10-Q 1 esca20220618_10q.htm FORM 10-Q esca20220618_10q.htm
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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 July 9, 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 August 1, 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 July 9, 2022, December 25, 2021, and July 10, 2021

3

     
 

Consolidated Condensed Statements of Operations for the Three Months and Six Months Ended July 9, 2022 and July 10, 2021

4

     
 

Consolidated Condensed Statements of Stockholders’ Equity for the Three Months and Six Months Ended July 9, 2022 and July 10, 2021

5

     
 

Consolidated Condensed Statements of Cash Flows for the Six Months Ended July 9, 2022 and July 10, 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

16

     

Item 4 -

Controls and Procedures

17

     

Part II.

Other Information

 
     

Item 1A -

Risk Factors

17

     

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

 

July 9,

2022

   

December 25,

2021

   

July 10,

2021

 
   

(Unaudited)

   

(Audited)

   

(Unaudited)

 
ASSETS                        
Current Assets:                        

Cash and cash equivalents

  $ 6,195     $ 4,374     $ 10,641  

Receivables, less allowance of $726; $457; and $717; respectively

    60,011       65,991       52,248  

Inventories

    130,246       92,382       86,612  

Prepaid expenses

    7,263       7,569       4,775  

Prepaid income tax

    621       739       --  

TOTAL CURRENT ASSETS

    204,336       171,055       154,276  
                         

Property, plant and equipment, net

    28,344       24,936       20,792  

Operating lease right-of-use assets

    9,318       2,210       2,079  

Intangible assets, net

    35,353       20,778       21,638  

Goodwill

    39,226       32,695       32,695  

Other assets

    275       124       137  

TOTAL ASSETS

  $ 316,852     $ 251,798     $ 231,617  
                         
LIABILITIES AND STOCKHOLDERS' EQUITY                        
Current Liabilities:                        

Current portion of long-term debt

  $ 7,143     $ 7,143     $ 7,143  

Trade accounts payable

    24,650       15,847       14,705  

Accrued liabilities

    20,483       24,385       14,875  

Income tax payable

    --       --       180  

Current operating lease liabilities

    676       818       1,526  

TOTAL CURRENT LIABILITIES

    52,952       48,193       38,429  
                         
Other Liabilities:                        

Long‑term debt

    94,040       50,396       42,857  

Deferred income tax liability

    4,759       4,759       4,193  

Operating lease liabilities

    8,660       1,387       557  

Other liabilities

    448       448       448  

TOTAL LIABILITIES

    160,859       105,183       86,484  
                         
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 13,779,489; shares respectively

    13,590       13,493       13,779  

Retained earnings

    142,403       133,122       131,354  

TOTAL STOCKHOLDERS' EQUITY

    155,993       146,615       145,133  

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

  $ 316,852     $ 251,798     $ 231,617  

 

See notes to Consolidated Condensed Financial Statements.

 

3

 

 

 

ESCALADE, INCORPORATED AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)

 

   

Three Months Ended

   

Six Months Ended

 

All Amounts in Thousands Except Per Share Data

 

July 9,

2022

   

July 10,

2021

   

July 9,

2022

   

July 10,

2021

 
                                 

Net sales

  $ 94,337     $ 99,679     $ 166,717     $ 158,870  
                                 
Costs and Expenses                                

Cost of products sold

    70,613       74,606       122,874       116,363  

Selling, administrative and general expenses

    14,680       13,810       25,206       23,686  

Amortization

    855       577       1,425       1,006  
                                 

Operating Income

    8,189       10,686       17,212       17,815  
                                 
Other Income (Expense)                                

Interest expense

    (948 )     (387 )     (1,508 )     (621 )

Other income

    29       21       72       56  
                                 

Income Before Income Taxes

    7,270       10,320       15,776       17,250  
                                 

Provision for Income Taxes

    1,597       2,194       3,449       3,682  
                                 

Net Income

  $ 5,673     $ 8,126     $ 12,327     $ 13,568  
                                 
Earnings Per Share Data:                                

Basic earnings per share

  $ 0.42     $ 0.59     $ 0.91     $ 0.98  

Diluted earnings per share

  $ 0.42     $ 0.58     $ 0.91     $ 0.97  
                                 

Dividends declared

  $ 0.15     $ 0.14     $ 0.30     $ 0.28  

 

