Escalade, Inc. — Q2 2023 Form 10-Q
Business and reporting period. Escalade sells sporting goods, including basketball goals, archery, billiards, recreation and fitness products. This unaudited filing covers the quarter and six months ended June 30, 2023. Comparisons require care: the 2023 second quarter was 91 days, while the comparable 2022 quarter was 112 days following the company’s fiscal-calendar change.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $67.8 million | $94.3 million | $124.7 million | $166.7 million |
| Gross margin | 24.6% | 25.2% | 22.2% | 26.3% |
| Operating income | $6.3 million | $8.2 million | $6.4 million | $17.2 million |
| Net income | $3.6 million | $5.7 million | $2.7 million | $12.3 million |
| Diluted EPS | $0.26 | $0.42 | $0.20 | $0.91 |
- Sales fell 28.2% in Q2 and 25.2% for the first half. Management attributes the quarterly decline to softer post-pandemic demand and 21 fewer reporting days; excluding the calendar effect, Q2 sales declined 9.5%. First-half weakness was concentrated particularly in archery, basketball and indoor/outdoor games, alongside excess retail-channel inventory.
- Q2 gross margin decreased 0.6 percentage point; first-half margin fell 4.1 points. Management cited higher-cost inventory, storage and handling costs, unfavorable product mix and reduced operating leverage. SG&A declined 33.5% in Q2 and 20.4% in the first half, but first-half SG&A rose as a percentage of sales to 16.1% from 15.1%.
- Interest expense was $1.6 million in Q2 and $3.0 million for the first half, versus $0.9 million and $1.5 million, respectively, in 2022.
- Operating cash flow was $12.9 million for the first half, compared with a $0.3 million use in the prior-year period. Investing used $1.1 million; financing used $15.2 million. Cash declined $3.4 million to $0.6 million.
- At June 30, current assets were $172.7 million and current liabilities $32.7 million (current ratio about 5.3); inventory was $111.7 million. Total debt was $84.0 million, down $10.9 million from December 31, 2022. Total debt equaled 53.0% of equity. Debt comprised a $36.3 million term loan and $47.7 million drawn on the revolving facility.
- The company declared dividends of $0.15 per share per quarter; first-half dividends paid totaled $4.1 million. No shares were repurchased during Q2.
Outlook, financing and risks
- No specific revenue or earnings guidance is provided. Management expects 2023 operating cash generation and revolving-credit access to provide sufficient cash for operations and growth, while cautioning that results to date are not necessarily indicative of full-year results.
- Management cited potential demand pressure from inflation, rising interest rates, recession concerns, housing-market changes and lower consumer confidence, as well as lingering supply-chain, freight, materials and labor-cost challenges.
- A May 2023 credit amendment revised financial covenants: the funded-debt-to-EBITDA limit was 4.25:1 at Q2, 3.00:1 at Q3 and 2.75:1 at Q4 and thereafter. The fixed-charge-coverage covenant was suspended for Q2 and Q3, with a minimum EBITDA covenant of $22.5 million at each quarter-end. Fixed-charge coverage requirements resume at 1.10:1 in Q4 and 1.25:1 from Q1 2024. The filing does not clearly state actual covenant compliance.
- Under the amendment, revolving-facility availability is to decrease from $90 million to $75 million upon completion of the sale of the Mexican subsidiary and dissolution of Escalade Insurance; proceeds are to be used to reduce revolver borrowings. The filing does not give a completion date or sale proceeds.
- The company reported ordinary-course litigation but does not expect existing claims to have a material adverse effect. It reported no material change in risk factors from its 2022 Form 10-K, and management concluded disclosure controls were effective.
Investor facts to verify
- How much of the sales and earnings decline reflects the shorter comparison quarter versus underlying demand, and whether retail inventory is normalizing.
- Progress on reducing inventory and the related storage, handling and higher-cost inventory burden.
- Compliance with the amended EBITDA and leverage covenants, and the timing and impact of the Mexican subsidiary sale and insurance-company dissolution.
- Whether operating cash generation and available credit can sustain working-capital needs, debt reduction and quarterly dividends given cash of only $0.6 million.