one reportable business segment, Sporting Goods, selling products including archery, basketball, table tennis, fitness, games and recreation equipment.
Financial performance and condition
| Metric | 2020 | 2019 |
|---|---|---|
| Net sales | $273.6 million | $180.5 million |
| Gross margin | 27.3% | 23.5% |
| Operating income | $33.0 million | $9.3 million |
| Net income | $25.9 million | $7.3 million |
| Diluted earnings per share | $1.82 | $0.50 |
| Cash provided by operating activities | $2.6 million | $16.0 million |
- Net sales rose 51.6%, with increased sales across nearly all product categories. Management cited particularly strong outdoor and fitness demand, increased product placement, better factory utilization, sales mix and supply-chain improvements.
- SG&A increased 27.5% to $40.3 million, but declined to 14.7% of sales from 17.6%. The effective tax rate was 21.2%, compared with 18.8%.
- Fourth quarter: Net sales were $74.8 million, operating income $6.9 million, net income $5.1 million and diluted EPS $0.36. Fourth-quarter 2019 net sales were $47.0 million, operating income $3.5 million, net income $2.6 million and diluted EPS $0.18.
- Operating cash flow fell to $2.6 million, primarily amid increases in receivables and inventory. Year-end receivables were $65.3 million versus $35.5 million; inventory was $72.5 million versus $42.3 million. Cash and cash equivalents were $3.5 million, down from $5.9 million.
- The current ratio declined to 3.1 from 4.8. Year-end long-term debt was $30.1 million, versus none reported in 2019. Maximum borrowings under the revolving credit lines and overdraft facility during 2020 were $33.6 million; the reported effective interest rate was 2.4%.
- The revolving credit facility was expanded to $75 million and extended to December 14, 2023. The company reported no off-balance-sheet financing arrangements. It paid $7.5 million in dividends and repurchased $6.7 million of stock during 2020.
Material changes and notable items
- 2020 included acquisitions of American Heritage Billiards product lines and RAVE Sports for total consideration of $15.4 million. The RAVE acquisition added $5.9 million of goodwill and $5.0 million of intangible assets; RAVE’s controls were excluded from the year-end internal-control assessment while integration was underway.
- COVID-19 initially boosted demand for home recreation and fitness products, while restrictions disrupted some manufacturing and operations. The company increased inventory and accelerated supplier orders to address anticipated demand and potential product shortages.
- Amazon represented approximately 23% of 2020 revenue and Dick’s Sporting Goods approximately 13%. Amazon, Academy Sports and Dick’s accounted for 26%, 14% and 11%, respectively, of year-end receivables.
- The Board increased the authorized stock repurchase program to $15 million in December 2020. The quarterly dividend was $0.14 per share, subject to Board discretion.
- After year-end, CEO Scott Sincerbeaux resigned effective February 19, 2021. Chairman Walter Glazer became interim CEO and president while the company sought a permanent replacement.
- The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. The auditor identified customer allowances and acquisition valuation as critical audit matters; estimated customer allowances reduced 2020 sales by $21.3 million, with $7.5 million accrued at year-end.
Outlook, risks and contingencies
- Management stated that 2020 results are not necessarily indicative of 2021 and that the pandemic’s duration and effects on demand, suppliers, logistics and operations remain uncertain. No specific revenue or earnings guidance was provided.
- Management estimated 2021 capital expenditures of approximately $7.0 million and expected operating cash generation and committed borrowing availability to fund operations. It noted weaker economic conditions could require cost reductions or infrastructure realignment.
- Key risks include a possible reversal of pandemic-related demand, supply-chain and shipping-container constraints and higher freight costs, tariffs and sourcing exposure, customer concentration and collection risk, and the ongoing CEO transition. The labor contract covering approximately 28 employees was set to expire May 1, 2021.
- The company was involved in ordinary-course litigation but did not expect its resolution to materially adversely affect business or financial condition. It reported $40.1 million of material contractual obligations, including debt, interest, leases and purchase, royalty and license commitments.
Investor verification points
- Assess whether the sharp 2020 sales and margin gains persist as pandemic-driven demand and comparisons normalize.
- Review cash conversion and working-capital trends, especially receivables, inventory, customer payment timing and operating cash flow.
- Confirm debt and revolver utilization, covenant headroom, borrowing costs and the effect of the amended facility terms.
- Track customer concentration, major-customer receivables and the estimation of customer allowances, warranty claims and inventory reserves.
- Monitor integration and performance of the 2020 acquisitions, including RAVE’s internal controls, and the permanent CEO search.