ESCALADE INC - Quarter Report: 2019 October (Form 10-Q)
UNITED STATES
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 quarterly period ended October 5, 2019 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 | 13-2739290 |
| (State of incorporation) | (I.R.S. EIN) |
| 817 Maxwell Ave, Evansville, Indiana | 47711 |
| (Address of principal executive office) | (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 x 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 x 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 x | |
| Non-accelerated filer ¨ | Smaller reporting company x | |
| 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 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 October 28, 2019 | |
| Common, no par value | 14,265,040 |
INDEX
2
PART I - FINANCIAL INFORMATION
ESCALADE, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
| All Amounts in Thousands Except Share Information | October 5, 2019 | December 29, 2018 | October 6, 2018 | |||||||||
| (Unaudited) | (Audited) | (Unaudited) | ||||||||||
| ASSETS | ||||||||||||
| Current Assets: | ||||||||||||
| Cash and cash equivalents | $ | 5,226 | $ | 2,824 | $ | 11,121 | ||||||
| Receivables, less allowance of $519; $532; and $516; respectively | 35,592 | 40,682 | 36,522 | |||||||||
| Inventories | 48,424 | 39,122 | 45,660 | |||||||||
| Prepaid expenses | 2,696 | 4,151 | 2,982 | |||||||||
| Prepaid income tax | 1,613 | 1,082 | -- | |||||||||
| Other current assets | -- | 2 | 12 | |||||||||
| TOTAL CURRENT ASSETS | 93,551 | 87,863 | 96,297 | |||||||||
| Property, plant and equipment, net | 15,207 | 15,498 | 13,367 | |||||||||
| Operating lease right-of-use assets | 1,242 | -- | -- | |||||||||
| Intangible assets, net | 19,181 | 19,785 | 18,624 | |||||||||
| Goodwill | 26,749 | 26,381 | 21,548 | |||||||||
| Other assets | 86 | -- | -- | |||||||||
| TOTAL ASSETS | $ | 156,016 | $ | 149,527 | $ | 149,836 | ||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||
| Current Liabilities: | ||||||||||||
| Note payable | $ | 135 | $ | -- | $ | -- | ||||||
| Trade accounts payable | 9,947 | 5,631 | 9,465 | |||||||||
| Accrued liabilities | 8,819 | 11,072 | 9,859 | |||||||||
| Income tax payable | -- | -- | 1,120 | |||||||||
| Current operating lease liabilities | 689 | -- | -- | |||||||||
| TOTAL CURRENT LIABILITIES | 19,590 | 16,703 | 20,444 | |||||||||
| Other Liabilities: | ||||||||||||
| Long-term debt | 5,221 | -- | -- | |||||||||
| Deferred income tax liability | 3,409 | 3,409 | 2,469 | |||||||||
| Operating lease liabilities | 575 | -- | -- | |||||||||
| Other liabilities | 1,094 | 1,094 | 503 | |||||||||
| TOTAL LIABILITIES | 29,889 | 21,206 | 23,416 | |||||||||
| 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 – 14,291,347; 14,438,824; and 14,439,724; shares respectively | 14,291 | 14,439 | 14,440 | |||||||||
| Retained earnings | 111,836 | 113,882 | 111,980 | |||||||||
| TOTAL STOCKHOLDERS' EQUITY | 126,127 | 128,321 | 126,420 | |||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 156,016 | $ | 149,527 | $ | 149,836 | ||||||
See notes to Consolidated Condensed Financial Statements.
