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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended October 1, 2022 or

 

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from _____ to _____

 

Commission File Number 0-6966

 

ESCALADE, INCORPORATED

(Exact name of registrant as specified in its charter)

 

Indiana

(State of incorporation)

13-2739290

(I.R.S. EIN)

 

817 Maxwell Ave, Evansville, Indiana

(Address of principal executive office)

47711

(Zip Code)

 

812-467-1358

(Registrant's Telephone Number)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class Trading Symbol Name of Exchange on which registered

Common Stock, No Par Value

ESCA

The NASDAQ Stock Market LLC

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐

 

Accelerated filer

Non-accelerated filer ☐

 

Smaller reporting company

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.          ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes No ☒

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

Outstanding at October 21, 2022

Common, no par value

13,590,407

 

1

 

 

 

INDEX

 

 

   

Page
No.

Part I.

Financial Information:

 
     

Item 1 -

Financial Statements:

 
     
 

Consolidated Condensed Balance Sheets as of October 1, 2022, December 825, 2021, and October 2, 2021

3

     
 

Consolidated Condensed Statements of Operations for the Three Months and Nine Months Ended October 1, 2022 and October 2, 2021

4

     
 

Consolidated Condensed Statements of Stockholders’ Equity for the Three Months and Nine Months Ended October 1, 2022 and October 2, 2021

5

     
 

Consolidated Condensed Statements of Cash Flows for the Nine Months Ended October 1, 2022 and October 2, 2021

6

     
 

Notes to Consolidated Condensed Financial Statements

7

     

Item 2 -

Management’s Discussion and Analysis of Financial Condition and Results of Operations

14

     

Item 3 -

Quantitative and Qualitative Disclosures About Market Risk

17

     

Item 4 -

Controls and Procedures

17

     

Part II.

Other Information

 
     

Item 1A -

Risk Factors

18

     

Item 2 -

Unregistered Sales of Equity Securities and Use of Proceeds

18

     

Item 6 -

Exhibits

19

     
 

Signature

19

 

2

 

PART I - FINANCIAL INFORMATION

 

Item 1. FINANCIAL STATEMENTS

 

 

ESCALADE, INCORPORATED AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

 

All Amounts in Thousands Except Share Information

 

October 1,

2022

   

December 25,
2021

   

October 2,

2021

 
   

(Unaudited)

   

(Audited)

   

(Unaudited)

 

ASSETS

                       
Current Assets:                        

Cash and cash equivalents

  $ 4,000     $ 4,374     $ 6,492  

Receivables, less allowance of $729; $457; and $636; respectively

    65,258       65,991       68,849  

Inventories

    134,957       92,382       91,755  

Prepaid expenses

    4,143       7,569       6,527  

Prepaid income tax

    1,075       739       --  

TOTAL CURRENT ASSETS

    209,433       171,055       173,623  
                         

Property, plant and equipment, net

    27,618       24,936       24,000  

Operating lease right-of-use assets

    9,074       2,210       2,500  

Intangible assets, net

    34,712       20,778       21,207  

Goodwill

    39,226       32,695       32,695  

Other assets

    261       124       131  

TOTAL ASSETS

  $ 320,324     $ 251,798     $ 254,156  
                         

LIABILITIES AND STOCKHOLDERS' EQUITY

                       
Current Liabilities:                        

Current portion of long-term debt

  $ 7,143     $ 7,143     $ 7,143  

Trade accounts payable

    22,684       15,847       25,071  

Accrued liabilities

    19,060       24,385       18,100  

Income tax payable

    --       --       124  

Current operating lease liabilities

    816       818       990  

TOTAL CURRENT LIABILITIES

    49,703       48,193       51,428  
                         
Other Liabilities:                        

Long‑term debt

    99,568       50,396       51,874  

Deferred income tax liability

    4,759       4,759       4,193  

Operating lease liabilities

    8,557       1,387       1,493  

Other liabilities

    448       448       448  

TOTAL LIABILITIES

    163,035       105,183       109,436  
                         
Stockholders' Equity:                        

Preferred stock:

                       
Authorized 1,000,000 shares; no par value, none issued                        

Common stock:

                       

Authorized 30,000,000 shares; no par value, issued and outstanding – 13,590,407; 13,493,332; and 13,557,879; shares respectively

    13,590       13,493       13,558  

Retained earnings

    143,699       133,122       131,162  

TOTAL STOCKHOLDERS' EQUITY

    157,289       146,615       144,720  

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

  $ 320,324     $ 251,798     $ 254,156  

 

See notes to Consolidated Condensed Financial Statements.

 

3

 

 

 

ESCALADE, INCORPORATED AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)

 

   

Three Months Ended

   

Nine Months Ended

 

All Amounts in Thousands Except Per Share Data

 

October 1,
2022

   

October 2,
2021

   

October 1,
2022

   

October 2,
2021

 
                                 

Net sales

  $ 74,904     $ 81,298     $ 241,621     $ 240,168  
                                 
Costs and Expenses                                

Cost of products sold

    61,273       62,992       184,147       179,355  

Selling, administrative and general expenses

    8,769       10,202       33,975       33,888  

Amortization

    642       432       2,067       1,438  
                                 

Operating Income

    4,220       7,672       21,432       25,487  
                                 
Other Income (Expense)                                

Interest expense

    (954 )     (414 )     (2,462 )     (1,035 )

Other income (expense)

    (22 )     68       50       124  
                                 

Income Before Income Taxes

    3,244       7,326       19,020       24,576  
                                 

Provision for Income Taxes

    286       1,360       3,735       5,042  
                                 

Net Income

  $ 2,958     $ 5,966     $ 15,285     $ 19,534  
                                 
Earnings Per Share Data:                                

Basic earnings per share

  $ 0.22     $ 0.44     $ 1.13     $ 1.41  

Diluted earnings per share

  $ 0.22     $ 0.43     $ 1.12     $ 1.40  
                                 

Dividends declared

  $ 0.15     $ 0.14     $ 0.45     $ 0.42  

 

See notes to Consolidated Condensed Financial Statements.

