Despite a high-single-digit decline in Q4 sales, Escalade, Inc. characterized its fourth quarter as delivering a strong finish to the last year, with “improved gross margins, robust cash generation and a significant reduction in leverage.”
Company President and CEO Walt Glazer said on a conference call with analysts that the company generated $20.6 million of cash from operations in the quarter, which supported $21.1 million in debt repayments and a one-turn decline in its net leverage ratio at year-end.
“The strong cash generation during the quarter was driven by our continued emphasis on improved working capital efficiency, which included a strategic focus on inventory reduction,” Glazer explained. “While our inventory reduction initiatives drove substantial cash flow in the quarter, our margins were pressured as a result of those efforts. Even so, our fourth quarter gross margins still improved by more than 190 basis points versus the prior-year fourth quarter due to lower freight costs, improved sales mix, and price discipline on our in-line product assortments.”
Total net sales for the parent of the Brunswick Billiards, Stiga, Accudart, Rave Sports, Victory Tailgate, Onix, Goalrilla, Lifeline Fitness, Woodplay, and Bear Archery brands declined 9.2 percent on a year-over-year (YoY) basis to $65.5 million in the fourth quarter, said to be due primarily to softer consumer demand across the majority of the company’s product categories, partially offset by improved demand in the company’s basketball and indoor games product categories.
“Exiting the holiday selling season, we believe channel inventories have declined meaningfully as our retail partners successfully drove product sell-through,” Glazer shared. “This has helped position us for a solid start to 2024 with most retail inventories in good shape. We continue to experience strong momentum in our direct-to-consumer sales with non-licensed DTC sales up 39 percent in the fourth quarter versus the prior year driven by growth across most of our product lines.”
The company reported gross margins of 24.3 percent of net sales in the fourth quarter, compared to 22.4 percent in the prior-year period. The 192-basis point improvement was said to be primarily due to more favorable product sales mix, lower freight costs, reduced inventory handling expenses, and operating expense reductions, partially offset by the impact of the company’s inventory reduction initiative and under-absorbed fixed costs associated with its facility in Mexico.
Selling, general and administrative (SG&A) expenses in the quarter decreased by 4 percent YoY compared to $10.4 million in the prior-year period. As a percentage of net sales, SG&A margin increased 80 basis points YoY to 15.8 percent in the fourth quarter of 2023 compared to 15 percent in the fourth quarter of 2022. The decrease in SG&A expense year-over-year was said to be a result of overhead cost reductions and lower variable spending, including incentive compensation, according to company CFO Stephen Wawrin.
EBITDA (Earnings before interest, taxes, depreciation, and amortization) increased 11.1 percent, or $0.6 million to $6.4 million in the fourth quarter of 2023, versus $5.8 million in the prior-year Q4 period.
Escalade reported net income of $2.9 million, or 21 cents per diluted share, in the 2023 fourth quarter versus net income of $2.7 million, or 20 cents per diluted share, for the fourth quarter in 2022.
Wawrin said total cash provided by operations for the fourth quarter of 2023 was $20.6 million, compared to $14.3 million in the prior-year period. He said the increasing cash flow from operations primarily reflects cash generated from improvements to working capital as a result of a reduction of inventories and accounts payable through the fourth quarter of 2023.
“Cash conversion during the fourth quarter exceeded 100 percent for the second straight quarter, primarily due to a $12.8 million reduction in our inventory and a $13.4 million reduction in accounts receivable,” detailed Glazer. “In 2024, we will remain focused on maximizing cash generation and repaying our higher interest variable rate debt.”
Achieving improving numbers was made somewhat easier by the rough first half posted but the company’s 2023, which revenues down more than 25 percent, The company saw a bit of a turnaround in the third quarter when sales were down just 2.1 percent.
Full Year 2023 versus Full Year 2022
For the full year, net sales decreased 16.0 percent to $263.6 million, gross margin declined 3 basis points, to 23.4 percent, operating income decreased 32.3 percent to $17.8 million, and EBITDA totaled $23.5 million, a decrease of 27.6 percent.
Gross Annual Sales by Channel
During 2023, 2022 and 2021, the company had one customer that accounted for approximately 20 percent, 23 percent and 21 percent, respectively of the company’s revenues. During 2023, 2022 and 2021 the company had another customer which accounted for approximately 11 percent, 12 percent and 11 percent, respectively, of the Company’s revenues.