3
ESCALADE, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| All Amounts in Thousands Except Per Share Data | October 5, 2019 | October 6, 2018 | October 5, 2019 | October 6, 2018 | ||||||||||||
| Net sales | $ | 45,756 | $ | 43,955 | $ | 133,497 | $ | 124,788 | ||||||||
| Costs and Expenses | ||||||||||||||||
| Cost of products sold | 35,717 | 31,646 | 102,022 | 91,994 | ||||||||||||
| Selling, administrative and general expenses | 6,793 | 6,856 | 24,576 | 22,927 | ||||||||||||
| Amortization | 347 | 319 | 1,135 | 1,067 | ||||||||||||
| Operating Income | 2,899 | 5,134 | 5,764 | 8,800 | ||||||||||||
| Other Income (Expense) | ||||||||||||||||
| Interest expense | (96 | ) | (35 | ) | (295 | ) | (390 | ) | ||||||||
| Equity in earnings of affiliates | -- | -- | -- | 121 | ||||||||||||
| Gain on sale of equity method investment (includes ($3,729) of accumulated other comprehensive loss reclassification from foreign currency translation adjustment) | -- | -- | -- | 13,020 | ||||||||||||
| Other income (expense) | 3 | 7 | 12 | (92 | ) | |||||||||||
| Income Before Income Taxes | 2,806 | 5,106 | 5,481 | 21,459 | ||||||||||||
| Provision for Income Taxes | 266 | 1,531 | 798 | 4,597 | ||||||||||||
| Net Income | $ | 2,540 | $ | 3,575 | $ | 4,683 | $ | 16,862 | ||||||||
| Earnings Per Share Data: | ||||||||||||||||
| Basic earnings per share | $ | 0.18 | $ | 0.25 | $ | 0.32 | $ | 1.17 | ||||||||
| Diluted earnings per share | $ | 0.18 | $ | 0.25 | $ | 0.32 | $ | 1.17 | ||||||||
| Dividends declared | $ | 0.125 | $ | 0.125 | $ | 0.375 | $ | 0.375 | ||||||||
See notes to Consolidated Condensed Financial Statements.
4
ESCALADE, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| All Amounts in Thousands | October 5, 2019 | October 6, 2018 | October 5, 2019 | October 6, 2018 | ||||||||||||
| Net Income | $ | 2,540 | $ | 3,575 | $ | 4,683 | $ | 16,862 | ||||||||
| Foreign currency translation adjustment before reclassification | -- | -- | -- | (1,119 | ) | |||||||||||
| Amounts reclassified from comprehensive income due to divestiture of equity investment | -- | -- | -- | 3,729 | ||||||||||||
| Comprehensive Income | $ | 2,540 | $ | 3,575 | $ | 4,683 | $ | 19,472 | ||||||||
All amounts are net of tax
See notes to Consolidated Condensed Financial Statements.
5
ESCALADE, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
| Accumulated | ||||||||||||||||||||
| Other | ||||||||||||||||||||
| Common Stock | Retained | Comprehensive | ||||||||||||||||||
| All Amounts in Thousands | Shares | Amount | Earnings | Income (Loss) | Total | |||||||||||||||
| Balances at July 14, 2018 | 14,440 | $ | 14,440 | $ | 110,112 | $ | -- | $ | 124,552 | |||||||||||
| Other comprehensive loss | -- | -- | ||||||||||||||||||
| Net income | 3,575 | 3,575 | ||||||||||||||||||
| Expense of stock options and restricted stock units | 99 | 99 | ||||||||||||||||||
| Dividends declared | (1,806 | ) | (1,806 | ) | ||||||||||||||||
| Balances at October 6, 2018 | 14,440 | $ | 14,440 | $ | 111,980 | $ | -- | $ | 126,420 | |||||||||||
| Balances at December 30, 2017 | 14,372 | $ | 14,372 | $ | 99,908 | $ | (2,610 | ) | $ | 111,670 | ||||||||||
| Other comprehensive income | 2,610 | 2,610 | ||||||||||||||||||
| Net income | 16,862 | 16,862 | ||||||||||||||||||
| Expense of stock options and restricted stock units | 469 | 469 | ||||||||||||||||||
| Exercise of stock options | 9 | 9 | 45 | 54 | ||||||||||||||||
| Settlement of restricted stock units | 47 | 47 | (47 | ) | -- | |||||||||||||||
| Dividends declared | (5,410 | ) | (5,410 | ) | ||||||||||||||||
| Stock issued to directors as compensation | 12 | 12 | 153 | 165 | ||||||||||||||||
| Balances at October 6, 2018 | 14,440 | $ | 14,440 | $ | 111,980 | $ | -- | $ | 126,420 | |||||||||||
