Escalade, Inc. — Q1 2022 Form 10-Q
Business context and period. The filing covers the three months ended March 19, 2022; the comparable period ended March 20, 2021. Escalade focuses on sporting goods, including basketball, archery, billiards, indoor and outdoor recreation, and fitness products. Financial amounts below are in millions unless noted.
Financial performance and position
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Net sales | $72.4 | $59.2 |
| Gross margin | 27.8% | 29.5% |
| Operating income | $9.0 | $7.1 |
| Net income | $6.7 | $5.4 |
| Diluted EPS | $0.49 | $0.39 |
| Operating cash flow | ($2.9) | ($10.2) |
| Capital expenditures | $0.7 | $1.5 |
- Net sales rose 22.3%; operating income increased about 26.6% and net income about 22.3% year over year. Gross margin fell 1.7 percentage points as cost of products sold increased to 72.2% of sales from 70.5%.
- SG&A was $10.5 million, up 6.6%, but declined to 14.5% of sales from 16.7%. The effective tax rate was 21.8%, versus 21.5%.
- Cash and cash equivalents were $6.4 million at March 19, 2022. Current assets were $201.0 million and current liabilities $56.1 million; inventory was $114.6 million, up $22.2 million from year-end 2021.
- Total debt was $100.0 million, compared with $57.5 million at December 25, 2021 and $46.9 million a year earlier. Debt equaled 66.0% of stockholders’ equity. Q1 financing cash flow of $40.2 million helped fund the acquisition and other cash needs.
Material changes and notable items
- Sales growth reflected strong organic growth in basketball, archery, pickleball, and indoor games, plus the Brunswick Billiards acquisition. Mass merchant gross sales increased to $27.0 million from $18.4 million; other sales channels also increased.
- On January 21, 2022, Escalade acquired the Brunswick Billiards business for an estimated $34.6 million, funded with cash and the revolving credit facility. Purchase price and fair-value estimates were preliminary; estimated acquired goodwill was $6.1 million and intangible assets $16.0 million.
- The amended credit agreement increased revolving facility availability from $50 million to $65 million, with an accordion feature up to $90 million subject to conditions, and extended revolving and term-loan maturities to January 21, 2027. The agreement also includes a $7.5 million swingline commitment and revised certain financial covenants. Debt is secured by substantially all company assets other than real estate, as well as subsidiary guarantees and collateral.
- The company declared a $0.15 per-share dividend; approximately $2.0 million was paid March 21, 2022. No shares were repurchased during the quarter.
Outlook, risks, and contingencies
- Management said supply-chain challenges, raw-material cost inflation, and labor constraints pressured gross margin. The company also cited uncertainty related to COVID-19 and its potential effects on sales channels, supply, operations, and consumer spending.
- No numerical earnings or revenue guidance was provided. Management expects 2022 operating cash generation and access to adequate revolving credit to support operations and growth needs, while cautioning that Q1 results are not necessarily indicative of full-year results and noting seasonal aspects.
- Disclosed risks include competition and pricing, demand, customer and supplier relationships, supply-chain disruption, cost control, tariffs and trade restrictions, acquisition integration, financing and covenant compliance, and economic conditions. Management reported no material change to the risk factors in the 2021 Form 10-K.
- The company is involved in ordinary-course litigation and does not expect its resolution to materially adversely affect its business or financial condition. It also disclosed $9.9 million of legally binding minimum payments for a warehouse and operations lease not yet commenced.
- Management concluded disclosure controls were effective and reported no material changes to internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether gross-margin pressure from supply costs and labor continues, and whether pricing or productivity offsets it.
- Final Brunswick Billiards purchase-price adjustments, acquired-asset valuations, integration progress, and contribution to sales and earnings.
- Debt, revolving-facility usage, covenant headroom, and financing costs following the acquisition and credit-agreement amendment.
- Working-capital needs, particularly inventory growth, and the company’s ability to convert earnings into operating cash flow.
- Execution of the company’s outlook assumptions given COVID-19, supply-chain, consumer-demand, and seasonal uncertainties.