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 March 20, 2021

    13,925     $ 13,925     $ 127,975     $ 141,900  
                                 

Net income

                    8,126       8,126  

Expense of stock options and restricted stock units

                    326       326  

Settlement of restricted stock units

    1       1       (1 )     --  

Dividends declared

                    (1,937 )     (1,937 )

Purchase of stock

    (153 )     (153 )     (3,264 )     (3,417 )

Stock issued to directors as compensation

    6       6       129       135  
                                 

Balances at July 10, 2021

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

Balances at December 26, 2020

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

Net income

                    13,568       13,568  

Expense of stock options and restricted stock units

                    437       437  

Exercise of stock options

    10       10       134       144  

Settlement of restricted stock units

    46       46       (46 )     --  

Dividends declared

                    (3,887 )     (3,887 )

Purchase of stock

    (202 )     (202 )     (4,218 )     (4,420 )

Stock issued to directors as compensation

    6       6       129       135  
                                 

Balances at July 10, 2021

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

 

 

 

 

   

Common Stock

   

Retained

         

All Amounts in Thousands

 

Shares

   

Amount

   

Earnings

   

Total

 
                                 

Balances at March 19, 2022

    13,585     $ 13,585     $ 138,034     $ 151,619  
                                 

Net income

                    5,673       5,673  

Expense of restricted stock units

                    688       688  

Settlement of restricted stock units

    1       1       (1 )     --  

Dividends declared

                    (2,038 )     (2,038 )

Stock issued to directors as compensation

    4       4       47       51  
                                 

Balances at July 9, 2022

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

Balances at December 25, 2021

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

Net income

                    12,327       12,327  

Expense of restricted stock units

                    1,076       1,076  

Settlement of restricted stock units

    93       93       (93 )     --  

Dividends declared

                    (4,076 )     (4,076 )

Stock issued to directors as compensation

    4       4       47       51  
                                 

Balances at July 9, 2022

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

 

See notes to Consolidated Condensed Financial Statements.

 

5

 

 

 

ESCALADE, INCORPORATED AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

   

Six Months Ended

 

All Amounts in Thousands

 

July 9, 2022

   

July 10, 2021

 
                 
Operating Activities:                

Net income

  $ 12,327     $ 13,568  

Depreciation and amortization

    3,603       2,709  

Provision for doubtful accounts

    258       (152 )

Stock-based compensation

    1,076       437  

Gain on disposal of property and equipment

    --       (26 )

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

    (17,589 )     (17,030 )

Net cash used by operating activities

    (325 )     (494 )
                 
Investing Activities:                

Purchase of property and equipment

    (1,536 )     (4,278 )

Proceeds from sale of property and equipment

    --       42  

Acquisitions

    (35,757 )     --  

Net cash used by investing activities

    (37,293 )     (4,236 )
                 
Financing Activities:                

Proceeds from issuance of long-term debt

    124,571       162,666  

Payments on long-term debt

    (80,927 )     (142,739 )

Proceeds from exercise of stock options

    --       144  

Purchase of stock

    --       (4,420 )

Director stock compensation

    51       135  

Deferred financing fees

    (180 )     (33 )

Cash dividends paid

    (4,076 )     (3,887 )

Net cash provided by financing activities

    39,439       11,866  

Net increase in cash and cash equivalents

    1,821       7,136  

Cash and cash equivalents, beginning of period

    4,374       3,505  

Cash and cash equivalents, end of period

  $ 6,195     $ 10,641  

 

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 six month periods ended July 9, 2022 and July 10, 2021 are not necessarily indicative of the results to be expected for the full year.

 

 

 

Note C ‑ Inventories


 

In thousands

 

July 9,

2022

   

December 25,

2021

   

July 10,

2021

 
                         

Raw materials

  $ 9,821     $ 9,142     $ 10,291  

Work in progress

    4,653       3,529       4,070  

Finished goods

    115,772       79,711       72,251  
    $ 130,246     $ 92,382     $ 86,612  

 

 

 

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 July 9, 2022, December 25, 2021 and July 10, 2021.