| Accumulated | ||||||||||||||||||||
| Other | ||||||||||||||||||||
| Common Stock | Retained | Comprehensive | ||||||||||||||||||
| All Amounts in Thousands | Shares | Amount | Earnings | Income (Loss) | Total | |||||||||||||||
| Balances at July 13, 2019 | 14,468 | $ | 14,468 | $ | 112,775 | $ | -- | $ | 127,243 | |||||||||||
| Other comprehensive income | -- | -- | ||||||||||||||||||
| Net income | 2,540 | 2,540 | ||||||||||||||||||
| Expense of stock options and restricted stock units | 68 | 68 | ||||||||||||||||||
| Dividends declared | (1,805 | ) | (1,805 | ) | ||||||||||||||||
| Purchase of stock | (177 | ) | (177 | ) | (1,742 | ) | (1,919 | ) | ||||||||||||
| Balances at October 5, 2019 | 14,291 | $ | 14,291 | $ | 111,836 | $ | -- | $ | 126,127 | |||||||||||
| Balances at December 29, 2018 | 14,439 | $ | 14,439 | $ | 113,882 | $ | -- | $ | 128,321 | |||||||||||
| Other comprehensive income | -- | -- | ||||||||||||||||||
| Net income | 4,683 | 4,683 | ||||||||||||||||||
| Expense of stock options and restricted stock units | 409 | 409 | ||||||||||||||||||
| Exercise of stock options | 10 | 10 | 108 | 118 | ||||||||||||||||
| Settlement of restricted stock units | 25 | 25 | (25 | ) | -- | |||||||||||||||
| Dividends declared | (5,423 | ) | (5,423 | ) | ||||||||||||||||
| Purchase of stock | (192 | ) | (192 | ) | (1,891 | ) | (2,083 | ) | ||||||||||||
| Stock issued to directors as compensation | 9 | 9 | 93 | 102 | ||||||||||||||||
| Balances at October 5, 2019 | 14,291 | $ | 14,291 | $ | 111,836 | $ | -- | $ | 126,127 | |||||||||||
See notes to Consolidated Condensed Financial Statements.
6
ESCALADE, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
| Nine Months Ended | ||||||||
| All Amounts in Thousands | October 5, 2019 | October 6, 2018 | ||||||
| Operating Activities: | ||||||||
| Net income | $ | 4,683 | $ | 16,862 | ||||
| Depreciation and amortization | 3,266 | 3,056 | ||||||
| Loss on disposal of property and equipment | 6 | -- | ||||||
| Stock-based compensation | 409 | 468 | ||||||
| Gain on sale of equity method investment | -- | (13,020 | ) | |||||
| Gain on insurance proceeds received for damage to property | -- | (241 | ) | |||||
| Dividends received from equity method investments | -- | 2,323 | ||||||
| Adjustments necessary to reconcile net income to net cash provided by operating activities | (1,176 | ) | (4,464 | ) | ||||
| Net cash provided by operating activities | 7,188 | 4,984 | ||||||
| Investing Activities: | ||||||||
| Purchase of property and equipment | (1,849 | ) | (1,846 | ) | ||||
| Acquisitions | (765 | ) | -- | |||||
| Proceeds from sale of equity investment | -- | 33,705 | ||||||
| Insurance proceeds received for damage to property | -- | 1,018 | ||||||
| Proceeds from sale of property and equipment | 4 | -- | ||||||
| Net cash provided (used) by investing activities | (2,610 | ) | 32,877 | |||||
| Financing Activities: | ||||||||
| Proceeds from issuance of long-term debt | 65,191 | 21,873 | ||||||
| Payments on long-term debt | (59,969 | ) | (44,994 | ) | ||||
| Proceeds from exercise of stock options | 118 | 54 | ||||||
| Deferred financing fees | (112 | ) | -- | |||||
| Purchase of stock | (2,083 | ) | -- | |||||
| Cash dividends paid | (5,423 | ) | (5,410 | ) | ||||
| Director stock compensation | 102 | 165 | ||||||
| Net cash used by financing activities | (2,176 | ) | (28,312 | ) | ||||
| Net increase in cash and cash equivalents | 2,402 | 9,549 | ||||||
| Cash and cash equivalents, beginning of period | 2,824 | 1,572 | ||||||
| Cash and cash equivalents, end of period | $ | 5,226 | $ | 11,121 | ||||
| Non-Cash Transactions | ||||||||
| Note payable for deferred purchase price obligation | $ | 135 | $ | -- | ||||
See notes to Consolidated Condensed Financial Statements.