 

4

 

 

 

ESCALADE, INCORPORATED AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED)

 

   

Common Stock

   

Retained

         

All Amounts in Thousands

 

Shares

   

Amount

   

Earnings

   

Total

 
                                 

Balances at July 10, 2021

    13,779     $ 13,779     $ 131,354     $ 145,133  
                                 

Net income

                    5,966       5,966  

Expense of stock options and restricted stock units

                    229       229  

Dividends declared

                    (1,917 )     (1,917 )

Purchase of stock

    (221 )     (221 )     (4,470 )     (4,691 )

Stock issued to directors as compensation

                               
                                 

Balances at October 2, 2021

    13,558     $ 13,558     $ 131,162     $ 144,720  
                                 
                                 

Balances at December 26, 2020

    13,919     $ 13,919     $ 125,237     $ 139,156  
                                 

Net income

                    19,534       19,534  

Expense of stock options and restricted stock units

                    666       666  

Exercise of stock options

    10       10       134       144  

Settlement of restricted stock units

    46       46       (46 )     --  

Dividends declared

                    (5,804 )     (5,804 )

Purchase of stock

    (423 )     (423 )     (8,688 )     (9,111 )

Stock issued to directors as compensation

    6       6       129       135  
                                 

Balances at October 2, 2021

    13,558     $ 13,558     $ 131,162     $ 144,720  

 

   

Common Stock

   

Retained

         

All Amounts in Thousands

 

Shares

   

Amount

   

Earnings

   

Total

 
                                 

Balances at July 9, 2022

    13,590     $ 13,590     $ 142,403     $ 155,993  
                                 

Net income

                    2,958       2,958  

Expense of restricted stock units

                    377       377  

Dividends declared

                    (2,039 )     (2,039 )
                                 

Balances at October 1, 2022

    13,590     $ 13,590     $ 143,699     $ 157,289  
                                 
                                 

Balances at December 25, 2021

    13,493     $ 13,493     $ 133,122     $ 146,615  
                                 

Net income

                    15,285       15,285  

Expense of restricted stock units

                    1,453       1,453  

Settlement of restricted stock units

    93       93       (93 )     --  

Dividends declared

                    (6,115 )     (6,115 )

Stock issued to directors as compensation

    4       4       47       51  
                                 

Balances at October 1, 2022

    13,590     $ 13,590     $ 143,699     $ 157,289  

 

See notes to Consolidated Condensed Financial Statements.

 

5

 

 

 

ESCALADE, INCORPORATED AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

   

Nine Months Ended

 

All Amounts in Thousands

 

October 1, 2022

   

October 2, 2021

 
                 
Operating Activities:                

Net income

  $ 15,285     $ 19,534  

Depreciation and amortization

    5,207       3,935  

Provision for doubtful accounts

    258       (224 )

Stock-based compensation

    1,453       666  

Gain on disposal of property and equipment

    (22 )     (27 )

Adjustments necessary to reconcile net income to net cash used by operating activities

    (27,974 )     (26,933 )

Net cash used by operating activities

    (5,793 )     (3,049 )
                 
Investing Activities:                

Purchase of property and equipment

    (1,792 )     (8,281 )

Proceeds from sale of property and equipment

    40       43  

Acquisitions

    (35,757 )     --  

Net cash used by investing activities

    (37,509 )     (8,238 )
                 
Financing Activities:                

Proceeds from issuance of long-term debt

    180,355       192,792  

Payments on long-term debt

    (131,183 )     (163,849 )

Proceeds from exercise of stock options

    --       144  

Purchase of stock

    --       (9,111 )

Director stock compensation

    51       135  

Deferred financing fees

    (180 )     (33 )

Cash dividends paid

    (6,115 )     (5,804 )

Net cash provided by financing activities

    42,928       14,274  

Net increase (decrease) in cash and cash equivalents

    (374 )     2,987  

Cash and cash equivalents, beginning of period

    4,374       3,505  

Cash and cash equivalents, end of period

  $ 4,000     $ 6,492  

 

See notes to Consolidated Condensed Financial Statements.

 

6

 

 

ESCALADE, INCORPORATED AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

 

 

Note A – Summary of Significant Accounting Policies


 

Presentation of Consolidated Condensed Financial Statements – The significant accounting policies followed by the Company and its wholly owned subsidiaries for interim financial reporting are consistent with the accounting policies followed for its annual financial reporting. All adjustments that are of a normal recurring nature and are in the opinion of management necessary for a fair statement of the results for the periods reported have been included in the accompanying consolidated condensed financial statements. The consolidated condensed balance sheet of the Company as of December 25, 2021 has been derived from the audited consolidated balance sheet of the Company as of that date. Certain information and note disclosures normally included in the Company’s annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) have been condensed or omitted. These consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 10-K annual report for 2021 filed with the Securities and Exchange Commission.

 

 

Note B ‑ Seasonal Aspects


 

The results of operations for the three and nine month periods ended October 1, 2022 and October 2, 2021 are not necessarily indicative of the results to be expected for the full year.

