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ESCALADE INC - Quarter Report: 2011 March (Form 10-Q)

Unassociated Document
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

x Quarterly report pursuant to Section 13 OR 15 (d) of the Securities Exchange Act of 1934
For the quarter ended March 19, 2011 or

o 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)

812-467-4449
(Registrant’s Telephone Number)

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 x No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).
Yes o No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o
Accelerated filer o
Non-accelerated filer o (do not check if a smaller reporting company)
Smaller reporting company x

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12 b-2 of the Exchange Act).
Yes o No x

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 April 12, 2011
Common, no par value
 
12,836,068
 
 
 

 
 
INDEX
 
    Page No.
       
   
       
   
       
 
3
 
       
  4
 
       
  4
   
       
  5
  
       
  6
 
       
10
  
       
13
 
       
14
 
       
   
       
15
 
       
16
 
       
  16
 
 
 
2

 
 
FINANCIAL INFORMATION

FINANCIAL STATEMENTS
 
ESCALADE, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(All amounts in thousands, except share information)

   
March 19,
2011
   
March 20,
2010
   
December 25,
2010
 
   
(Unaudited)
   
(Unaudited)
   
(Audited)
 
ASSETS
                 
Current Assets:
                 
Cash and cash equivalents
  $ 1,583     $ 3,133     $ 1,536  
Time deposits
    1,000       750       1,250  
Receivables, less allowance of $1,184; $1,566; and $1,204; respectively
      23,938         20,270         25,458  
Notes receivable
          227        
Inventories
    29,080       23,182       22,888  
Prepaid expenses
    1,829       1,372       1,160  
Deferred income tax benefit
    1,364       387       1,502  
Income tax receivable
    430       1,102       1,216  
TOTAL CURRENT ASSETS
    59,224       50,423       55,010  
                         
Property, plant and equipment, net
    19,675       20,584       19,844  
Intangible assets
    15,512       16,757       15,678  
Goodwill
    26,024       25,681       25,397  
Investments
    12,564       9,453       11,624  
Deferred income tax benefit
          342        
    $ 132,999     $ 123,240     $ 127,553  
                         
LIABILITIES AND STOCKHOLDERS’ EQUITY
                       
Current Liabilities:
                       
Notes payable
  $ 13,331     $ 24,007     $ 9,407  
Current portion of long-term debt
    2,000             2,000  
Overdraft facility
    1,322       780       1,646  
Trade accounts payable
    4,739       2,878       3,751  
Accrued liabilities
    12,224       11,348       14,074  
Deferred compensation
          1,315        
TOTAL CURRENT LIABILITIES
    33,616       40,328       30,878  
                         
Other Liabilities:
                       
Long-term debt
    7,000             7,500  
Deferred income tax liability
    2,105             2,145  
TOTAL LIABILITIES
    42,721       40,328       40,523  
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 – 12,812,943; 12,692,759; and 12,780,372; shares respectively
          12,813             12,693             12,780  
Retained earnings
    71,651       66,276       70,329  
Accumulated other comprehensive income
    5,814       3,943       3,921  
      90,278       82,912       87,030  
    $ 132,999     $ 123,240     $ 127,553  
 
See notes to Consolidated Condensed Financial Statements.

 
3

 

ESCALADE, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
(All amounts in thousands, except per share amounts)

   
Three Months Ended
 
   
March 19,
2011
   
March 20,
2010
 
             
Net sales
  $ 27,998     $ 25,169  
                 
Costs, expenses and other income:
               
Cost of products sold
    17,873       16,616  
Selling, general and administrative expenses
    7,741       6,861  
Amortization
    317       283  
Operating income
    2,067       1,409  
                 
Interest expense, net
    (184 )     (360 )
Other income
    122       258  
Income before income taxes
    2,005       1,307  
                 
Provision for income taxes
    802       505  
                 
Net income
  $ 1,203     $ 802  
                 
Per share data:
               
Basic earnings per share
  $ 0.09     $ 0.06  
Diluted earnings per share
  $ 0.09     $ 0.06  
 
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME(LOSS)(UNAUDITED)

Net income
  $ 1,203     $ 802  
                 
Foreign currency translation adjustment
     1,893       (823 )
                 
Comprehensive income (loss)
  $ 3,096     $ (21 )
 
See notes to Consolidated Condensed Financial Statements.
 