7
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 29, 2018 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 2018 filed with the Securities and Exchange Commission.
Note B - Seasonal Aspects
The results of operations for the three and nine month periods ended October 5, 2019 and October 6, 2018 are not necessarily indicative of the results to be expected for the full year.
Note C - Inventories
| In thousands | October 5, 2019 | December 29, 2018 | October 6, 2018 | |||||||||
| Raw materials | $ | 3,860 | $ | 3,622 | $ | 3,760 | ||||||
| Work in progress | 2,410 | 2,892 | 3,051 | |||||||||
| Finished goods | 42,154 | 32,608 | 38,849 | |||||||||
| $ | 48,424 | $ | 39,122 | $ | 45,660 | |||||||
Note D – Equity Interest Investments
The Company had a 50% interest in a joint venture, Stiga Sports AB (Stiga). The joint venture was accounted for under the equity method of accounting. Stiga, located in Sweden, is a global sporting goods company producing table tennis equipment, snow sleds, and game products. The Company entered into a share purchase agreement for the private sale of the Company’s 50% interest in the Stiga joint venture. On May 17, 2018, the Company completed the sale of its 50% interest for $33.7 million, resulting in a gain on sale of $13.0 million. In conjunction with the sale, the Company entered into a new license agreement with Stiga for the licensing rights to manufacture, market, promote, sell and distribute Stiga-branded table tennis hobby products in the United States, Mexico and Canada. The Company has had the licensing rights for such products since 1995 pursuant to an existing license agreement that expired December 31, 2018. The new license agreement went into effect on January 1, 2019.
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 income statement amounts. The Company’s 50% portion of net income for Stiga, included in equity in earnings of affiliates on the Company’s statements of operations, is as follows:
| In thousands | Three Months Ended October 6, 2018 | Period from December 31, 2017 through May 17, 2018 | ||||||
| Equity in earnings of affiliates | $ | -- | $ | 121 | ||||
8
Summarized financial information for Stiga Sports AB statements of operations for the three month period ended October 6, 2018 and the period from December 31, 2017 through May 17, 2018 is as follows:
| In thousands | Three Months Ended October 6, 2018 | Period from December 31, 2017 through May 17, 2018 | ||||||
| Net sales | $ | -- | $ | 12,978 | ||||
| Gross profit | -- | 6,019 | ||||||
| Net income | -- | 241 | ||||||
Note E – Income Taxes
The provision for income taxes was computed based on financial statement income.
Note F – 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. Proceeds from the sale of the Company’s 50% interest in Stiga were used to pay off outstanding debt during the nine months ending October 6, 2018.