SG&A expense was $41.5 million in 2023, or 15.7 percent of net sales, compared to $44.8 million or 14.3 percent of net sales in 2022. The $3.3 million decrease in SG&A expenses during 2023 was said to reflect efforts to intentionally manage the com[any’s fixed and variable costs during a period of softening consumer demand.
Net income for the full year was $9.8 million, or 71 cents per diluted share, in 2023, compared to net income of $18.0 million, or $1.31 per diluted share, for 2022
Cash provided by operations was $48.3 million in 2023 versus $8.6 million in 2022.
For the full year, capital expenditures were said to be similar to the prior year.
Balance Sheet and Debt Repayment
As of December 31, 2023, the company had total cash and equivalents of $16,000, together with $66.8 million of availability on its senior Secure Revolving Credit Facility, maturing in 2027.
Inventories were $92.5 million at year-end, compared to $121.9 million at year-end 2022, reflecting a 24.1 percent decline year-over-year.
“While we have successfully reduced our inventory to our goal of less than $100 million at the end of 2023, we still see an opportunity for further inventory reduction as we move through 2024, particularly in our billiards and water sports categories,” Glazer noted.
As of December 31, 2023, the company had approximately 29 percent of its total accounts receivable with one customer. As of December 31, 2022, the Company had approximately 28 percent of its total accounts receivable with one customer.
At the end of the fourth quarter of 2023, net debt outstanding or total debt less cash was 2.2 times trailing in 12-month EBITDA. Wawrin said the company repaid $21.1 million of debt during the fourth quarter of 2023, bringing total debt repayment for the full year 2023 to $44 million.
“As of December 31, 2023, we had $50.9 million of total debt outstanding, including $18.2 million of high interest variable rate debt,” Wawrin detailed. “We will continue to prioritize the repayment of this variable rate debt during 2024, while managing our total net leverage within our long-term target range of 1.5 times to 2.5 times EBITDA.”
Wawrin also walked through some footnotes to the financials and the company’s accounting practices.
“As we discussed in early March, our public accounting firm, Forvis, LLP has identified certain material weaknesses in our internal financial reporting controls,” he shared. “Specifically, as it relates to our information technology general controls, controls over the year-end closing process, documentation and design controls related to financial statement accounts and assertions, and the monitoring of the company’s internal control frameworks. There are several key takeaways from this disclosure worth noting.
“First, and most importantly,” he continued, “these material weaknesses did not impact the accuracy of our historical consolidated financial statements. Second, these material weaknesses did not impact Forvis’ ability to issue an opinion on the consolidated financial statements for the 2023 10-K. Third, we intend to take decisive remedial action as we continue to develop strong internal controls across the organization. Our entire management team intends to resolve this process in a timely and compliant manner and expects the remedial process to conclude this year.”
Wawrin also reminded call participants that, effective on January 1, 2023, the company transitioned to a conventional 12-month reporting calendar.
“There was a relatively minimal impact on our results for the fourth quarter because there were 92 operating days in the fourth quarter of 2023 as opposed to 91 in the prior year period,” he explained.
“For the full year, our 2023 results now reflect a normal 365 operating days, compared to 371 operating days during 2022,” Wawrin noted. “As we move into 2024, the year-over-year comparability of our results will no longer be impacted by this change.”
Glazer added that, looking ahead, the company will continue to closely monitor the relative health of household balance sheets, employment conditions, and consumer discretionary spending.
“Changing consumer behavior has pressured discretionary spending in most of our categories,” he offered. “We expect consumer demand to remain relatively soft as these trends continue into 2024.”
The CEO called out the fact that ESCA realized its goal of reducing costs by $2 million annually as of the end of the fourth quarter.
“These cost reductions are comprised of lower inventory handling and storage costs, lower freight costs, and operational improvements<” he said. “We also focused on reducing our fixed and variable operating expenses, which resulted in a 4 percent reduction in our SG&A expenses during the fourth quarter of 2023.
“In combination, these actions have positioned us to improve operating leverage and expand gross margins as we move through 2024,” Glazer continued. “The plan divested share of our Rosarito, Mexico operations continues to progress. We transitioned our manufacturing and warehousing in Rosarito to other facilities in the fourth quarter and reduced operating expenses.”
He said they also continue to actively market the facility to prospective buyers.
Escalade’s Board of Directors has declared a quarterly dividend of 15 cents per share of common stock. The dividend is payable on April 22, 2024 to all shareholders of record at the close of business on April 15, 2024.
Escalade Inc. Categories and Brands
Image courtesy Escalade, Inc./Brunswick Billiards, Data and chart courtesy Escalade, Inc.