 

 

Note C ‑ Inventories


 

In thousands

 

October 1,

2022

   

December 25,
2021

   

October 2,

2021

 
                         

Raw materials

  $ 9,988     $ 9,142     $ 10,160  

Work in progress

    4,537       3,529       3,873  

Finished goods

    120,432       79,711       77,722  
    $ 134,957     $ 92,382     $ 91,755  

 

 

Note D – Fair Values of Financial Instruments


 

The following methods were used to estimate the fair value of all financial instruments recognized in the accompanying balance sheets at amounts other than fair values.

 

Cash and Cash Equivalents

 

Fair values of cash and cash equivalents approximate cost due to the short period of time to maturity.

 

Long-term Debt

 

Fair values of long-term debt is estimated based on borrowing rates currently available to the Company for bank loans with similar terms and maturities and determined through the use of a discounted cash flow model.

 

7

 

 

The following table presents estimated fair values of the Company’s financial instruments and the level within the fair value hierarchy in which the fair value measurements fall in accordance with FASB ASC 825 at October 1, 2022, December 25, 2021 and October 2, 2021.

 

           

Fair Value Measurements Using

 

October 1, 2022

In thousands

 

Carrying
Amount

   

Quoted Prices in
Active Markets
for Identical
Assets (Level 1)

   

Significant Other


Observable Inputs
(Level 2)

   

Significant



Unobservable
Inputs
(Level 3)

 

Financial assets

                               

Cash and cash equivalents

  $ 4,000     $ 4,000     $ --     $ --  
                                 

Financial liabilities

                               

Current portion of long-term debt

  $ 7,143     $ --     $ 7,143     $ --  

Long-term debt

  $ 99,568     $ --     $ 99,568     $ --  

 

           

Fair Value Measurements Using

 

December 25, 2021

In thousands

 

Carrying

Amount

   

Quoted Prices in
Active Markets
for Identical
Assets (Level 1)

   

Significant Other
Observable Inputs
(Level 2)

   

Significant
Unobservable
Inputs

(Level 3)

 

Financial assets

                               

Cash and cash equivalents

  $ 4,374     $ 4,374     $ --     $ --  
                                 

Financial liabilities

                               

Current portion of long-term debt

  $ 7,143     $ --     $ 7,143     $ --  

Long-term debt

  $ 50,396     $ --     $ 50,396     $ --  

 

           

Fair Value Measurements Using

 

October 2, 2021

In thousands

 

Carrying

\Amount

   

Quoted Prices in
Active Markets
for Identical
Assets (Level 1)

   

Significant Other

Observable Inputs
(Level 2)

   

Significant



Unobservable
Inputs
(Level 3)

 

Financial assets

                               

Cash and cash equivalents

  $ 6,492     $ 6,492     $ --     $ --  
                                 

Financial liabilities

                               

Current portion of long-term debt

  $ 7,143     $ --     $ 7,143     $ --  

Long-term debt

  $ 51,874     $ --     $ 51,874     $ --  

 

 

Note E – Stock Compensation


 

The fair value of stock-based compensation is recognized in accordance with the provisions of FASB ASC 718, Stock Compensation.

 

During the nine months ended October 1, 2022 and pursuant to the 2017 Incentive Plan, in lieu of cash payments of director fees, the Company awarded to certain directors 3,886 shares of common stock. During the nine months ended October 1, 2022, the Company awarded 20,000 restricted stock units to directors and 196,254 restricted stock units to employees. The restricted stock units awarded to directors time vest over two years (one-half one year from grant date and one-half two years from grant date) provided that the director is still a director of the Company at the vest date. Director restricted stock units are subject to forfeiture, except for termination of services as a result of retirement, death or disability, if on the vesting date the director no longer holds a position with the Company. The 2022 restricted stock units awarded to employees time vest over three years (one-third one year from grant, one-third two years from grant and one-third three years from grant) provided that the employee is still employed by the Company on the vesting date.

 

For the three and nine months ended October 1, 2022, the Company recognized stock based compensation expense of $377 thousand and $1,453 thousand, respectively compared to stock based compensation expense of $229 thousand and $666 thousand for the same periods in the prior year. At October 1, 2022 and October 2, 2021, respectively, there was $1,937 thousand and $865 thousand in unrecognized stock-based compensation expense related to non-vested stock awards.

 

8

 

 

 

Note F ‑ Segment Information


 

   

For the Three Months

Ended October 1, 2022

 

In thousands

 

Sporting
Goods

   

Corp.

   

Total

 
                         

Revenues from external customers

  $ 74,904     $ --     $ 74,904  

Operating income (loss)

    4,661       (441 )     4,220  

Net income (loss)

    2,387       571       2,958  

 

   

As of and for the Nine Months

Ended October 1, 2022

 

In thousands

 

Sporting
Goods

   

Corp.

   

Total

 
                         

Revenues from external customers

  $ 241,621     $ --     $ 241,621  

Operating income (loss)

    23,026       (1,594 )     21,432  

Net income

    14,665       620       15,285  

Total assets

  $ 312,418     $ 7,906     $ 320,324  

 

   

For the Three Months

Ended October 2, 2021

 

In thousands

 

Sporting
Goods

   

Corp.

   

Total

 
                         

Revenues from external customers

  $ 81,298     $ --     $ 81,298  

Operating income (loss)

    8,087       (415 )     7,672  

Net income

    5,614       352       5,966  

 

   

As of and for the Nine Months

Ended October 2, 2021

 

In thousands

 

Sporting
Goods

   

Corp.

   

Total

 
                         

Revenues from external customers

  $ 240,168     $ --     $ 240,168  

Operating income (loss)

    27,049       (1,562 )     25,487  

Net income

    18,956       578       19,534  

Total assets

  $ 246,777     $ 7,379     $ 254,156  

 

 

Note G – Dividend Payment


 

On September 13, 2022, the Company paid a quarterly dividend of $0.15 per common share to all shareholders of record on September 6, 2022. The total amount of the dividend was approximately $2.0 million and was charged against retained earnings.