The following table presents estimated fair values of the Company’s financial instruments and the level within the fair value hierarchy in which the fair value measurements fall in accordance with FASB ASC 825 at October 5, 2019, December 29, 2018 and October 6, 2018.
| Fair Value Measurements Using | ||||||||||||||||
October 5, 2019 In thousands | Carrying Amount | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant
Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
| Financial assets | ||||||||||||||||
| Cash and cash equivalents | $ | 5,226 | $ | 5,226 | $ | -- | $ | -- | ||||||||
| Financial liabilities | ||||||||||||||||
| Long-term debt | $ | 5,221 | $ | -- | $ | 5,221 | $ | -- | ||||||||
| Fair Value Measurements Using | ||||||||||||||||
December 29, 2018 In thousands | Carrying Amount | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
| Financial assets | ||||||||||||||||
| Cash and cash equivalents | $ | 2,824 | $ | 2,824 | $ | -- | $ | -- | ||||||||
9
| Fair Value Measurements Using | ||||||||||||||||
October 6, 2018 In thousands | Carrying Amount | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
| Financial assets | ||||||||||||||||
| Cash and cash equivalents | $ | 11,121 | $ | 11,121 | $ | -- | $ | -- | ||||||||
Note G – Stock Compensation
The fair value of stock-based compensation is recognized in accordance with the provisions of FASB ASC 718, Stock Compensation.
During the nine months ended October 5, 2019 and pursuant to the 2017 Incentive Plan, in lieu of cash payments of director fees, the Company awarded to certain directors 8,839 shares of common stock. During the nine months ended October 5, 2019, the Company awarded 11,400 restricted stock units to directors and 35,900 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 vesting 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 2019 restricted stock units awarded to employees are subject to a three year cliff vesting schedule, which means that these restricted stock units will fully vest, if at all, three years from the grant date provided that the employee is still employed by the Company on the vesting date. In addition, vesting of certain of the restricted stock units is subject to the Company meeting certain conditions based on Return on Equity and Adjusted EBITDA.
For the three and nine months ended October 5, 2019, including expense associated with issuing certain directors stock in lieu of cash for certain director fees, the Company recognized stock based compensation expense of $68 thousand and $511 thousand, respectively compared to stock based compensation expense of $98 thousand and $633 thousand for the same periods in the prior year. At October 5, 2019 and October 6, 2018, respectively, there was $0.8 million and $0.7 million in unrecognized stock-based compensation expense related to non-vested stock awards.
Note H - Segment Information
| For the Three Months Ended October 5, 2019 | ||||||||||||
| In thousands | Sporting Goods | Corp. | Total | |||||||||
| Revenues from external customers | $ | 45,756 | $ | -- | $ | 45,756 | ||||||
| Operating income (loss) | 3,223 | (324 | ) | 2,899 | ||||||||
| Net income | 2,269 | 271 | 2,540 | |||||||||
| As of and for the Nine Months Ended October 5, 2019 | ||||||||||||
| In thousands | Sporting Goods | Corp. | Total | |||||||||
| Revenues from external customers | $ | 133,497 | $ | -- | $ | 133,497 | ||||||
| Operating income (loss) | 7,001 | (1,237 | ) | 5,764 | ||||||||
| Net income (loss) | 4,871 | (188 | ) | 4,683 | ||||||||
| Total assets | $ | 148,664 | $ | 7,352 | $ | 156,016 | ||||||
10
| For the Three Months Ended October 6, 2018 | ||||||||||||
| In thousands | Sporting Goods | Corp. | Total | |||||||||
| Revenues from external customers | $ | 43,955 | $ | -- | $ | 43,955 | ||||||
| Operating income (loss) | 5,483 | (349 | ) | 5,134 | ||||||||
| Net income (loss) | 3,957 | (382 | ) | 3,575 | ||||||||
| As of and for the Nine Months Ended October 6, 2018 | ||||||||||||
| In thousands | Sporting Goods | Corp. | Total | |||||||||
| Revenues from external customers | $ | 124,788 | $ | -- | $ | 124,788 | ||||||
| Operating income (loss) | 10,044 | (1,244 | ) | 8,800 | ||||||||
| Net income | 7,026 | 9,836 | 16,862 | |||||||||
| Total assets | $ | 138,286 | $ | 11,550 | $ | 149,836 | ||||||
Note I – Dividend Payment
On September 16, 2019, the Company paid a quarterly dividend of $0.125 per common share to all shareholders of record on September 9, 2019. The total amount of the dividend was approximately $1.8 million and was charged against retained earnings.
