Escalade, Incorporated (NASDAQ:ESCA) Q2 2022 Results Conference Call August 4, 2022 11:00 AM ET Company Participants Patrick Griffin - Vice President, IR and Corporate Development Walt Glazer - Chief Executive Officer and President Stephen Wawrin - Chief Financial Officer Conference Call Participants Rommel Dionisio - Aegis Capital Operator Good day, and welcome to the Escalade, Incorporated Second Quarter 2022 Results Conference Call. [Operator Instructions] Please note this event is being recorded. I woul ...

Financial Data and Key Metrics Changes - For Q1 2022, net sales increased to $72.4 million, up 22% from $59.2 million in Q1 2021, with a 12.2% increase in net sales excluding acquisition-related revenues [23][18] - Net income for Q1 2022 was $6.7 million or $0.49 per diluted share, compared to $5.4 million or $0.39 per diluted share in Q1 2021 [23] - EBITDA for Q1 2022 increased by 27% to $10.5 million, benefiting from strong organic sales growth and contributions from the Brunswick Billiards acquisition [24] Business Line Data and Key Metrics Changes - Strong organic growth was noted across basketball, archery, pickleball, and indoor game categories, contributing to overall sales growth [24][18] - Gross profit margin declined by 165 basis points to 27.8% due to global supply chain challenges and raw material cost inflation [25] Market Data and Key Metrics Changes - Mass merchants and international sales channels both saw approximately 50% growth in gross sales compared to the previous year, attributed to increased consumer traffic and effective inventory management [28][29] Company Strategy and Development Direction - The company focuses on product innovation and has received multiple awards for its new products, indicating a commitment to maintaining a competitive edge [10] - Escalade employs a hybrid sourcing model, balancing domestic manufacturing with international procurement to enhance inventory control and delivery [11][12] - The company has a robust capital allocation strategy, prioritizing reinvestment in core businesses and returning capital to shareholders through dividends and share repurchases [15][16] Management's Comments on Operating Environment and Future Outlook - Management anticipates ongoing global supply chain issues and is closely monitoring consumer behavior amid rising interest rates and inflation [19] - The acquisition of Brunswick Billiards is expected to be accretive to earnings starting in the second half of 2022, with integration efforts already underway [20] Other Important Information - The company returned nearly $45 million to shareholders since 2019, with a recent dividend increase of 7.1% to $0.15 per quarter [15] - The ratio of net debt to trailing 12 months EBITDA was reported at 2.56, with a focus on debt reduction for the remainder of 2022 [21] Q&A Session Summary Question: Sales breakdown by distribution channel - Management noted strong demand across customer bases, with effective inventory supply contributing to growth in mass merchants and international channels [28][29] Question: Pull forward of sales from Q2 to Q1 - Management indicated that customers are buying earlier due to inventory concerns, but did not quantify the sales pull forward [30][31] Question: Long-term targets for gross and operating margins - Management targets a minimum of 10% operating margins and aims for low to mid-teens long-term growth rates, with potential for margin improvement [35][36] Question: Expectations for Brunswick Billiards integration - Management expressed optimism about operational synergies and sales growth from the Brunswick acquisition, indicating it would enhance overall business performance [40][41] Question: Seasonality of Brunswick's business - Management confirmed that Brunswick has some seasonality, typically peaking in fall and winter, but noted recent trends have blurred traditional seasonal patterns [42]

Revenue and Customer Dependence - Escalade Sports generated approximately 21% of its revenues from Amazon.com, Inc. in 2021, with Dick's Sporting Goods contributing around 11%[10]. - As of December 25, 2021, approximately 24% of total accounts receivable were from Amazon.com, Inc.