Escalade, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Escalade changed its fiscal year-end to December 31 beginning in 2023; the comparison period ended March 19, 2022, so the period-end dates differ. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions where shown.
Business context and results
Escalade focuses on sporting goods, including basketball goals, archery, billiards, indoor and outdoor recreation, and fitness products. It reports one revenue-generating segment, Sporting Goods. Net sales fell 21.3% year over year as post-pandemic demand shifted, retail inventories remained elevated, and unfavorable weather delayed spring business.
| Metric | Q1 2023 | Prior comparable period |
|---|---|---|
| Net sales | $56.9 million | $72.4 million |
| Gross margin | 19.4% | 27.8% |
| Operating income | $0.1 million | $9.0 million |
| Net income (loss) | $(1.0) million | $6.7 million |
| Diluted EPS | $(0.07) | $0.49 |
| Operating cash flow | $4.5 million | $(2.9) million |
| Capital expenditures | $0.7 million | $0.7 million |
Financial position and liquidity
- Cash was $6.1 million at March 31, 2023, versus $4.0 million at December 31, 2022. Total current assets were $184.0 million and current liabilities were $35.9 million.
- Total debt was $95.2 million, up $0.3 million from year-end; this comprised $7.1 million current and $88.1 million long-term debt. Debt was 60.9% of stockholders’ equity.
- The company had $57.1 million drawn on its revolving facility and $38.1 million outstanding on its term loan. The revolving facility’s stated maximum availability was $90 million before the subsequent amendment described below.
- Operating cash flow was positive despite the quarterly net loss; the cash flow statement reports $3.2 million of net adjustments reconciling net loss to operating cash flow. Cash increased by $2.1 million during the quarter. Dividends paid were $2.1 million.
Changes, outlook, and risks
- Gross margin contracted 8.4 percentage points. Management cited less favorable product mix, inventory storage and handling costs, and reduced operating leverage at lower sales. SG&A decreased 2.3% to $10.3 million, but rose to 18.0% of sales from 14.5%.
- Interest expense increased to $1.4 million from $0.6 million. The company declared a quarterly dividend of $0.15 per share.
- On May 8, 2023, after quarter-end, Escalade amended its credit agreement. The amendment waived Q1 2023 funded-debt-to-EBITDA and minimum fixed-charge-coverage covenant requirements; set a $22.5 million minimum EBITDA covenant for Q2 and Q3 2023 while suspending the fixed-charge-coverage covenant for those quarters; and revised leverage and coverage tests thereafter. It also provides for reducing revolving-facility availability from $90 million to $75 million upon sale of the Mexican subsidiary and dissolution of Escalade Insurance, with proceeds to partially repay revolver borrowings.
- Management expects 2023 operating cash generation and revolving-credit access to be sufficient for operations and growth needs, but says Q1 results are not necessarily indicative of full-year results. It cited potential demand pressure from inflation, recession concerns, higher interest rates, housing-market changes, and lower consumer confidence, as well as supply-chain, freight, materials, labor, and other operating uncertainties. No specific earnings or revenue guidance is provided.
- The company says ordinary-course litigation is not expected to materially harm its business or financial condition. It reported no material changes to the risk factors in its 2022 Form 10-K and concluded disclosure controls were effective.
Important facts for investors to verify
- Whether the company meets the amended credit covenants, including the $22.5 million minimum EBITDA requirement, and how covenant changes affect borrowing flexibility.
- Progress, timing, and net proceeds from the planned Mexican subsidiary sale and insurance-subsidiary dissolution, and the resulting debt reduction and facility availability.
- Whether retail inventory normalization and seasonal demand improve sales, and whether gross margins recover from Q1 levels.
- Whether operating cash flow remains adequate to fund working capital, dividends, and debt service given the high inventory balance and elevated debt.