On June 10, 2019, the Company paid a quarterly dividend of $0.125 per common share to all shareholders of record on June 3, 2019. The total amount of the dividend was approximately $1.8 million and was charged against retained earnings.
On March 18, 2019, the Company paid a quarterly dividend of $0.125 per common share to all shareholders of record on March 11, 2019. The total amount of the dividend was approximately $1.8 million and was charged against retained earnings.
Note J - Earnings Per Share
The shares used in computation of the Company’s basic and diluted earnings per common share are as follows:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| In thousands | October 5, 2019 | October 6, 2018 | October 5, 2019 | October 6, 2018 | ||||||||||||
| Weighted average common shares outstanding | 14,440 | 14,440 | 14,455 | 14,417 | ||||||||||||
| Dilutive effect of stock options and restricted stock units | 28 | 29 | 30 | 30 | ||||||||||||
| Weighted average common shares outstanding, assuming dilution | 14,468 | 14,469 | 14,485 | 14,447 | ||||||||||||
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 2019 and 2018 were 80,950 and 69,531, respectively.
11
Note K – New Accounting Standards and Changes in Accounting Principles
With the exception of that discussed below, there have been no recent accounting pronouncements or changes in accounting pronouncements during the three and nine month periods ended October 5, 2019, as compared to the recent accounting pronouncements described in the Company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2018, that are of significance, or potential significance to the Company.
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU) 2016-02, Leases (Topic 842), which supersedes ASC 840, Leases. The amendments in this update will increase the transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Under ASU 2016-02, a lessee will recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-to-use asset representing its right to use the underlying asset for the lease term. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from current GAAP. ASU 2016-02 retains a distinction between finance leases and operating leases. The classification criteria for distinguishing between finance leases and operating leases will be substantially similar to the classification criteria for distinguishing between capital leases and operating leases under prior GAAP. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.
The guidance permits a practical expedient with regards to initial adoption, allowing adopters the option to apply the new leases standard prospectively at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Under this expedient, comparative periods presented in the financial statements in which the new lease standard is adopted, will continue to be presented in accordance with prior GAAP.
The Company adopted this standard on December 30, 2018 using the prospective application method practical expedient. The adoption of this standard had an immaterial impact on our consolidated balance sheet, recognizing a ROU asset and lease liability of $985 thousand. Refer to Note M for disclosure requirements related to this standard.
Note L – Revenue from Contracts with Customers
Revenue Recognition – Effective December 31, 2017, we adopted ASC 606. The adoption of this standard did not impact the timing of revenue recognition for customer sales. 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.
12
Disaggregation of Revenue – We generate revenue from the sale of widely recognized sporting goods brands in basketball goals, archery, indoor and outdoor game recreation and fitness products. These products are sold through multiple sales channels that include; mass merchants, specialty dealers, key on-line retailers (“E-commerce”) and international. The following table depicts the disaggregation of revenue according to sales channel:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| All Amounts in Thousands | October 5, 2019 | October 6, 2018 | October 5, 2019 | October 6, 2018 | ||||||||||||
| Gross Sales by Channel: | ||||||||||||||||
| Mass Merchants | $ | 20,757 | $ | 20,074 | $ | 51,025 | $ | 52,767 | ||||||||
| Specialty Dealers | 11,826 | 11,954 | 41,590 | 43,915 | ||||||||||||
| E-commerce | 15,712 | 13,806 | 50,452 | 34,060 | ||||||||||||
| International | 1,880 | 1,684 | 5,228 | 6,266 | ||||||||||||
| Other | 637 | 663 | 2,079 | 1,200 | ||||||||||||
| Total Gross Sales | 50,812 | 48,181 | 150,374 | 138,208 | ||||||||||||
| Less: Gross-to-Net Sales Adjustments | ||||||||||||||||
| Returns | 1,473 | 1,315 | 4,353 | 3,513 | ||||||||||||
| Warranties | 360 | 289 | 1,092 | 1,090 | ||||||||||||
| Customer Allowances | 3,223 | 2,622 | 11,432 | 8,817 | ||||||||||||
| Total Gross-to-Net Sales Adjustments | 5,056 | 4,226 | 16,877 | 13,420 | ||||||||||||
| Total Net Sales | $ | 45,756 | $ | 43,955 | $ | 133,497 | $ | 124,788 | ||||||||
Contract Balances – The following table provides information on changes in our contract liability balances during the three and nine month periods ended October 5, 2019 and October 6, 2018. The contract liability recorded during the nine month periods ended October 6, 2018 is related to a lump sum payment received for consulting services to be provided over the next year. The contract liability will be amortized, and revenues recognized, evenly over the year. As of October 5, 2019, the contract liability was fully amortized.