 
4

 
 
ESCALADE, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
(All amounts in thousands)

   
Three Months Ended
 
   
March 19,
2011
   
March 20,
2010
 
             
Operating Activities:
           
Net income
  $ 1,203     $ 802  
Depreciation and amortization
    962       992  
Loss on disposal of property and equipment
    22        
Loss on disposal of  Investments held for sale
          7  
Stock-based compensation
    85       129  
Adjustments necessary to reconcile net income to net cash provided (used) by operating activities
    (5,157 )          1,604  
Net cash provided (used) by operating activities
    (2,885 )      3,534  
                 
Investing Activities:
               
Purchase of property and equipment
    (223 )     (54 )
Proceeds from disposal of short-term time deposits
     250        
Net cash provided (used) by investing activities
     27       (54 )
                 
Financing Activities:
               
Net increase (decrease) in notes payable
    3,924       (3,637 )
Net decrease in overdraft facility
    (324 )     (8 )
Principal payment on long-term debt
    (500 )      
Proceeds from exercise of stock options
     14        6  
Director stock compensation
    52       33  
Net cash provided (used) by financing activities
     3,166       (3,606 )
Effect of exchange rate changes on cash
    (261 )      220  
Net increase in cash and cash equivalents
    47       94  
Cash and cash equivalents, beginning of period
     1,536        3,039  
Cash and cash equivalents, end of period
  $ 1,583     $ 3,133  
 
See notes to Consolidated Condensed Financial Statements.
 
 
5

 
 
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 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, 2010 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 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 2010 filed with the Securities and Exchange Commission.

Note B - Reclassifications


Certain reclassifications have been made to prior year financial statements to conform to the current year financial statement presentation. These reclassifications had no effect on net earnings.

Note C - Seasonal Aspects


The results of operations for the three month periods ended March 19, 2011 and March 20, 2010 are not necessarily indicative of the results to be expected for the full year.

Note D - Inventories


In thousands
 
March 19,
2011
   
March 20,
2010
   
December 25,
2010
 
                   
Raw materials
  $ 8,420     $ 6,750     $ 5,973  
Work in progress
    3,417       2,969       2,497  
Finished goods
    17,243       13,463       14,418  
    $ 29,080     $ 23,182     $ 22,888  
 
Note E – Equity Interest Investments


The Company has a 50% interest in a joint venture, Stiga Sports AB (Stiga). The joint venture is accounted for under the equity method of accounting. Stiga, located in Sweden, is a global sporting goods company producing table tennis equipment and game products. Financial information for Stiga reflected in the table below has been translated from local currency to U.S. dollars using exchange rates in effect at the respective period-end for balance sheet amounts, and using average exchange rates for statement of operations amounts. Certain differences exist between U.S. GAAP and local GAAP in Sweden, and the impact of these differences is not reflected in the summarized information reflected in the table below. The most significant difference relates to the accounting for goodwill for Stiga which is amortized over eight years in Sweden but is not amortized for U.S. GAAP reporting purposes. The effect on Stiga’s net assets resulting from the amortization of goodwill for the periods ended March 19, 2011 and March 20, 2010 are addbacks to Stiga’s consolidated financial information of $8.5 million and $6.0 million, respectively. These net differences are comprised of cumulative goodwill adjustments of $11.9 million offset by the related cumulative tax effect of $3.4 million as of March 19, 2011 and cumulative goodwill adjustments of $8.4 million offset by the related cumulative tax effect of $2.4 million as of March 20, 2010. The statement of operations impact of these goodwill and tax adjustments and other individually insignificant U.S. GAAP adjustments for the periods ended March 19, 2011, and March 20, 2010 are to increase Stiga’s net income by approximately $0.4 million and $0.3 million, respectively.
 
 
6

 
 
In addition, Escalade has a 50% interest in two joint ventures, Escalade International, Ltd. in the United Kingdom, and Neoteric Industries Inc. in Taiwan. Escalade International Ltd. is a sporting goods wholesaler, specializing in fitness equipment. The Company’s 50% portion of net income for Escalade International for the periods ended March 19, 2011 and March 20, 2010 was $53,735 and $58,031 respectively, and is included in other income on the Company’s statement of operations. The income and assets of Neoteric have no material impact on the Company’s financial reporting. Additional information regarding these entities is considered immaterial and has not been included in the combined totals listed below.