 

On June 7, 2022, the Company paid a quarterly dividend of $0.15 per common share to all shareholders of record on May 31, 2021. The total amount of the dividend was approximately $2.0 million and was charged against retained earnings.

 

On March 21, 2022, the Company paid a quarterly dividend of $0.15 per common share to all shareholders of record on March 14, 2022 (the amount was funded to the transfer agent by the Company on March 17, 2022). The total amount of the dividend was approximately $2.0 million and was charged against retained earnings.

 

9

 

 

Note H ‑ Earnings Per Share


 

The shares used in computation of the Company’s basic and diluted earnings per common share are as follows:

 

   

Three Months Ended

   

Nine Months Ended

 

In thousands

 

October 1,
2022

   

October 2,
2021

   

October 1,
2022

   

October 2,
2021

 
                                 

Weighted average common shares outstanding

    13,590       13,706       13,565       13,821  

Dilutive effect of stock options and restricted stock units

    62       102       82       102  

Weighted average common shares outstanding, assuming dilution

    13,652       13,808       13,647       13,923  

 

Stock options that are anti-dilutive as to earnings per share and unvested restricted stock units which have a market condition for vesting that has not been achieved are ignored in the computation of dilutive earnings per share. The number of stock options and restricted stock units that were excluded in 2022 and 2021 were zero and 11,900, respectively.

 

 

Note I – New Accounting Standards and Changes in Accounting Principles


 

There have been no recent accounting pronouncements or changes in accounting pronouncements during the three and nine months ended October 1, 2022, as compared to the recent accounting pronouncements described in the Company’s Annual Report on Form 10-K for the fiscal year ended December 25, 2021, that are of significance, or potential significance to the Company.

 

 

Note J – Revenue from Contracts with Customers


 

Revenue Recognition – Revenue is recognized when obligations under the terms of a contract with our customer are satisfied; generally this occurs with the transfer of control of our goods at a point in time based on shipping terms and transfer of title. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods. Sales, value add, and other taxes we collect concurrent with revenue-producing activities are excluded from revenue. Shipping and handling fees charged to customers are reported within revenue.

 

Gross-to-net sales adjustments – We recognize revenue net of various sales adjustments to arrive at net sales as reported on the statement of operations. These adjustments are referred to as gross-to-net sales adjustments and primarily fall into one of three categories: returns, warranties and customer allowances.

 

Returns The Company records an accrued liability and reduction in sales for estimated product returns based upon historical experience. An accrued liability and reduction in sales is also recorded for approved return authorizations that have been communicated by the customer.

 

Warranties – Limited warranties are provided on certain products for varying periods. We record an accrued liability and reduction in sales for estimated future warranty claims based upon historical experience and management’s estimate of the level of future claims. Changes in the estimated amounts recognized in prior years are recorded as an adjustment to the accrued liability and sales in the current year.

 

Customer Allowances – Customer allowances are common practice in the industries in which the Company operates. These agreements are typically in the form of advertising subsidies, volume rebates and catalog allowances and are accounted for as a reduction to gross sales. The Company reviews such allowances on an ongoing basis and accruals are adjusted, if necessary, as additional information becomes available.

 

10

 

Disaggregation of Revenue – We generate revenue from the sale of widely recognized sporting goods brands in basketball goals, archery, indoor and outdoor game recreation and fitness products. These products are sold through multiple sales channels that include: mass merchants, specialty dealers, key on-line retailers (“E-commerce”) and international. The following table depicts the disaggregation of revenue according to sales channel:

 

   

Three Months Ended

   

Nine Months Ended

 

All Amounts in Thousands

 

October 1,
2022

   

October 2,
2021

   

October 1,
2022

   

October 2,
2021

 
                                 

Gross Sales by Channel:

                               

Mass Merchants

  $ 29,849     $ 41,792     $ 85,804     $ 93,298  

Specialty Dealers

    20,298       19,170       74,631       73,347  

E-commerce

    26,090       25,116       87,441       86,053  

International

    4,032       2,259       12,643       9,182  

Other

    1,188       883       3,454       2,469  

Total Gross Sales

    81,457       89,220       263,973       264,349  
                                 

Less: Gross-to-Net Sales Adjustments

                               

Returns

    892       1,283       3,740       5,531  

Warranties

    663       590       1,985       1,703  

Customer Allowances

    4,998       6,049       16,627       16,947  

Total Gross-to-Net Sales Adjustments

    6,553       7,922       22,352       24,181  

Total Net Sales

  $ 74,904     $ 81,298     $ 241,621     $ 240,168  

 

 

Note K – Leases


 

We have operating leases for office, manufacturing and distribution facilities as well as for certain equipment. Our leases have remaining lease terms of 1 year to 10 years. As of October 1, 2022, the Company has not entered into any lease arrangements classified as a finance lease.

 

We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, current operating lease liabilities and operating lease liabilities on our consolidated balance sheet. The Company has elected an accounting policy to not recognize short-term leases (one year or less) on the balance sheet. The Company also elected the package of practical expedients which applies to leases that commenced before the adoption date. By electing the package of practical expedients, the Company did not need to reassess the following; whether any existing contracts are or contain leases, the lease classification for any existing leases and initial direct costs for any existing leases.

