Escalade(ESCA)2024-03-29 20:03Customer Concentration - In 2023, one customer accounted for approximately 20% of the Company's revenues, while another customer accounted for about 11%[13]. - As of December 31, 2023, approximately 29% of total accounts receivable was with one customer, compared to 28% in 2022[14]. - The Company has two major customers, each accounting for over 10% of consolidated gross sales in the 2023 fiscal year, highlighting the risk of revenue loss if either customer is lost[39]. Workforce and Operations - Escalade's workforce decreased from 593 employees in 2022 to 479 employees in 2023, with a notable reduction in employees in Mexico from 90 to 10[25]. - As of December 31, 2023, the company ceased all manufacturing and distribution operations at its Rosarito, Mexico location, moving inventories to facilities in Olney, Illinois, and Evansville, Indiana[98]. - The company operates from multiple locations, including a 771,000 square foot facility in Evansville, Indiana, which is owned and used for distribution, sales, marketing, and engineering[98]. Financial Performance - Net sales for the Sporting Goods segment decreased by 16.0% in 2023, totaling 313.8 million in 2022[120]. - Operating income for the Sporting Goods segment fell to 25.9 million in 2022, representing a decrease of 32.2%[120]. - Net income for the Sporting Goods segment decreased by 45.6% in 2023, amounting to 16.1 million in 2022[120]. - The overall gross margin decreased to 23.4% in 2023 from 23.5% in 2022, impacted by reduced inventory levels and increased handling costs[117]. - Selling, general and administrative expenses (SG&A) were 44.8 million in 2022, with SG&A as a percentage of sales rising to 15.7%[118]. - The effective tax rate for 2023 was 21.3%, slightly higher than the 20.5% rate in 2022, primarily due to state taxes[119]. - Net sales for 2023 were 313,757,000 in 2022[211]. - Cost of products sold decreased to 240,118,000 in 2022, reflecting a reduction of 16%[211]. - Operating income for 2023 was 26,315,000 in 2022[211]. - Net income for 2023 was 17,989,000 in 2022[211]. - Basic earnings per share decreased to 1.33 in 2022, representing a decline of 46%[211]. - Total assets decreased to 298,718,000 in 2022, a reduction of 15%[209]. - Total liabilities decreased significantly from 88,426,000 in 2023, a decrease of 37%[209]. - Stockholders' equity increased to 158,475,000 in 2022, an increase of 4%[209]. - Current assets decreased to 188,198,000 in 2022, a decline of 22%[209]. - Long-term debt was reduced from 43,753,000 in 2023, a decrease of 50%[209]. Supply Chain and Sourcing - The Company has increased sourcing from Brazil and Vietnam to mitigate supply chain disruptions[26]. - The Company relies on third-party suppliers for raw materials, and disruptions in supply could negatively impact sales and customer satisfaction[41]. - The Company has experienced increased shipping costs for products obtained from overseas due to a shortage of available shipping containers, which could impair operating results[44]. - The Company sources many products and raw materials from countries including Mexico, Brazil, China, and Vietnam, exposing it to unique international operational risks[58]. - U.S. tariffs on goods imported from China have increased costs, potentially leading to lower profitability if price increases cannot be offset[60]. - The Phase 1 trade agreement between the U.S. and China expired on December 31, 2021, with ongoing trade negotiations remaining uncertain[61]. Strategic Initiatives - The Company has made strategic acquisitions over the years, including the acquisition of Brunswick Billiards® in January 2022, enhancing its billiards portfolio[19]. - Escalade's business strategy focuses on investing in product innovation and developing strong brand names to differentiate its product line[20]. - The Company's growth strategy includes expanding its e-commerce business and making strategic acquisitions in the Sporting Goods sector[35]. Regulatory and Compliance - The Company believes it is in material compliance with all applicable regulations set by the Consumer Product Safety Commission[15]. - The Company is subject to various laws and regulations related to health, safety, and environmental protection, which could adversely affect its operations[72]. - Changes in accounting standards could materially affect how the Company records and reports its financial condition and results of operations[75]. - The Company identified material weaknesses in its internal control over financial reporting, which could lead to material misstatements in financial statements[66]. - The Company has not maintained effective internal control over financial reporting as of December 31, 2023, due to identified material weaknesses[199]. - The company’s internal control weaknesses include issues related to information technology general controls and the period end close process[203]. Risk Factors - The sporting goods market is highly competitive, with Escalade facing competition from larger companies with greater resources[29]. - The Company continues to face challenges in attracting and retaining skilled management and key personnel, which could adversely affect its business and financial condition[37]. - Cybersecurity threats are increasing, and any breach could result in significant financial, legal, and reputational damage to the Company[50]. - The company has not identified any significant cybersecurity risks stemming from known threats, but ongoing risks remain that could materially affect its business[92]. - The company is committed to continuously improving its cybersecurity posture through regular assessments, employee training, and engagement of third-party consultants[96]. - The company is exposed to risks from geopolitical instability, natural disasters, and public health crises, which could significantly impact its sales and profitability[85]. - The company faces uncertainties regarding the economic impact of potential future pandemics and public health crises, which could adversely affect its financial performance[87]. - The Company acknowledges that new risk factors may emerge in a rapidly changing environment, impacting its business and financial performance[88]. Capital and Liquidity - The Company's ability to expand its business is dependent on the availability of adequate capital, influenced by cash flow and access to equity and debt capital[36]. - The Company's quarterly cash dividend is currently 50.9 million, with maximum borrowings under revolving credit lines totaling 4.0 million[131]. - The Company has no material commitments for capital expenditures as of December 31, 2023[147]. Internal Controls and Auditing - The independent registered accounting firm for the company is FORVIS, LLP, with PCAOB ID number 686[174]. - The company has been audited by FORVIS, LLP since 1977, indicating a long-standing relationship with the auditor[195]. - The company’s financial statements were audited in accordance with PCAOB standards, and an unqualified opinion was expressed on those financial statements[200]. - The report on internal control over financial reporting was based on criteria established in the Internal Control – Integrated Framework (2013) issued by COSO[197]. - The Company plans to engage third-party resources to support internal control testing and remediation efforts[161].