Summarized financial information for Stiga Sports AB balance sheets as of March 19, 2011, March 20, 2010, and December 25, 2010 and statements of operations for the periods ended March 19, 2011 and March 20, 2010 is as follows:

 
In thousands
 
March 19,
2011
   
March 20,
2010
   
December 25,
2010
 
                   
Current assets
  $ 16,315     $ 11,633     $ 19,384  
Non-current assets
    11,774       11,667       11,338  
Total assets
    28,089       23,300       30,722  
                         
Current liabilities
    6,089       5,873       9,599  
Non-current liabilities
    9,080       7,801       8,918  
Total liabilities
    15,169       13,674       18,517  
                         
Net assets
  $ 12,920     $ 9,626     $ 12,205  

   
Three Months Ended
 
   
March 19,
2011
   
March 20,
2010
 
             
Net Sales
  $ 4,471     $ 3,359  
Gross Profit
    2,260       1,691  
Net Loss
    (194 )     (85 )
 
Note F – Notes Payable


On April 14, 2011, the Company entered into the Seventh Amendment to its Credit Agreement with its issuing bank, JP Morgan Chase Bank, N.A. (Chase). The Seventh Amendment amends the Credit Agreement originally dated as of April 30, 2009, and as amended had a maturity date of May 31, 2012. The Seventh Amendment now makes available to the Company a senior revolving credit facility in the maximum principal amount of up to $22 million with a maturity date of July 31, 2013 and a term loan in the principal amount of $8.5 million with a maturity date of May 31, 2015. The term loan agreement requires the Company to make repayment of the principal balance in equal installments of $0.5 million per quarter beginning in September 2010. The Credit Agreement Amendment also provides a $2 million euro overdraft facility. A portion of the credit facility not in excess of $5 million is available for the issuance of commercial or standby letters of credit to be issued by Chase.

 
7

 
 
Note G – Income Taxes


The provision for income taxes was computed based on financial statement income. In accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 740, the Company has recorded the following changes in uncertain tax positions:

   
Three Months Ended
 
In thousands
 
March 19,
2011
   
March 20,
2010
 
Beginning Balance
  $ 220     $ 536  
Additions for current year tax positions
           
Additions for prior year tax positions
           
Settlements
          (262 )
Reductions Settlements
           
Reductions for prior year tax positions
          (25 )
Ending Balance
  $ 220     $ 249  
 
Note H – 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 and Time Deposits
 
Fair values of cash and cash equivalents and time deposits approximate cost due to the short period of time to maturity.
 
Notes Payable and Long-term Debt
 
The Company believes the carrying value of both short-term and long-term debt adequately reflects the fair value of these instruments.
 
The following table presents estimated fair values of the Company’s financial instruments in accordance with FASB ASC 480 at March 19, 2011 and March 20, 2010.
 
   
March 19, 2011
   
March 20, 2010
 
In thousands                      
 
Carrying Amount
   
Fair Value
   
Carrying Amount
   
Fair Value
 
Financial assets
                       
Cash and cash equivalents
  $ 1,583     $ 1,583     $ 3,133     $ 3,133  
Time deposits
  $ 1,000     $ 1,000     $ 750     $ 750  
                                 
Financial liabilities
                               
Note payable and Short-term debt
  $ 13,331     $ 13,331     $ 24,007     $ 24,007  
Bank overdraft facility
  $ 1,322     $ 1,322     $ 780     $ 780  
Current portion of Long-term debt
  $ 2,000     $ 2,000     $     $  
Long-term debt
  $ 7,000     $ 7,000     $     $  
 
 
8

 
 
Note I – Stock Compensation


The fair value of stock-based compensation is recognized in accordance with the provisions of FASB ASC 718, Stock Compensation.
 
During the three months ended March 19, 2011 and pursuant to the 2007 Incentive Plan, in lieu of director fees, the Company awarded to certain directors 6,585 shares of common stock. In addition, the Company awarded 37,500 stock options to directors and 200,000 stock options to employees. The stock options awarded to directors vest at the end of one year and have an exercise price equal to the market price on the date of grant. Director stock options 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 2011 stock options awarded to employees have a graded vesting of 25% per year over four years and are subject to forfeiture if on the vesting date the employee is no longer employed. The Company utilizes the Black-Scholes option pricing model to determine the fair value of stock options granted.

For the three months ended March 19, 2011 and March 20, 2010, the Company recognized stock based compensation expense of $137 thousand and $162 thousand, respectively. At March 19, 2011 and March 20, 2010, respectively, there was $1.4 million and $1.0 million in unrecognized stock-based compensation expense related to non-vested stock awards.

