Escalade, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended July 9, 2022. Financial amounts are in U.S. dollars; unless stated otherwise, figures below are in millions. Escalade’s business is focused on sporting goods, including basketball, archery, billiards, indoor and outdoor recreation, and fitness products.
Financial performance
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Net sales | $94.3 | $99.7 | $166.7 | $158.9 |
| Gross margin | 25.2% | 25.2% | 26.3% | 26.8% |
| Operating income | $8.2 | $10.7 | $17.2 | $17.8 |
| Net income | $5.7 | $8.1 | $12.3 | $13.6 |
| Diluted EPS | $0.42 | $0.58 | $0.91 | $0.97 |
- Q2 sales declined 5.4% year over year; first-half sales increased 4.9%. Q2 net income fell about 30%, while first-half net income declined about 9%.
- Q2 gross margin held at 25.2%; first-half gross margin eased 0.5 percentage points. Q2 operating margin was 8.7%, versus 10.7% a year earlier; first-half operating margin was 10.3%, versus 11.2%.
- Q2 SG&A was $14.7 million, up 6.3%; first-half SG&A was $25.2 million, up 6.4%. Amortization also increased, partly reflecting acquired intangible assets.
- Cash and equivalents were $6.2 million at July 9, versus $4.4 million at December 25, 2021. Current assets were $204.3 million and current liabilities $53.0 million.
- First-half operating cash flow was a use of $0.3 million, compared with a use of $0.5 million in the prior-year period. Investing cash outflow was $37.3 million, including $35.8 million for the acquisition; financing provided $39.4 million. Cash increased $1.8 million over the half.
- Total debt was $101.2 million, up $43.6 million from year-end 2021; debt equaled 64.9% of stockholders’ equity, compared with 39.2% at year-end. The balance included $43.5 million outstanding on the term loan and $57.7 million drawn on the revolving facility.
Material changes and business developments
- On January 21, 2022, Escalade acquired the Brunswick Billiards business assets for $35.8 million, funded with cash and revolving-credit borrowings. Purchase-price allocation remained preliminary; estimated goodwill and other intangible assets totaled $22.5 million.
- Q2 sales softness reflected sales timing in basketball, lower fitness demand, and lower outdoor-category sales, including archery and water sports. Management cited ongoing global supply-chain, raw-material inflation, and labor constraints; gross margin nonetheless remained flat in Q2 year over year.
- Inventory rose to $130.2 million from $92.4 million at December 25, 2021, primarily reflecting the period-end balance and acquired inventory. Finished goods were $115.8 million.
- A January credit agreement increased revolving-facility availability from $50 million to $65 million and extended facility and term-loan maturities to January 21, 2027. On July 18, after quarter-end, an amendment increased the revolving limit to $75 million and set the funded-debt-to-EBITDA covenant at 3.0-to-1.0 for Q3 and Q4 2022.
Outlook, risks, and other items
- The filing gives no specific revenue or earnings guidance. Management expected operating cash generation and access to revolving credit to support operations and growth, but cautioned that results for the period may not indicate full-year performance and that the business is seasonal.
- Risks highlighted include uncertain COVID-19 effects, demand and consumer-spending changes, competition and pricing, supply-chain disruptions, inflation and cost control, tariffs, customer and supplier relationships, acquisition integration, financing compliance, and cybersecurity or product-safety issues.
- Escalade disclosed a voluntary Q1 2022 recall of its Ping Pong Avenger table tennis table due to a potential consumer fall risk. The filing warns that recalls, warranty claims, or product-liability claims could harm reputation and results; adequacy of reserves or insurance may not cover future claims.
- Management stated that ordinary-course litigation was not expected to have a material adverse effect. Disclosure controls were judged effective, and no material change in internal control over financial reporting was reported.
Investor verification points
- Review subsequent sales, margins, and inventory levels, particularly given Q2 demand weakness and the substantial finished-goods balance.
- Verify the final Brunswick Billiards purchase-price allocation and whether the acquisition delivers expected integration benefits.
- Monitor debt, borrowing costs, covenant compliance, and the impact of the July credit amendment and higher facility limit.
- Assess cash conversion and working-capital needs, since first-half operating cash flow was negative despite reported net income.
- Track costs, claims, and any developments related to the Ping Pong Avenger recall and broader product-safety exposure.