[11]. - Escalade's reliance on key customers like Amazon and Dick's Sporting Goods poses a risk to revenue stability[10][11]. - The Company relies heavily on a few significant customers, with two major customers accounting for over 10% of consolidated gross sales in the 2021 fiscal year[42]. - The Company faces risks from customer financial difficulties, which could lead to significant write-offs of receivables and adversely affect financial condition[43]. Financial Performance - Net revenue increased by 14.6% in 2021 compared to 2020, primarily driven by growth in outdoor product categories such as archery and pickleball[123]. - Gross margin decreased to 24.6% in 2021 from 27.3% in 2020, negatively impacted by currency exchange rates and higher supply chain costs[123]. - Selling, general and administrative expenses (SG&A) rose to $43.4 million in 2021, an increase of $3.1 million or 7.6% from 2020, with SG&A as a percentage of sales decreasing to 13.8%[124]. - Operating income decreased to $31.5 million in 2021, down from $32.7 million in 2020, while net income fell to $21.9 million from $23.6 million[127]. - The Sporting Goods segment experienced a net income decline of 7.3% in 2021, following a significant increase of 293.9% in 2020[115]. Supply Chain and Operational Risks - Price increases in raw materials negatively impacted the Company's net income in fiscal year 2021, highlighting supply chain vulnerabilities[44]. - Increased shipping costs due to container shortages are currently affecting the Company's ability to meet customer demand[49]. - The Company does not have long-term supply contracts with significant suppliers, which could lead to procurement challenges and impact liquidity[48]. - The ongoing COVID-19 pandemic may lead to future business disruptions, inventory shortages, and delivery delays, which could materially affect the company's financial condition and results of operations[74]. - The company cannot predict the long-term impact of the COVID-19 pandemic on its customers and suppliers, creating uncertainty in demand for its products[76]. Acquisitions and Growth Strategy - Escalade completed the acquisition of Brunswick Billiards® on January 21, 2022, enhancing its billiards brand portfolio[17]. - The company has made strategic acquisitions over the years, including the assets of Triumph Sports USA in 2016 and Lifeline Fitness, Inc. in 2017[17]. - The Company is focused on organic growth, strategic acquisitions, and new product development to enhance its Sporting Goods segment[110]. - Escalade's growth strategy includes expanding its e-commerce business and direct-to-consumer distribution channels[36]. Financial Position and Liquidity - Total current assets increased to $171,055,000 in December 2021 from $145,398,000 in December 2020, representing an increase of 17.6%[208]. - Cash and cash equivalents rose to $4,374,000 in December 2021, up from $3,505,000 in December 2020, a growth of 24.8%[208]. - Total liabilities grew to $105,183,000 in December 2021, up from $81,549,000 in December 2020, reflecting a rise of 28.9%[208]. - Long-term debt increased to $50,396,000 in December 2021 from $30,073,000 in December 2020, which is a substantial increase of 67.5%[208]. - The current ratio improved to 3.5 in 2021 from 3.1 in 2020, indicating better liquidity[129]. Regulatory and Compliance Risks - International operations expose the Company to risks such as political instability and trade regulations, which could adversely affect profitability[65]. - Tariffs on imported goods, particularly from China, have increased costs and could lead to lower profitability if price increases are not accepted by customers[66]. - The company is subject to customs and tax requirements, with potential adverse effects from changes in U.S. policies and Brexit, which could impact import costs and trade regulations[69]. - The Company believes it is in material compliance with all applicable environmental regulations and maintains satisfactory conditions for its facilities[99]. Internal Control and Audit - Escalade's management assessed the effectiveness of internal control over financial reporting as of December 25, 2021, and determined it was effective[160]. - The audit report expressed an unqualified opinion on the effectiveness of Escalade, Incorporated's internal control over financial reporting[199]. - The financial statements were audited in accordance with PCAOB standards, ensuring compliance and reliability[188]. - The Company has been audited by BKD, LLP since 1977, ensuring a long-standing relationship with the auditing firm[194]. Market Conditions and Economic Factors - The sporting goods market is highly fragmented and competitive, with Escalade facing competition from larger companies with greater resources[30]. - The company faces risks from changes in economic conditions that influence consumer spending, which could negatively impact sales and profitability[86]. - The company is exposed to risks related to changes in currency exchange rates, which can significantly impact earnings and financial condition[71]. - The company's operations may be disrupted by natural disasters, political unrest, or public health crises, affecting supply chain and manufacturing[95].