Note J - Segment Information


   
As of and for the Three Months
Ended March 19, 2011
 
 
In thousands
 
 
Sporting Goods
   
Information Security and Print Finishing
   
 
 
Corp.
   
 
 
Total
 
                         
Revenues from external customers
  $ 19,187     $ 8,811     $     $ 27,998  
Operating income (loss)
    2,336       580       (849 )     2,067  
Net income (loss)
    1,324       237       (358 )     1,203  
Total assets
  $ 70,943     $ 40,258     $ 21,798     $ 132,999  

   
As of and for the Three Months
Ended March 20, 2010
 
 
In thousands
 
 
Sporting Goods
   
Information Security and Print Finishing
   
 
 
Corp.
   
 
 
Total
 
                         
Revenues from external customers
  $ 16,951     $ 8,218     $     $ 25,169  
Operating income (loss)
    2,077       292       (960 )     1,409  
Net income (loss)
    917       173       (288 )     802  
Total assets
  $ 66,715     $ 38,112     $ 18,413     $ 123,240  
 
Note K – Dividend Payment

 
The Company has not declared a dividend to be paid in 2011.
 
 
9

 
 
Note L - 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
 
 
All amounts in thousands
 
March 19,
2011
   
March 20,
2010
 
             
Weighted average common shares outstanding
    12,804       12,685  
Dilutive effect of stock options and restricted stock units
     545        462  
Weighted average common shares outstanding, assuming dilution
     13,349        13,147  

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 2011 and 2010 were 264,024 and 616,850, respectively.

Note M – New Accounting Standards


There have been no recent accounting pronouncements or changes in accounting pronouncements during the three months ended March 19, 2011, 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, 2010, that are of significance, or potential significance to the Company.

Note N – Commitments and Contingencies


In the second quarter of 2010, the Company was made aware of a potential financial obligation relating to an 8,600 square foot facility the Company is sub-leasing in Spain. At this time, Management is unable to estimate the potential exposure related to this matter, if any, but does not believe this will create a material adverse impact on our consolidated financial conditions.

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.
 
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, the impact of competitive products and pricing, product demand and market acceptance, new product development, the continuation and development of key customer and supplier relationships, Escalade’s ability to control costs, general economic conditions, fluctuation in operating results, changes in the securities market, Escalade’s ability to obtain financing and to maintain compliance with the terms of such financing, 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.
 
 
10

 
 
Overview

Escalade, Incorporated (“Escalade” or “Company”) manufactures and distributes products for two industries: Sporting Goods and Information Security and Print Finishing. Within these industries the Company has successfully built a market presence in niche markets. This strategy is heavily dependent on expanding the customer base, barriers to entry, brand recognition and excellent customer service. A key strategic advantage is the Company’s established relationships with major customers that allow the Company to bring new products to the market in a cost effective manner while maintaining a diversified product line and wide customer base. In addition to strategic customer relations, the Company has substantial manufacturing and import experience that enable it to be a low cost supplier.

A majority of the Company’s products are in markets that are experiencing low growth rates. Where the Company enjoys a commanding market position, such as table tennis tables in the Sporting Goods segment and paper folding machines in the Information Security and Print Finishing segment, revenue growth is expected to be roughly equal to general growth/decline in the economy. However, in markets that are fragmented and where the Company is not the dominant leader, such as archery in the Sporting Goods segment and data security shredders in the Information Security and Print Finishing segment, the Company anticipates growth. To enhance growth, the Company has a strategy of promoting new product innovation and development and brand marketing. In the Information Security and Print Finishing segment, the Company’s strategic focus is increasingly upon expanding its product and service offerings to assist businesses and governments with their document and information high security needs to secure sensitive customer, employee and business information and to comply with new information privacy laws, rules and regulations. The Company continues to extend the capabilities of its line of shredders to include not only the secure destruction of paper but also the secure destruction and/or de-commissioning of medical patient information, drug prescriptions and adhesive labels, pill and syrup vials, CDs, DVDs, and other forms of magnetic, optical and solid state media. The Company is further exploring opportunities to provide secure on-site and off-site document and data destruction and disposal services to meet the specific needs of its customers.

