Escalade, Inc. — Q3 2022 Form 10-Q
Reporting period: The quarter and nine months ended October 1, 2022. Financial amounts below are in U.S. dollars; amounts are in millions unless noted. Escalade focuses on sporting goods, including basketball, archery, billiards, recreation, and fitness products.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $74.9 | $81.3 | $241.6 | $240.2 |
| Gross margin | 18.2% | 22.5% | 23.8% | 25.3% |
| Operating income | $4.2 | $7.7 | $21.4 | $25.5 |
| Net income | $3.0 | $6.0 | $15.3 | $19.5 |
| Diluted EPS | $0.22 | $0.43 | $1.12 | $1.40 |
- Q3 cost of products sold was $61.3 million; SG&A was $8.8 million, down 14.0% year over year. Interest expense rose to $1.0 million from $0.4 million.
- For the first nine months, operating cash flow was negative $5.8 million versus negative $3.0 million a year earlier. Investing cash flow was negative $37.5 million, including $35.8 million for the Brunswick Billiards acquisition. Financing provided $42.9 million. Cash ended at $4.0 million, down from $4.4 million at fiscal year-end.
- At October 1, current assets were $209.4 million and current liabilities $49.7 million. Inventory was $135.0 million, up from $92.4 million at December 25, 2021.
- Total debt was $106.7 million, up $49.2 million from fiscal year-end; debt equaled 67.8% of stockholders’ equity. The balance included $41.7 million outstanding on the term loan and $65.0 million drawn on the revolving facility. Stockholders’ equity was $157.3 million.
Material changes and business developments
- Q3 sales fell 7.9% year over year; sales for the first nine months increased 0.6%. Mass-merchant gross sales declined to $29.8 million from $41.8 million in Q3, while specialty, e-commerce, and international sales increased.
- Management attributed the quarterly sales decline to softer consumer demand and excess retail-channel inventories. Billiards and pickleball growth, including the Brunswick acquisition contribution, was more than offset by lower outdoor-category sales, including archery, games, water sports, and playground.
- Q3 gross margin fell 4.3 percentage points. The company cited lower sales, unfavorable product mix, supply-chain constraints, and nonrecurring product-recall expenses; the filing does not quantify the recall costs.
- Escalade acquired the Brunswick Billiards business on January 21, 2022, for $35.8 million, funded with cash and its revolving facility. Purchase accounting remained subject to final evaluation of certain fair values.
- The January credit agreement increased revolving availability from $50 million to $65 million and extended facility maturities to January 2027. Availability was later increased to $75 million in July. A post-quarter October 26 amendment increased it to $90 million and revised leverage-covenant terms and permitted certain EBITDA add-backs.
Outlook, risks, and other disclosures
- Management expects cash generated from 2022 operations and access to revolving credit to provide sufficient funding for operations and growth needs. It gave no specific earnings or revenue guidance and cautioned that period results may not indicate full-year results.
- Management noted potential demand pressure from inflation, recession concerns, higher interest rates, housing-market changes, and lower consumer confidence. Other cited uncertainties include supply-chain disruption, freight and material costs, labor availability and costs, tariffs, competition, customer financial health, and acquisition integration.
- The company reported that disclosure controls were effective and that there were no material changes to internal control over financial reporting. It reported no material changes to previously disclosed risk factors.
- The filing says the company is involved in ordinary-course litigation but does not expect existing claims to materially adversely affect its business or financial condition; the legal-proceedings item separately reports none.
- The quarterly dividend was $0.15 per share. No shares were repurchased during Q3; $4.15 million remained available under the repurchase program at October 1.
Important facts for investors to verify
- Whether softer demand and elevated retail inventories persist, and whether inventory levels convert to sales without further margin pressure.
- The size and financial effects of the product recall, which are not quantified in the filing.
- Operating cash-flow trends and liquidity, particularly given low cash, negative year-to-date operating cash flow, and substantial inventory.
- Revolver utilization, covenant compliance, and the effect of the October credit amendment and higher permitted leverage on borrowing flexibility.
- Final purchase-price allocation and integration results for Brunswick Billiards, including the contribution to sales and earnings.