Revenue and Customer Dependence - In 2020, Amazon.com, Inc. accounted for approximately 23% of Escalade's revenues, while Dick's Sporting Goods accounted for 13%[12]. - The Company derives a substantial portion of its revenue from two major customers, each accounting for over 10% of consolidated gross sales in the 2020 fiscal year[44]. - The COVID-19 pandemic has led to increased demand for fitness and recreational products, although future demand remains uncertain[123]. Financial Performance - Net revenue increased by 51.6% in 2020 compared to 2019, with significant sales growth in outdoor and fitness categories[128]. - Gross margin improved to 27.3% in 2020 from 23.5% in 2019, driven by factory utilization and supply chain improvements[128]. - Net income for 2020 was $23.6 million, significantly up from $6.0 million in 2019[137]. - Net income for the Sporting Goods segment surged by 293.9% in 2020, compared to a decline of 39.2% in 2019[122]. - Selling, general and administrative expenses (SG&A) increased by $8.7 million or 27.5% to $40.3 million in 2020, with SG&A as a percentage of sales decreasing to 14.7% from 17.6% in 2019[130]. Operational Challenges - The Company is currently transitioning to a new Interim Chief Executive Officer, which may result in some operational disruptions[40]. - The company is experiencing increased shipping costs for products obtained from overseas due to a shortage of available shipping containers[52]. - The Company relies on third-party suppliers for raw materials, and disruptions in supply could adversely affect sales and customer satisfaction[48]. - The company cannot predict the long-term impact of the COVID-19 pandemic on its customers and suppliers, which could lead to material adverse effects on its business[81]. - The company's operations have been disrupted by the pandemic, leading to remote work for most office staff and potential future manufacturing disruptions[77]. Strategic Initiatives - Escalade's growth strategy includes expanding its e-commerce business and developing a direct-to-consumer distribution channel[37]. - The company aims to expand its Sporting Goods segment through organic growth, strategic acquisitions, and new product development[116]. - Escalade's strategic acquisitions include the purchase of Triumph Sports USA in 2016 and RAVE Sports in 2020, expanding its product offerings[18]. Market and Competitive Environment - Escalade's Sporting Goods segment competes in various product categories, including basketball goals, archery, and fitness products[16]. - The company has established a strong market presence in niche markets within the sporting goods industry, focusing on customer relationships and product innovation[117]. - The Company’s market is highly competitive, with many products experiencing low growth rates, impacting profitability[30]. Risks and Compliance - The company faces risks from regulatory changes that could adversely affect earnings, cash flows, and operations[86]. - The company is exposed to risks from fluctuations in currency exchange rates, which can materially affect earnings and financial condition[73]. - The company is subject to customs and tax requirements, with potential adverse effects from changes in U.S. policies and Brexit, which could increase import costs significantly[70]. - The expiration or termination of material trademarks and licensing agreements could adversely affect the Company's business[56]. - The Company has not experienced a significant cybersecurity breach that materially impacted its business, although threats are increasing[61]. Internal Control and Audit - As of December 26, 2020, the Company's management assessed that the internal control over financial reporting was effective[165]. - The internal control system is designed to provide reasonable assurance regarding the reliability of financial reporting in accordance with generally accepted accounting principles[162]. - The audit opinion on the consolidated financial statements was unqualified, indicating fair presentation in all material respects[189]. - The complexity of estimating customer allowances involved significant management judgment due to the volume of contracts and changing terms[197]. - The Company maintains disclosure controls and procedures to ensure timely and accurate reporting in compliance with SEC rules[160].