 

           

Fair Value Measurements Using

 
July 9, 2022   Carrying    

Quoted Prices in

Active Markets

for Identical

   

Significant Other

Observable Inputs

   

Significant

Unobservable

Inputs

 

In thousands

  Amount     Assets (Level 1)     (Level 2)     (Level 3)  
Financial assets                                

Cash and cash equivalents

  $ 6,195     $ 6,195     $ --     $ --  
                                 
Financial liabilities                                

Current portion of long-term debt

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

Long-term debt

  $ 94,040     $ --     $ 94,040     $ --  

 

           

Fair Value Measurements Using

 
December 25, 2021   Carrying    

Quoted Prices in

Active Markets

for Identical

   

Significant Other

Observable Inputs

   

Significant

Unobservable

Inputs

 

In thousands

 

Amount

   

Assets (Level 1)

   

(Level 2)

   

(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

 
July 10, 2021   Carrying    

Quoted Prices in

Active Markets

for Identical

   

Significant Other

Observable Inputs

   

Significant

Unobservable

Inputs

 

In thousands

 

Amount

   

Assets (Level 1)

   

(Level 2)

   

(Level 3)

 

Financial assets

                               

Cash and cash equivalents

  $ 10,641     $ 10,641     $ --     $ --  
                                 

Financial liabilities

                               

Current portion of long-term debt

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

Long-term debt

  $ 42,857     $ --     $ 42,857     $ --  

 

 

 

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 six months ended July 9, 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 six months ended July 9, 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 six months ended July 9, 2022, the Company recognized stock based compensation expense of $688 thousand and $1,076 thousand, respectively compared to stock based compensation expense of $326 thousand and $437 thousand for the same periods in the prior year. At July 9, 2022 and July 10, 2021, respectively, there was $2.6 million and $1.1 million in unrecognized stock-based compensation expense related to non-vested stock awards.

 

8

 

 

 

Note F ‑ Segment Information


 

   

For the Three Months

Ended July 9, 2022

 

In thousands

 

Sporting

Goods

   

Corp.

   

Total

 
                         

Revenues from external customers

  $ 94,337     $ --     $ 94,337  

Operating income (loss)

    8,830       (641 )     8,189  

Net income (loss)

    5,737       (64 )     5,673  

 

 

   

As of and for the Six Months

Ended July 9, 2022

 

In thousands

 

Sporting

Goods

   

Corp.

   

Total

 
                         

Revenues from external customers

  $ 166,717     $ --     $ 166,717  

Operating income (loss)

    18,365       (1,153 )     17,212  

Net income

    12,278       49       12,327  

Total assets

  $ 307,941     $ 8,911     $ 316,852  

 

 

   

For the Three Months

Ended July 10, 2021

 

In thousands

 

Sporting

Goods

   

Corp.

   

Total

 
                         

Revenues from external customers

  $ 99,679     $ --     $ 99,679  

Operating income (loss)

    11,367       (681 )     10,686  

Net income

    7,980       146       8,126  

 

 

   

As of and for the Six Months

Ended July 10, 2021

 

In thousands

 

Sporting

Goods

   

Corp.

   

Total

 
                         

Revenues from external customers

  $ 158,870     $ --     $ 158,870  

Operating income (loss)

    18,962       (1,147 )     17,815  

Net income

    13,342       226       13,568  

Total assets

  $ 220,712     $ 10,905     $ 231,617  

 

 

 

Note G – Dividend Payment


 

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

   

Six Months Ended

 

In thousands

 

July 9,

2022

   

July 10,

2021

   

July 9,

2022

   

July 10,

2021

 
                                 

Weighted average common shares outstanding

    13,588       13,863       13,554       13,871  

Dilutive effect of stock options and restricted stock units

    55       93       62       91  

Weighted average common shares outstanding, assuming dilution

    13,643       13,956       13,616       13,962  

 

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 six months ended July 9, 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

   

Six Months Ended

 

All Amounts in Thousands

 

July 9,

2022

   

July 10,

2021

   

July 9,

2022

   

July 10,

2021

 
                                 
Gross Sales by Channel:                                