 

ROU assets and operating lease liabilities are recognized based on the present value of future minimum lease payments over the lease term at commencement date. When the implicit rate of the lease is not provided or cannot be determined, we use our incremental borrowing rate based on the information available at the commencement date to determine the present value of future payments. Lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise those options. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. Components of lease expense and other information is as follows:

 

   

Three Months Ended

   

Nine Months Ended

 

All Amounts in Thousands

 

October 1,
2022

   

October 2,
2021

   

October 1,

2022

   

October 2,
2021

 
                                 

Lease Expense

                               

Operating Lease Cost

  $ 393     $ 433     $ 1,073     $ 1,151  

Short-term Lease Cost

    658       692       1,882       2,339  

Variable Lease Cost

    81       101       393       304  

Total Operating Lease Cost

  $ 1,132     $ 1,226     $ 3,348     $ 3,794  
                                 

Operating Lease – Operating Cash Flows

  $ 100     $ 434     $ 712     $ 1,050  

New ROU Assets – Operating Leases

  $ 30     $ 1,189     $ 7,773     $ 2,329  

 

11

 

 

Other information about lease amounts recognized in our consolidated financial statements is summarized as follows:

 

   

Nine Months Ended

 

All Amounts in Thousands

 

October 1,
2022

   

October 2,
2021

 
                 

Weighted Average Remaining Lease Term – Operating Leases (in years)

    9.29       3.93  

Weighted Average Discount Rate – Operating Leases

    5.00 %     5.00 %

 

Future minimum lease payments under non-cancellable leases as of October 1, 2022 were as follows:

 

All Amounts in Thousands

       
         

Year 1

  $ 146  

Year 2

    1,364  

Year 3

    1,313  

Year 4

    1,294  

Year 5

    1,283  

Thereafter

    6,467  

Total future minimum lease payments

    11,867  

Less imputed interest

    (2,494 )

Total

  $ 9,373  
         

Reported as of October 1, 2022

       

Current operating lease liabilities

    816  

Long-term operating lease liabilities

    8,557  

Total

  $ 9,373  

 

 

Note L – Commitments and Contingencies


 

The Company is involved in litigation arising in the normal course of business. The Company does not believe that the disposition or ultimate resolution of existing claims or lawsuits will have a material adverse effect on the business or financial condition of the Company.

 

 

Note M – Acquisition


 

On January 21, 2022, the Company completed its acquisition of the assets constituting the Brunswick Billiards business of Life Fitness, LLC. The purchase price of the acquisition is $35.8 million. The acquisition was funded by cash and the Company’s revolving credit facility. The Company has not yet finalized its final evaluation of the fair value of certain items. The current estimates of fair value for the more significant assets acquired and liabilities assumed were receivables ($1.3 million), inventory ($13.6 million), fixed assets, including building and land ($4.1 million), accounts payable ($3.2 million), other accrued liabilities ($2.5 million), goodwill and other intangible assets ($22.5 million).

 

 

Note N – Debt


 

On January 21, 2022, the Company entered into an Amended and Restated Credit Agreement (“Restated Credit Agreement”) with its issuing bank, JP Morgan Chase Bank, N.A. (“Chase”), and the other lenders identified in the Restated Credit Agreement (collectively, the “Lender”). Under the terms of the Restated Credit Agreement, Old National Bank has been added as a Lender. The Lenders have now made available to the Company a senior revolving credit facility with increased maximum availability of $65.0 million (the “Revolving Facility”), up from $50.0 million, plus an accordion feature that would allow borrowings up to $90.0 million under the Revolving Facility subject to certain terms and conditions. The maturity date of the revolving credit facility was extended to January 21, 2027. The Company may prepay the Revolving Facility, in whole or in part, and reborrow prior to the revolving loan maturity date. The Restated Credit Agreement further extended the maturity date for the term loan facility to January 21, 2027.

 

12

 

On July 18, 2022, the Company entered into the First Amendment to the Restated Credit Agreement. Under the terms of the First Amendment, the Lender increased the maximum availability under the senior revolving credit facility from $65.0 million to $75.0 million pursuant to the accordion feature in the Restated Credit Agreement. The First Amendment also adjusted the funded debt to EBITDA ratio financial covenant to 3:00 to 1:00 as of the end of the Company’s third and fourth fiscal quarters of 2022.

 

As of October 1, 2022, the outstanding principal amount of the term loan was $41.7 million and total amount drawn under the Revolving Facility was $65.0 million.

 

 

Note O – Subsequent Events


 

On October 26, 2022, the Company entered into the Second Amendment ("Second Amendment”) to the Restated Credit Agreement. Under the terms of the Second Amendment, the Lender increased the maximum availability under the senior revolving credit facility from $75.0 million to $90.0 million pursuant to the accordion feature in the Restated Credit Agreement. The Second Amendment adjusted the funded debt to EBITDA ratio financial covenant to 3:25 to 1:00 as of the end of the Company’s third and fourth fiscal quarters of 2022 and 3:00 to 1:00 as of the end of the Company’s first fiscal quarter of 2023. The Second Amendment also modified the EBITDA definition to permit add-backs of a) up to $2.0 million for disposition related expenses; and b) up to $2.0 million for unusual or non-recurring expenses which are incurred prior to the end of fiscal year 2023 and which are subject to the approval of the Administrative Agent.