In addition, the Company will continue to investigate acquisition opportunities of companies or product lines that complement or expand the Company’s product lines. 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. Management believes that key indicators in measuring the success of this strategy are revenue growth, earnings growth and the expansion of channels of distribution.

 
11

 

Results of Operations

Consolidated net sales for the first quarter of 2011 were 11% higher compared to the same quarter last year. A portion of the sales increase for the quarter was aided by the timing of shipments which are not expected to be repeated in subsequent quarters. Operating income for the quarter was $2.0 million compared with $1.4 million in the same quarter last year. The primary driver for this increase is gross margin improvements resulting from increased sales volume. The Company is experiencing pricing pressure from suppliers on certain products which may negatively impact future gross margins. The following schedule sets forth certain consolidated statement of operations data as a percentage of net revenue:


   
Three Months Ended
 
   
March 19, 2011
   
March 20, 2010
 
Net revenue
    100.0 %     100.0 %
Cost of products sold
    63.9 %     66.0 %
Gross margin
    36.1 %     34.0 %
Selling, administrative and general expenses
    27.6 %     27.3 %
Amortization
    1.1 %     1.1 %
Operating income
    7.4 %     5.6 %
 
Consolidated Revenue and Gross Margin

Revenues from the Sporting Goods business were up 13.2% for the first quarter of 2011 compared to the same quarter last year. Increases in consumer spending, new product development, expanded product placement and additional customer base are driving sales increases. Management believes improved sales in the Sporting Goods segment will continue through the remainder of the year; although the improvement may be less than that experienced in the first quarter.

Revenues from the Information Security and Print Finishing business increased 7.2% for the first quarter of 2011 compared with the same quarter last year. Excluding the effects of changes in the currency exchange rates, revenues increased 7.4% for the quarter. A portion of the increase in the first quarter is the result of the timing of certain shipments which will not be repeated in subsequent quarters.

The overall gross margin ratio for the first quarter of 2011 was 36.1% compared to 34.0% for the same quarter last year. Management expects gross margins for the remainder of 2011 to be slightly higher than those experienced in the prior year.

Consolidated Selling, General and Administrative Expenses

Compared to the same quarter last year, consolidated selling, general and administrative (“SG&A”) costs increased as a percent of net sales to 27.6%, which is slightly higher than the 27.3% experienced in the same quarter last year. The Company will continue to focus on strategic investments in product development and brand marketing throughout the year.

Provision for Income Taxes

The effective tax rate in the first quarter of 2011 was 40.0% compared with 38.6% for the same quarter last year. The increase in the current year tax rate is due mainly to losses generated in foreign taxing districts for which no tax benefit is expected to be realized.

Financial Condition and Liquidity

Total funded debt at the end of the first three months of 2011 was down $1.2 million or 0.5% from the same quarter last year, and up $3.1 million or 15.0% from the latest year end. The increase in debt is driven by a build-up of inventory to support customer orders from an increased customer base. The following schedule summarizes the Company’s total bank debt:
 
 
In thousands
 
March 19,
 2011
   
March 20,
 2010
   
December 25,
2010
 
                   
Notes payable short-term
  $ 13,331     $ 24,007     $ 9,407  
Current portion long-term debt
    2,000             2,000  
Bank overdraft facility
    1,322       780       1,646  
Long term debt
    7,000             7,500  
Total bank debt
  $ 23,653     $ 24,787     $ 20,553  
 
 
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The Company is maintaining a healthy debt to equity ratio. As a percentage of stockholders’ equity, total bank debt was 26%, 30% and 24% at March 19, 2011, March 20, 2010 and December 25, 2010, respectively.

During the first three months of 2011, operating activities used $2.9 million in cash primarily due to increases in inventory and a reduction in accrued liabilities.

The Company funds working capital requirements through operating cash flows and revolving credit agreements with its bank. As a result of the successful reduction of existing outstanding debt during the prior year, the Company was able to again reduce its borrowing capacity commitment. The Company successfully completed negotiations with JP Morgan Chase Bank, N.A., its primary lender, regarding an amendment to its Senior Secured Revolving Credit Facility and finalized the agreement on April 14, 2011. Based on working capital requirements, the Company expects to have access to adequate levels of revolving credit to meet growth needs.