Mass Merchants

  $ 28,925     $ 33,110     $ 55,955     $ 51,506  

Specialty Dealers

    28,990       31,617       54,333       54,177  

E-commerce

    38,495       39,711       61,351       60,937  

International

    4,531       4,196       8,611       6,923  

Other

    1,492       1,015       2,266       1,586  

Total Gross Sales

    102,433       109,649       182,516       175,129  
                                 
Less: Gross-to-Net Sales Adjustments                                

Returns

    678       2,633       2,848       4,248  

Warranties

    697       531       1,322       1,113  

Customer Allowances

    6,721       6,806       11,629       10,898  

Total Gross-to-Net Sales Adjustments

    8,096       9,970       15,799       16,259  

Total Net Sales

  $ 94,337     $ 99,679     $ 166,717     $ 158,870  

 

 

 

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 July 9, 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

   

Six Months Ended

 

All Amounts in Thousands

 

July 9,

2022

   

July 10,

2021

   

July 9,

2022

   

July 10,

2021

 
                                 
Lease Expense                                

Operating Lease Cost

  $ 342     $ 407     $ 680     $ 718  

Short-term Lease Cost

    723       655       1,224       1,031  

Variable Lease Cost

    130       117       312       203  

Total Operating Lease Cost

  $ 1,195     $ 1,179     $ 2,216     $ 1,952  
                                 

Operating Lease – Operating Cash Flows

  $ 309     $ 361     $ 612     $ 616  

New ROU Assets – Operating Leases

  $ 7,743     $ 313     $ 7,743     $ 1,140  

 

11

 

 

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

 

   

Six Months Ended

 

All Amounts in Thousands

 

July 9,

2022

   

July 10,

2021

 
                 

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

    9.47       1.66  

Weighted Average Discount Rate – Operating Leases

    5.00 %     5.00 %

 

Future minimum lease payments under non-cancellable leases as of July 9, 2022 were as follows:

 

All Amounts in Thousands

       
         

Year 1

  $ 253  

Year 2

    1,358  

Year 3

    1,306  

Year 4

    1,287  

Year 5

    1,276  

Thereafter

    6,464  

Total future minimum lease payments

    11,944  

Less imputed interest

    (2,608 )

Total

  $ 9,336  
         

Reported as of July 9, 2022

       

Current operating lease liabilities

    676  

Long-term operating lease liabilities

    8,660  

Total

  $ 9,336  

 

 

 

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

 

As of July 9, 2022, the outstanding principal amount of the term loan was $43.5 million and total amount drawn under the Revolving Facility was $57.7 million.

 

 

Note O – Subsequent Events


 

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.

 

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

 

 

The Company continues to respond to the challenges and opportunities arising from the COVID-19 pandemic. Management cannot predict the full impact of the COVID-19 pandemic on the Company’s sales channels, supply chain, manufacturing and distribution nor to economic conditions generally, including the effects on consumer spending. 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. Due to the above circumstances and as described generally in this Form 10-Q, the Company’s results of operations for the period ended July 9, 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

   

Six Months Ended

 
   

July 9, 2022

   

July 10, 2021

   

July 9, 2022

   

July 10, 2021

 

Net revenue

    100.0 %     100.0 %     100.0 %     100.0 %

Cost of products sold

    74.8 %     74.8 %     73.7 %     73.2 %

Gross margin

    25.2 %     25.2 %     26.3 %     26.8 %

Selling, administrative and general expenses

    15.6 %     13.9 %     15.1 %     14.9 %

Amortization

    0.9 %     0.6 %     0.9 %     0.7 %

Operating income

    8.7 %     10.7 %     10.3 %     11.2 %

 

Revenue and Gross Margin

Sales decreased by 5.4% for the second quarter of 2022, compared with the same period in the prior year. The decrease in sales was driven by timing of sales in basketball, lower demand in the fitness category and a reduction in outdoor category sales, including archery and water sports. For the first half of 2022, sales were up 4.9% compared to prior year.

 

The overall gross margin percentage remained flat at 25.2% for the second quarter of 2022 compared to 2021, despite continued challenges related to the global supply chain, raw materials cost inflation , and labor constraints.

 

Gross margin percentage decreased to 26.3% for the first six months of 2022, compared to 26.8% for the same period in the prior year.