 

13

 

 

 

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Forward-Looking Statements

 

This report contains forward-looking statements relating to present or future trends or factors that are subject to risks and uncertainties. These risks include, but are not limited to: specific and overall impacts of the COVID-19 global pandemic on Escalade’s financial condition and results of operations; the impact of competitive products and pricing; product demand and market acceptance; new product development; Escalade’s ability to achieve its business objectives, especially with respect to its Sporting Goods business on which it has chosen to focus; Escalade’s ability to successfully achieve the anticipated results of strategic transactions, including the integration of the operations of acquired assets and businesses and of divestitures or discontinuances of certain operations, assets, brands, and products; the continuation and development of key customer, supplier, licensing and other business relationships; Escalade’s ability to develop and implement our own direct to consumer e-commerce distribution channel; Escalade’s ability to successfully negotiate the shifting retail environment and changes in consumer buying habits; the financial health of our customers; disruptions or delays in our business operations, including without limitation disruptions or delays in our supply chain, arising from political unrest, war, labor strikes, natural disasters, public health crises such as the coronavirus pandemic, and other events and circumstances beyond our control; Escalade’s ability to control costs; Escalade’s ability to successfully implement actions to lessen the potential impacts of tariffs and other trade restrictions applicable to our products and raw materials, including impacts on the costs of producing our goods, importing products and materials into our markets for sale, and on the pricing of our products; general economic conditions; fluctuation in operating results; changes in foreign currency exchange rates; changes in the securities markets; continued listing of the Company’s common stock on the NASDAQ Global Market; the Company’s inclusion or exclusion from certain market indices; Escalade’s ability to obtain financing and to maintain compliance with the terms of such financing; the availability, integration and effective operation of information systems and other technology, and the potential interruption of such systems or technology; risks related to data security of privacy breaches; the potential impact of actual or perceived defects in, or safety of, our products, including any impact of product recalls or legal or regulatory claims, proceedings or investigations involving our products; and other risks detailed from time to time in Escalade’s filings with the Securities and Exchange Commission. Escalade’s future financial performance could differ materially from the expectations of management contained herein. Escalade undertakes no obligation to release revisions to these forward-looking statements after the date of this report.

 

Overview

 

Escalade, Incorporated (Escalade, the Company, we, us or our) is focused on growing its Sporting Goods business through organic growth of existing categories, strategic acquisitions, and new product development. The Sporting Goods business competes in a variety of categories including basketball goals, archery, billiards, indoor and outdoor game recreation and fitness products. Strong brands and on-going investment in product development provide a solid foundation for building customer loyalty and continued growth.

 

Within the sporting goods industry, the Company has successfully built a robust market presence in several niche markets. This strategy is heavily dependent on expanding our customer base, barriers to entry, strong brands, excellent customer service and a commitment to innovation. A key strategic advantage is the Company’s established relationships with major customers that allow the Company to bring new products to market in a cost effective manner while maintaining a diversified portfolio of products to meet the demands of consumers. In addition to strategic customer relations, the Company has substantial manufacturing and import experience that enable it to be a low cost supplier.

 

To enhance growth opportunities, the Company has focused on promoting new product innovation and development and brand marketing. In addition, the Company has embarked on a strategy of acquiring companies or product lines that complement or expand the Company's existing product lines or provide expansion into new or emerging categories in sporting goods. A key objective is the acquisition of product lines with barriers to entry that the Company can take to market through its established distribution channels or through new market channels. Significant synergies are achieved through assimilation of acquired product lines into the existing Company structure. In January 2022, the Company completed its acquisition of the assets of the Brunswick Billiards® business, complementing its existing portfolio of billiards brands and other offerings in the Company’s indoor recreation market. The Company also sometimes divests or discontinues certain operations, assets, brands, and products that do not perform to the Company's expectations or no longer fit with the Company's strategic objectives.

 

Management believes that key indicators in measuring the success of these strategies are revenue growth, earnings growth, new product introductions, and the expansion of channels of distribution.

 

14

 

 

As the impact of the COVID-19 pandemic evolves, the Company continues to respond to the challenges and opportunities arising from the COVID-19 pandemic. Even though the pandemic may not have had a material adverse direct effect on the Company, the pandemic’s effects on the global supply chain, higher freight and materials costs, supplier product delays, workforce availability and labor costs have caused operational challenges for the Company. The ultimate extent of the effects of the COVID-19 pandemic on the Company is highly uncertain and will depend on future developments, and such effects could exist for an extended period of time even after the pandemic ends. Consumer demand for the Company’s products may be slowing due to additional factors such as general economic conditions, inflation, recessionary fears, rising interest rates, changes in the housing market and declining consumer confidence. Management cannot predict the full impact of these factors on the Company. Due to the above circumstances and as described generally in this Form 10-Q, the Company’s results of operations for the period ended October 1, 2022 are not necessarily indicative of the results to be expected for fiscal year 2022.

 

Results of Operations

The following schedule sets forth certain consolidated statement of operations data as a percentage of net revenue:

 

   

Three Months Ended

   

Nine Months Ended

 
   

October 1,
2022

   

October 2,
2021

   

October 1,
2022

   

October 2,
2021

 

Net revenue

    100.0 %     100.0 %     100.0 %     100.0 %

Cost of products sold

    81.8 %     77.5 %     76.2 %     74.7 %

Gross margin

    18.2 %     22.5 %     23.8 %     25.3 %

Selling, administrative and general expenses

    11.7 %     12.6 %     14.0 %     14.1 %

Amortization

    0.9 %     0.5 %     0.9 %     0.6 %

Operating income

    5.6 %     9.4 %     8.9 %     10.6 %

 

Revenue and Gross Margin

Sales decreased by 7.9% for the third quarter of 2022, compared with the same period in the prior year. Sales declined due to softening consumer demand and excess inventories in the retail channel. During the third quarter of 2022, increases in billiards and pickleball sales, together with the contribution from the Brunswick Billiards® acquisition completed January 21, 2022, were more than offset by lower sales in outdoor categories including archery, games, water sports, and playground. For the first nine months of 2022, sales were up 0.6% compared to prior year.

