Escalade, Inc. — Q2 2021 Form 10-Q
Business context and period. Escalade sells sporting goods, including basketball goals, archery, games, pickleball, water sports and fitness products. This filing covers the three and six months ended July 10, 2021; comparisons are to the periods ended July 11, 2020. Amounts below are in millions of dollars except per-share data. The company notes that results are seasonal and interim results may not indicate full-year performance.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $99.7 | $83.5 | $158.9 | $120.8 |
| Gross margin | 25.2% | 27.8% | 26.8% | 27.7% |
| Operating income | $10.7 | $10.9 | $17.8 | $13.3 |
| Net income | $8.1 | $8.7 | $13.6 | $10.7 |
| Diluted EPS | $0.58 | $0.61 | $0.97 | $0.75 |
| Operating cash flow | Not separately presented for Q2 | $(0.5) | $16.7 |
- Growth and margins: Sales rose 19.3% in Q2 and 31.5% in the first half. Management attributed the increase to growth in nearly all product lines, led by archery, games and outdoor categories. Gross margin declined 2.6 percentage points in Q2 and 0.9 points year to date, reflecting higher material costs, wage pressure and inventory-handling costs.
- Expenses: Q2 selling, administrative and general expenses increased 15.8% to $13.8 million, but declined as a share of sales to 13.9% from 14.3%. First-half expenses increased 22.2% to $23.7 million, while their sales share fell to 14.9% from 16.0%. The first-half effective tax rate was 21.3%, versus 19.6%.
- Cash and working capital: Cash was $10.6 million at July 10, compared with $3.5 million at fiscal year-end and $16.7 million a year earlier. First-half operating cash flow was negative $0.5 million, versus positive $16.7 million, as operating balance-sheet adjustments used $17.0 million. Inventories increased to $86.6 million from $72.5 million at year-end and $41.7 million a year earlier. Capital expenditures were $4.3 million, versus $1.1 million.
- Liquidity and debt: Current assets were $154.3 million and current liabilities $38.4 million at July 10 (approximately a 4.0 current ratio). Total debt was $50.0 million, up $19.9 million from year-end; debt was 34.5% of equity, compared with 21.6% at year-end. The company reported $7.1 million current and $42.9 million long-term debt.
Material changes and capital allocation
- Under a July 7 credit agreement amendment, the lender provided a $50 million term loan and reduced the maximum revolving facility from $75 million to $50 million. Both facilities mature July 7, 2026; the revolver can be repaid and reborrowed. Debt is secured by domestic subsidiary equity and substantially all company assets, excluding real estate.
- First-half financing cash flow was positive $11.9 million. The company reported $162.7 million of debt proceeds and $142.7 million of debt repayments during the period.
- The company declared dividends of $0.14 per share for each quarter, versus $0.125 in Q2 2020; first-half declared dividends were $0.28 per share. It repurchased $4.4 million of stock in the first half. Approximately $10.2 million remained authorized under the repurchase program at July 10.
- A signed, not-yet-commenced warehouse and operations lease carries $9.9 million of legally binding minimum payments, excluded from reported lease liabilities. Reported lease liabilities totaled $2.1 million.
Outlook, commentary and risks
The filing gives no numerical earnings or revenue guidance. Management expected access to adequate revolving credit for growth and working-capital needs. It said elevated customer demand that began during 2020 continued through the first half of 2021, while the company accelerated ordering and increased inventory to meet demand. Management cautioned that a demand decline or slower customer payments could adversely affect liquidity.
Management described ongoing uncertainty from COVID-19, including changes in consumer demand, supply-chain and operating disruptions, and economic conditions; it could not predict the pandemic’s full effects. Other cited risks include competition and pricing, customer and supplier relationships, tariffs and trade restrictions, cost control, financing and covenant compliance, foreign exchange, technology and data security, and execution of acquisitions, divestitures and the direct-to-consumer strategy. The filing says existing ordinary-course litigation is not expected to have a material adverse effect. No material risk-factor changes from the 2020 Form 10-K were reported. Disclosure controls were concluded effective, with no material second-quarter change in internal control over financial reporting.
Important facts for investors to verify
- Whether elevated demand and inventory levels are sustainable, and how inventory converts to sales and operating cash flow.
- Whether higher materials, labor and handling costs continue to pressure gross margin and whether pricing or other actions offset them.
- Credit agreement terms, borrowing availability and compliance requirements, including the effect of the new term loan and reduced revolver limit.
- The cash-flow and liquidity effects of customer payment timing, inventory commitments, dividends, repurchases and the future warehouse lease.
- Whether the filing’s seasonal and COVID-related uncertainties affect second-half results; the company provides no numerical guidance.