Escalade, Inc. — Q3 2023 Form 10-Q
Business and period: Escalade sells sporting goods, including basketball, archery, billiards, recreation and fitness products. This unaudited report covers the quarter and first three quarters ended September 30, 2023. Amounts below are in millions unless stated otherwise. The company changed its fiscal year and quarter calendar beginning in 2023; management says the first three quarters had seven fewer days than the comparable 2022 period, while Q3 had more business days. Comparisons are therefore affected by calendar differences.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Three quarters 2023 | Three quarters 2022 |
|---|---|---|---|---|
| Net sales | $73.4 | $74.9 | $198.1 | $241.6 |
| Gross margin | 24.7% | 18.2% | 23.1% | 23.8% |
| Operating income | $6.4 | $4.2 | $12.9 | $21.4 |
| Net income | $4.3 | $3.0 | $7.0 | $15.3 |
| Diluted EPS | $0.31 | $0.22 | $0.50 | $1.12 |
| Interest expense | $1.3 | $1.0 | $4.3 | $2.5 |
- Management reports Q3 sales down 2.1% year over year, or 11.6% excluding the reporting-calendar effect. First-three-quarter sales were down 18.0%, or 15.5% excluding the calendar effect.
- Q3 gross margin improved on favorable product mix, lower supply-chain costs and the absence of prior-year nonrecurring product-recall expenses. Year-to-date margin declined due to less favorable mix and lower operating leverage.
- Q3 SG&A rose 26.3% to $11.1 million, or 15.1% of sales versus 11.7%. Year-to-date SG&A fell 8.4% to $31.1 million, but rose to 15.7% of sales from 14.0%.
- The effective tax rate for the first three quarters was 19.0%, versus 19.6%.
Cash flow, balance sheet and debt
- Cash from operations was $27.7 million for the first three quarters, compared with cash used of $5.7 million a year earlier. Investing used $1.6 million; financing used $29.2 million. Cash declined $3.0 million from year-end to $0.9 million.
- At September 30, current assets were $175.9 million and current liabilities $44.2 million. Inventory was $105.3 million, down from $121.9 million at December 2022 and $135.0 million a year earlier.
- Total debt was $72.0 million, down $22.8 million from December 31, 2022 and $34.7 million from October 1, 2022. Debt was 44.7% of equity, versus 59.9% and 67.8%, respectively. Debt comprised a $34.5 million term loan and $37.5 million drawn on the revolving facility.
- The revolving facility’s maximum availability was $85 million after a September amendment. Credit terms include funded-debt-to-EBITDA and fixed-charge-coverage covenants; amendments changed covenant thresholds and temporarily suspended the fixed-charge covenant for Q2 and Q3 2023. The filing does not state the company’s covenant headroom.
- Quarterly dividends were $0.15 per share; $6.2 million was paid during the first three quarters.
Management outlook, risks and notable items
- Management expects cash generated from 2023 operations and access to revolving credit to be sufficient for operations and growth needs. No specific revenue or earnings guidance is provided.
- Management cites softer consumer demand, inflation, recession concerns, higher interest rates, housing-market changes and lower consumer confidence. It also identifies supply-chain disruption, freight and material costs, labor availability and costs, competition, tariffs, customer and supplier relationships, and financing compliance among risks.
- The company says results through September are not necessarily indicative of full-year 2023 results. It notes ongoing residual effects of the pandemic but says the pandemic itself may not have had a material adverse direct effect.
- The credit agreement contemplated reducing revolving availability to $75 million upon sale of the Mexican subsidiary and dissolution of the insurance subsidiary, with proceeds used to repay debt. The filing says availability was reduced to $85 million after the insurance subsidiary’s dissolution; it does not clearly state whether the Mexican subsidiary sale was completed.
- Management reported disclosure controls were effective and no material changes to internal control over financial reporting. The company reported no legal proceedings in Part II and no material changes to the risk factors in its 2022 Form 10-K. A note says it is involved in ordinary-course litigation and does not expect existing claims to have a material adverse effect.
Important facts for investors to verify
- Whether demand and sales trends stabilized after the reported calendar-adjusted declines, and how Q4 seasonality affects results.
- The drivers and sustainability of Q3 gross-margin improvement, alongside higher Q3 SG&A as a share of sales.
- Cash conversion, liquidity needs and the low reported cash balance, including reliance on revolving credit.
- Compliance with amended debt covenants, covenant headroom and the status of the Mexican subsidiary sale and related debt repayment.
- Whether returns and warranty adjustments, including the higher Q3 returns provision, signal continuing product or demand issues.