 

Gross margin declined to 18.2% for the third quarter of 2022 compared to 22.5% for the same period in 2021 due to lower sales, unfavorable product mix, global supply chain constraints, and nonrecurring product recall expenses.

 

Gross margin percentage decreased to 23.8% for the first nine months of 2022, compared to 25.3% for the same period in the prior year.

 

Selling, General and Administrative Expenses

Selling, general and administrative expenses (SG&A) were $8.8 million for the third quarter of 2022 compared to $10.2 million for the same period in the prior year, a decrease of $1.4 million or 14.0%. SG&A as a percent of sales is 11.7% for the third quarter of 2022 compared with 12.6% for the same period in the prior year. For the first nine months of 2022, SG&A were $34.0 million compared to $33.9 million for the same period in 2021, an increase of $0.1 million or 0.3%. As a percent of sales, SG&A is 14.0% for the first nine months of 2022 compared with 14.1% for the same period in the prior year.

 

Provision for Income Taxes

The effective tax rate for the first nine months of 2022 was 19.6% compared to 20.5% for the same period last year.

 

15

 

 

Financial Condition and Liquidity

 

Total debt at the end of the first nine months of 2022 was $106.7 million, an increase of $49.2 million from December 25, 2021. The increase in debt was largely driven by the funding of the Brunswick Billiards acquisition completed in January of 2022. The following schedule summarizes the Company’s total debt:

 

In thousands

 

October 1,

2022

   

December 25,
2021

   

October 2,

2021

 
                         

Current portion of long-term debt

  $ 7,143     $ 7,143     $ 7,143  

Long term debt

    99,568       50,396       51,874  

Total Debt

  $ 106,711     $ 57,539     $ 59,017  

 

As a percentage of stockholders’ equity, total debt was 67.8%, 39.2% and 40.8% at October 1, 2022, December 25, 2021, and October 2, 2021, respectively.

 

On January 21, 2022, the Company entered into an Amended and Restated Credit Agreement (“Restated Credit Agreement”) with its issuing bank, JP Morgan Chase Bank, N.A. (“Chase”), and the other lenders identified in the Restated Credit Agreement (collectively, the “Lender”). Under the terms of the Restated Credit Agreement, Old National Bank has been added as a Lender. The Lenders have now made available to the Company a senior revolving credit facility with increased maximum availability of $65.0 million (the “Revolving Facility”), up from $50.0 million, plus an accordion feature that would allow borrowings up to $90.0 million under the Revolving Facility subject to certain terms and conditions. The maturity date of the revolving credit facility was extended to January 21, 2027. The Company may prepay the Revolving Facility, in whole or in part, and reborrow prior to the revolving loan maturity date. The Restated Credit Agreement further extended the maturity date for the term loan facility to January 21, 2027.

 

Each loan bears interest at the Adjusted LIBO Rate for the interest period in effect plus the Applicable Rate. Applicable Rate means the applicable rate per annum set forth below, based upon Escalade’s Funded Debt to Adjusted Ratio as of the most recent determination date:

 

Funded Debt to

EBITDA Ratio

 

Revolving
Commitment
ABR Spread

   

Revolving
Commitment Term
Benchmark Spread

   

Letter of
Credit Fee

   

Commitment

Fee Rate

 

Category 1

Greater than or equal to 2.50 to 1.0

    0.25 %       2.00 %       2.00 %       0.30 %  

Category 2

Greater than or equal to 1.50 to 1.0 but less than 2.50 to 1.0

    -0-       1.75 %     1.75 %     0.25 %

Category 3

Less than 1.50 to 1.0

    (0.25% )     1.50 %     1.50 %     0.20 %

 

The Applicable Rate is determined as of the end of each quarter based upon the Company’s annual or quarterly consolidated financial statements and shall be effective during the period commencing the date of delivery to the agent.

 

In addition to the increased revolving borrowing amount and extended maturity dates, other significant changes reflected in the Restated Credit Agreement included: specifying that Indian’s acquisition of the assets of the Brunswick Billiards business is a permitted acquisition; providing a $7.5 million swingline commitment by Chase; replacing LIBOR with the replacement benchmark secured overnight financing rate as previously contemplated; and adjustments to certain financial covenants relating to the fixed charge coverage ratio. Escalade’s indebtedness under the Restated Credit Agreement continues to be collateralized by liens on all of the present and future equity of each of Escalade’s domestic subsidiaries and substantially all of the assets of the Company (excluding real estate). Each direct and indirect domestic subsidiary of Escalade and Indian has secured its guaranty of indebtedness incurred under the Revolving Facility with a first priority security interest and lien on all of such subsidiary’s assets. Escalade, Indian and all of the domestic subsidiaries entered into an Amended and Restated Pledge and Security Agreement dated January 21, 2022 in favor of the Lender to continue the existing liens, previously existing under the original pledge and security agreements entered into on April 30, 2009, as amended, and thereafter for subsidiaries created or acquired after that date. The obligations, guarantees, liens and other interests granted by Escalade, Indian, and their domestic subsidiaries continue in full force and effect.

 

16

 

On July 18, 2022, the Company entered into the First Amendment to the Restated Credit Agreement. Under the terms of the First Amendment, the Lender increased the maximum availability under the senior revolving credit facility from $65.0 million to $75.0 million pursuant to the accordion feature in the Restated Credit Agreement. The First Amendment also adjusted the funded debt to EBITDA ratio financial covenant to 3:00 to 1:00 as of the end of the Company’s third and fourth fiscal quarters of 2022.