 

Selling, General and Administrative Expenses

Selling, general and administrative expenses (SG&A) were $14.7 million for the second quarter of 2022 compared to $13.8 million for the same period in the prior year, an increase of $0.9 million or 6.3%. SG&A as a percent of sales is 15.5% for the second quarter of 2022 compared with 13.9% for the same period in the prior year. For the first half of 2022, SG&A were $25.2 million compared to $23.7 million for the same period in 2021, an increase of $1.5 million or 6.4%. As a percent of sales, SG&A is 15.1% for the first half of 2022 compared with 14.9% for the same period in the prior year.

 

Provision for Income Taxes

The effective tax rate for the first half of 2022 was 21.9% compared to 21.3% for the same period last year.

 

Financial Condition and Liquidity

 

Total debt at the end of the first six months of 2022 was $101.2 million, an increase of $43.6 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

 

July 9,

2022

   

December 25,

2021

   

July 10,

2021

 
                         

Current portion of long-term debt

  $ 7,143     $ 7,143     $ 7,143  

Long term debt

    94,040       50,396       42,857  

Total Debt

  $ 101,183     $ 57,539     $ 50,000  

 

As a percentage of stockholders’ equity, total debt was 64.9%, 39.2% and 34.5% at July 9, 2022, December 25, 2021, and July 10, 2021, respectively.

 

15

 

 

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. As of July 9, 2022, the outstanding principal amount of the term loan was $43.5 million and total amount drawn under the Revolving Facility was $57.7 million.

 

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

    0.25 %     2.00 %     2.00 %     0.30 %  
Greater than or equal to 2.50 to 1.0                                  

Category 2

    -0-       1.75 %     1.75 %     0.25 %  
Greater than or equal to 1.50 to 1.0 but less than 2.50 to 1.0                                  

Category 3

    (0.25% )     1.50 %     1.50 %     0.20 %  
Less than 1.50 to 1.0                                  

 

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.

 

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.

 

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.

 

16

 

 

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 second 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.

 

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. 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, except for the additional risk factor set forth below, there have been no material changes in our risk factors from those disclosed in Part I, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended December 25, 2021, which risk factors are incorporated herein by reference.

 

17

 

 

Our business involves the potential for product recalls, warranty liability, product liability, and other claims against us, which could adversely affect our reputation, earnings and financial condition.

 

As a manufacturer, marketer and distributor of consumer products, we are subject to the United States Consumer Products Safety Act of 1972, as amended by the Consumer Product Safety Improvement Act of 2008, which empowers the Consumer Products Safety Commission (“CPSC”) to recall or exclude from the market products that are found to be unsafe or hazardous. Although recalls of our products have been infrequent, in the first quarter of 2022, we voluntarily recalled our Ping Pong Avenger table tennis table due to concerns that it could create a potential fall risk to consumers. Notwithstanding that we extensively and rigorously test our products, there can be no assurance we will be able to detect, prevent, or fix all defects and safety concerns. Under certain circumstances, the CPSC could require us to repurchase or recall additional products, even if we disagree with the defect determination or have data that shows the actual safety risk to be nominal. Any repurchase or recall of our products, monetary judgment, fine or other penalty could be costly and damaging to our reputation and/or adversely affect our brands. Furthermore, the occurrence of any material defects in our products could expose us to liability for warranty claims in excess of our current reserves, and/or to product liability claims that could exceed the limits of our insurance coverage, to the extent coverage may exist. If our warranty reserves and/or insurance coverage are inadequate to cover future warranty claims and/or potential product liability claims, our financial condition and operating results may be harmed.

 

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 3/19/2022 under the current repurchase program.

    2,153,132     $ 13.38       2,153,132     $ 4,153,252  

Second quarter purchases:

                               

3/20/2022–4/16/2022

 

None

   

None

   

No Change

   

No Change

 

4/17/2022-5/14/2022

 

None

   

None

   

No Change

   

No Change

 

5/15/2022-6/11/2022

 

None

   

None

   

No Change

   

No Change

 

6/12/2022-7/9/2022

 

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 July 9, 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 April 22, 2014. Incorporated by reference from the Company’s 2014 First Quarter Report on Form 10-Q.

     
 

10.1

First Amendment dated July 18, 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 July 21, 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:      August 4, 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