The Company is continuing to market the Reynosa facility through a national broker and is pursuing all viable offers of purchase or lease. There has been increased interest from potential buyers over the past few months. Implementation of a new ERP system was completed at the Wabash, Indiana facility as of the end of 2010 and the Company anticipates initiating roll-outs of additional implementations for its Martin Yale International sites and certain of its Sports sites in 2011. Should the Company decide to abandon the Oracle system at its one remaining location, the remaining book value of the Oracle system of approximately $5.0 million ($3.0 million, net of tax) would be expensed over the estimated remaining economic life of the system.
 
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to financial market risks, including changes in currency exchange rates and interest rates. The Company attempts to minimize these risks through regular operating and financing activities and, when considered appropriate, through the use of derivative financial instruments. During the quarter there were no derivatives in use. The Company does not purchase, hold or sell derivative financial instruments for trading or speculative purposes.

Interest Rates
The Company’s exposure to market-rate risk for changes in interest rates relates primarily to its revolving variable rate bank debt which is based on LIBOR interest rates and its overdraft facility which is based on EURIBOR interest rates. A hypothetical 1% or 100 basis point change in interest rates would not have a significant effect on our consolidated financial position or results of operation.

Foreign Currency
The Company conducts business in various countries around the world and is therefore subject to risks associated with fluctuating foreign exchange rates. This revenue is generated from the operations of the Company’s subsidiaries in their respective countries and surrounding geographic areas and is primarily denominated in each subsidiary’s local functional currency. These subsidiaries incur most of their expenses (other than inter-company expenses) in their local functional currency and include the Euro, Great Britain Pound Sterling, Mexican Peso, Chinese Yuan, Swedish Krona and South African Rand.

The geographic areas outside the United States in which the Company operates are generally not considered to be highly inflationary. Nonetheless, the Company’s foreign operations are sensitive to fluctuations in currency exchange rates arising from, among other things, certain inter-company transactions that are denominated in currencies other than the respective functional currency. Operating results as well as assets and liabilities are also subject to the effect of foreign currency translation when the operating results, assets and liabilities of our foreign subsidiaries are translated into U.S. dollars in our consolidated financial statements.
 
 
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The Company and its subsidiaries conduct substantially all their business in their respective functional currencies to avoid the effects of cross-border transactions. To protect against reductions in value and the volatility of future cash flows caused by changes in currency exchange rates, the Company carefully considers the use of transaction and balance sheet hedging programs such as matching assets and liabilities in the same currency. Such programs reduce, but do not entirely eliminate the impact of currency exchange rate changes. The Company has evaluated the use of currency exchange hedging financial instruments but has determined that it would not use such instruments under the current circumstances. Changes in currency exchange rates may be volatile and could affect the Company’s performance.
 
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 Rule 13a-14(c). In designing and evaluating the disclosure controls and procedures, Management recognized that any controls and procedures, no matter how well designed and operated, can 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. Also, the Company has investments in certain unconsolidated entities. As the Company does not control or manage these entities, its disclosure controls and procedures with respect to such entities are necessarily substantially more limited than those it maintains with respect to its consolidated subsidiaries.

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 the Company’s 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 first quarter of 2011.
 
 
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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 2011 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
OTHER INFORMATION

Not Required.

Not Required.

(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
Shares purchases prior to 12/26/2010 under the current repurchase program.
982,916
$8.84
982,916
$ 2,273,939
First quarter purchases:
       
12/26/2010–01/22/2011
None
None
No Change
No Change
01/23/2011-02/19/2011
None
None
No Change
No Change
02/20/2011-03/19/2011
None
 None
No Change
No Change
Total share purchases under the current program
982,916
 $8.84
982,916
$ 2,273,939
 
The Company has one stock repurchase program which was established in February 2003 by the Board of Directors and which authorized management to expend up to $3,000,000 to repurchase shares on the open market as well as in private negotiated transactions. The repurchase plan has no termination date. There have been no share repurchases that were not part of a publicly announced program. In February 2008, the Board of Directors increased the remaining amount on this plan to its original level of $3,000,000. Although authorized by the Board, the Company has agreed to certain restrictions on the repurchase of shares as part of the April 30, 2009 Credit Agreement terms. The Seventh Amendment contained no changes in these restrictions.

Not Required.

Not Required.
 
 
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Exhibits
 
(a)
Exhibits

Number
Description
   
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.
 
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: April 21, 2011
 
/s/ Deborah Meinert
   
Vice President and Chief Financial Officer
   
(On behalf of the registrant and in her
   
capacities as Principal Financial Officer
   
and Principal Accounting Officer)
 
 
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