 

On October 26, 2022, the Company entered into the Second Amendment ("Second Amendment”) to the Restated Credit Agreement. Under the terms of the Second Amendment, the Lender increased the maximum availability under the senior revolving credit facility from $75.0 million to $90.0 million pursuant to the accordion feature in the Restated Credit Agreement. The Second Amendment adjusted the funded debt to EBITDA ratio financial covenant to 3:25 to 1:00 as of the end of the Company’s third and fourth fiscal quarters of 2022 and 3:00 to 1:00 as of the end of the Company’s first fiscal quarter of 2023. The Second Amendment also modified the EBITDA definition to permit add-backs of a) up to $2.0 million for disposition related expenses; and b) up to $2.0 million for unusual or non-recurring expenses which are incurred prior to the end of fiscal year 2023 and which are subject to the approval of the Administrative Agent.

 

As of October 1, 2022, the outstanding principal amount of the term loan was $41.7 million and total amount drawn under the Revolving Facility was $65.0 million.

 

The Company funds working capital requirements, shareholder dividends, and stock repurchases through operating cash flows and revolving credit agreements with its Lenders. The Company expects that cash generated from its 2022 operations and its access to adequate levels of revolving credit will provide it with sufficient cash flows for its operations and to meet growth needs.

 

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not Required.

 

Item 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Escalade maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based closely on the definition of “disclosure controls and procedures” in Rules 13a-15(e) and 15d-15(e). In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, could provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.

 

Changes in Internal Control over Financial Reporting

 

Management of the Company has evaluated, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, changes in the Company’s internal controls over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the third quarter of 2022.

 

There have been no changes to the Company’s internal control over financial reporting that occurred since the beginning of the Company’s first quarter of 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

17

 

 

PART II. OTHER INFORMATION

 

Item 1. LEGAL PROCEEDINGS.

 

None.

 

Item 1A. RISK FACTORS.

 

In addition to the other information set forth in this report, you should carefully consider the risks and uncertainties disclosed in our Annual Report on Form 10-K for the fiscal year ended December 25, 2021, as updated in our Quarterly Report on Form 10-Q for the fiscal quarter ended July 9, 2022. These risks and uncertainties could materially and adversely affect our business, consolidated financial condition, results of operations, or cash flows. Our operations could also be affected by additional risks or uncertainties that are not presently known to us or that we currently do not consider material to our business. As of the date of this filing, there have been no material changes in our risk factors from those disclosed in the above-referenced Form 10-K and Form 10-Q, which risk factors are incorporated herein by reference.

 

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

c) Issuer Purchases of Equity Securities

 

Period

(a) Total
Number of
Shares (or
Units)
Purchased

(b) Average
Price Paid
per Share
(or Unit)

(c) Total Number
of Shares (or Units)
Purchased as Part
of Publicly
Announced Plans
or Programs

(d) Maximum Number

(or Approximate Dollar
Value) of Shares (or
Units) that May Yet Be
Purchased Under the
Plans or Programs

Share purchases prior to 7/9/2022 under the current repurchase program.

2,153,132

$13.38

2,153,132

$4,153,252

Third quarter purchases:

       

7/10/2022–8/6/2022

None

None

No Change

No Change

8/7/2022-9/3/2022

None

None

No Change

No Change

9/4/2022-10/1/2022

None

None

No Change

No Change

Total share purchases under the current program

2,153,132

$13.38

2,153,132

$4,153,252

 

The Company has one stock repurchase program which was established in February 2003 by the Board of Directors and which initially authorized management to expend up to $3,000,000 to repurchase shares on the open market as well as in private negotiated transactions. In February 2005, February 2006, August 2007 and February 2008 the Board of Directors increased the remaining balance on this plan to its original level of $3,000,000. In September 2019, the Board of Directors increased the stock repurchase program from $3,000,000 to $5,000,000. In December 2020, the Board of Directors increased the stock repurchase program to $15,000,000. From its inception date through October 1, 2022, the Company has repurchased 2,153,132 shares of its common stock under this repurchase program for an aggregate price of $28,812,686. The repurchase program has no termination date and there have been no share repurchases that were not part of a publicly announced program.

 

Item 3. DEFAULTS UPON SENIOR SECURITIES.

 

None.

 

Item 4. MINE SAFETY DISCLOSURES.

 

Not applicable.

 

Item 5. OTHER INFORMATION.

 

None.

 

18

 

 

Item 6. EXHIBITS

 

Number

Description

3.1

Articles of Incorporation of Escalade, Incorporated. Incorporated by reference from the Company’s 2007 First Quarter Report on Form 10-Q.

3.2

Amended By-laws of Escalade, Incorporated, as amended August 10, 2022.

10.1

Second Amendment dated October 26, 2022 to the Amended and Restated Credit Agreement dated as of January 21, 2022 among Escalade, Incorporated, Indian Industries, Inc., each of their domestic subsidiaries, and JPMorgan Chase Bank, N.A., as Administrative Agent (without exhibits and schedules, which Escalade has determined are not material). Incorporated by reference from the Company’s Current Report on Form 8-K filed on October 27, 2022.

31.1

Chief Executive Officer Rule 13a-14(a)/15d-14(a) Certification.

31.2

Chief Financial Officer Rule 13a-14(a)/15d-14(a) Certification.

32.1

Chief Executive Officer Section 1350 Certification.

32.2

Chief Financial Officer Section 1350 Certification.

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document

101.INS

Inline XBRL Instance Document

101.SCH

Inline XBRL Taxonomy Extension Schema Document

104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

 

 

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

ESCALADE, INCORPORATED

 

 

 

Date:         October 27, 2022 /s/ Stephen R. Wawrin
  Vice President and Chief Financial Officer
  (On behalf of the registrant and in his
  capacities as Principal Financial Officer
  and Principal Accounting Officer)

                                    

 

19