Escalade, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended October 3, 2020; comparisons are with the periods ended October 5, 2019. Escalade focuses on sporting goods, including basketball, archery, recreation and fitness products. Unless stated otherwise, amounts below are in millions of dollars.
Financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $78.1 | $45.8 | $198.9 | $133.5 |
| Gross margin | 30.1% | 21.9% | 28.6% | 23.6% |
| Operating income | $12.8 | $2.9 | $26.1 | $5.8 |
| Net income | $10.2 | $2.5 | $20.8 | $4.7 |
| Diluted EPS | $0.71 | $0.18 | $1.47 | $0.32 |
- Sales increased 70.6% in Q3 and 49.0% year to date. Management attributed growth to gains across most product categories, particularly archery, outdoor and fitness products, including basketball, Lifeline Fitness and Victory Tailgate.
- Gross margin improved 8.2 percentage points in Q3 and 5.0 points year to date, primarily from factory absorption and product mix. Operating margins were 16.4% and 13.1%, respectively, versus 6.3% and 4.3% in the comparable periods.
- SG&A was $10.4 million in Q3 and $29.8 million year to date, up 52.7% and 21.1%, respectively; as a percentage of sales it declined to 13.3% and 15.0%. The nine-month effective tax rate was 20.0%, versus 14.6%.
- Sales by channel grew year to date in mass merchants ($77.4 million versus $51.0 million), specialty dealers ($57.7 million versus $41.6 million), and e-commerce ($78.2 million versus $50.5 million). These are gross sales before returns, warranty provisions and customer allowances.
Cash flow, balance sheet and capital
- Nine-month operating cash flow was $10.9 million, versus $7.2 million; capital expenditures were $3.1 million, versus $1.8 million. Cash increased $0.9 million to $6.8 million.
- Working-capital balances rose materially from year-end 2019: receivables were $63.8 million versus $35.5 million, inventories $63.7 million versus $42.3 million, and current liabilities $53.2 million versus $18.2 million. Management noted the challenge of adjusting inventory to meet elevated demand.
- Total debt was zero at October 3, 2020, compared with $0.1 million at year-end 2019 and $5.4 million a year earlier. The company said it funds working capital through operating cash flow and revolving credit agreements and expects adequate revolving-credit access; the filing gives no clear facility availability amount.
- Nine-month dividends declared were $0.39 per share; cash dividends paid were $5.5 million. The board had authorized a $15 million repurchase program, but no purchases were made in Q3. The company reported $10.0 million of remaining program capacity at quarter-end.
Outlook, risks and other matters
- Management cautioned that interim results are not necessarily indicative of full-year results, citing seasonality and COVID-19 uncertainty. Demand had increased, especially for fitness, basketball, playground and indoor/outdoor games, but management said this may not continue.
- The company had so far obtained products on time but anticipated possible factory and shipping-capacity delays affecting shipments in the first half of 2021, or sooner. It was accelerating supplier orders and developing alternative sources.
- Risks identified include COVID-19 effects on demand, employees and operations; supply-chain disruption; changing retail channels and consumer behavior; competition and pricing; tariffs; customer and supplier relationships; and execution of strategic transactions. No quantified earnings or revenue guidance was provided.
- The filing lists litigation in the ordinary course of business and says management does not expect existing claims to materially adversely affect the company. The separate legal-proceedings item reports none. Disclosure controls were judged effective, with no material changes in internal control reported.
Important facts for investors to verify
- Whether elevated COVID-era demand and improved product mix and factory absorption are sustainable, and how seasonal demand affects subsequent quarters.
- Whether inventory, receivables and payables convert into cash as expected, and whether supply constraints or shipping delays affect 2021 deliveries.
- Availability and terms of revolving credit, particularly if working-capital needs continue to rise; the filing does not quantify unused borrowing capacity.
- Actual utilization of the expanded repurchase authorization and the sustainability of dividends given working-capital requirements.
- Potential effects of CEO transition, tariffs, customer concentration or other risks referenced in the filing; no quantified impact is provided here.