Financial Performance - Net revenue for the Sporting Goods segment increased by 2.7% in 2019 compared to 2018, reaching $180.5 million[116] - Operating income for the Sporting Goods segment decreased to $8.6 million in 2019, down from $14.0 million in 2018, representing a decline of 38.5%[116] - The gross margin percentage decreased to 23.5% in 2019 from 25.6% in 2018, primarily due to customer allowances, lower factory utilization, tariffs, and sales mix[111][117] - Selling, general and administrative expenses (SG&A) increased by 6.1% to $31.6 million in 2019, compared to $29.8 million in 2018[112] Tax and Liquidity - The effective tax rate for 2019 was 18.8%, a decrease from 22.7% in 2018, primarily due to federal benefits of state income taxes and federal income tax credits[115] - The current ratio for 2019 was 4.8, down from 5.3 in 2018, indicating a decrease in liquidity[118] Debt and Financial Health - Total long-term debt at the end of the 2019 fiscal year was zero, reflecting improved financial health[119] - The maximum borrowings under the primary revolving credit lines totaled $10.5 million in 2019, down from $24.2 million in 2018[119] Capital Expenditures and Investments - The Company estimates capital expenditures for 2020 to be approximately $2.9 million[122] - The proportionate share of net income from a minority equity investment was $0.1 million in 2018 and $1.6 million in 2017[140] - Total cash dividends received from the equity investment amounted to $2,323 thousand in 2018 and $2,168 thousand in 2017[140] - The company completed the sale of its 50% interest for $33.7 million on May 17, 2018, resulting in a gain on sale of $13.0 million[140] Strategic Focus - The Company is focused on strategic acquisitions and new product development to enhance growth opportunities in the Sporting Goods segment[106] - The company has had licensing rights for Stiga-branded products since 1995, with a new license agreement effective January 1, 2019[140] Asset Management - The company evaluates the recoverability of long-lived assets whenever events indicate that the carrying amount may not be recoverable[139] - The company uses a combination of market and income approaches to establish fair value for goodwill impairment testing[136] - The qualitative impairment assessment indicated that it was not "more likely than not" that the fair value of the reporting unit was less than the carrying value as of December 28, 2019[137] Cost Management - The company attempts to pass on increased costs through price increases and is working on reducing expenses and improving manufacturing technologies[141]

Financial Performance - Net revenue for the Sporting Goods segment decreased by 0.9% in 2018, totaling $175.78 million compared to $177.33 million in 2017[113]. - Operating income for the Sporting Goods segment was $13.999 million in 2018, down from $15.6 million in 2017, reflecting a decrease in operating income as a percentage of net revenue to 8.0%[114]. - Gross margin improved to 25.6% in 2018 from 25.2% in 2017, primarily due to a favorable product mix and increased sales in archery[108]. - Selling, general and administrative expenses (SG&A) increased by 4.4% to $29.8 million in 2018, representing 16.9% of sales compared to 16.1% in 2017[109]. - Other income surged to $13.1 million in 2018, significantly up from $1.7 million in 2017, largely due to a $13.0 million gain from the sale of a 50% owned investment[110]. Tax and Debt Management - The effective tax rate increased to 22.7% in 2018 from 9.4% in 2017, influenced by state income taxes and adjustments related to the 2017 U.S. Tax Reform[112]. - Total debt was reduced to zero by the end of 2018, down from $23.1 million in 2017, following the sale of the investment in Stiga[116]. Liquidity and Capital Expenditures - The current ratio improved to 5.3 in 2018 from 4.1 in 2017, indicating enhanced liquidity[115]. - The company estimates capital expenditures for 2019 to be approximately $3.0 million, supported by projected cash flows from operations[120]. - The Company estimates capital expenditures for 2019 to be approximately $3.0 million[138]. Strategic Initiatives - The company plans to pursue new product introductions and strategic acquisitions to drive revenue growth and expand its market presence[102]. - The Company completed the sale of its 50% interest for $33.7 million on May 17, 2018, resulting in a gain on sale of $13.0 million[136]. Asset Management - The Company recorded total goodwill of $26.4 million as of December 29, 2018, all allocated to the Escalade Sports reporting unit, with fair value exceeding carrying value[134]. - The Company evaluates the recoverability of long-lived assets whenever events indicate that carrying amounts may not be recoverable[135]. - The Company uses a combination of market and income approaches to establish fair value for goodwill impairment testing[133]. Investment Income - The Company reported proportionate share of net income from non-marketable equity investments of $0.1 million in 2018, $1.6 million in 2017, and $1.7 million in 2016[136]. - Total cash dividends received from equity investments were $2,323 thousand in 2018, $2,168 thousand in 2017, and $1,060 thousand in 2016[136]. Expense Management - The Company is working on reducing expenses and improving manufacturing technologies to manage inflationary pressures[137]. - The Company provides an allowance for doubtful accounts based on historical collection information and economic conditions[129]. - Customer allowances are accounted for as a reduction to gross sales and are reviewed on an ongoing basis[130].