| Three Months Ended | Nine Months Ended | |||||||||||||||
| All Amounts in Thousands | October 5, 2019 | October 6, 2018 | October 5, 2019 | October 6, 2018 | ||||||||||||
| Increase due to cash received, excluding amounts recognized as revenue during the period | $ | -- | $ | -- | $ | -- | $ | 671 | ||||||||
| Revenue recognized that was included in the contract liability balance at the beginning of the period | -- | 259 | 413 | -- | ||||||||||||
| Increase (decrease) in contract liability during the period | $ | -- | ($ | 259 | ) | ($ | 413 | ) | $ | 671 | ||||||
Note M – 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 5 years. As of October 5, 2019, 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.
13
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 as follows:
| All Amounts in Thousands | Three Months Ended October 5, 2019 | Nine Months Ended October 5, 2019 | ||||||
| Lease Expense | ||||||||
| Operating Lease Cost | $ | 164 | $ | 608 | ||||
| Short-term Lease Cost | 149 | 348 | ||||||
| Variable Lease Cost | 47 | 188 | ||||||
| Total Operating Lease Cost | $ | 360 | $ | 1,144 | ||||
| Operating Lease – Operating Cash Flows | $ | 156 | $ | 552 | ||||
| New ROU Assets – Operating Leases | $ | 108 | $ | 833 | ||||
Other information about lease amounts recognized in our consolidated financial statements is summarized as follows:
| Period Ended October 5, 2019 | ||||
| Weighted Average Remaining Lease Term – Operating Leases | 2.03 years | |||
| Weighted Average Discount Rate – Operating Leases | 5.00% | |||
Future minimum lease payments under non-cancellable leases as of October 5, 2019 were as follows:
| All Amounts in Thousands | ||||
| Year 1 | $ | 733 | ||
| Year 2 | 483 | |||
| Year 3 | 75 | |||
| Year 4 | 27 | |||
| Year 5 | 10 | |||
| Thereafter | -- | |||
| Total future minimum lease payments | 1,328 | |||
| Less imputed interest | (64 | ) | ||
| Total | $ | 1,264 | ||
| Reported as of October 5, 2019 | ||||
| Current operating lease liabilities | 689 | |||
| Long-term operating lease liabilities | 575 | |||
| Total | $ | 1,264 | ||
Note N – 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
14
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: 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; the 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 supply chain; 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; 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; 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, 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. 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.
15
Results of Operations
The following schedule sets forth certain consolidated statement of operations data as a percentage of net revenue:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| October 5, 2019 | October 6, 2018 | October 5, 2019 | October 6, 2018 | |||||||||||||
| Net revenue | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
| Cost of products sold | 78.1 | % | 72.0 | % | 76.4 | % | 73.7 | % | ||||||||
| Gross margin | 21.9 | % | 28.0 | % | 23.6 | % | 26.3 | % | ||||||||
| Selling, administrative and general expenses | 14.8 | % | 15.6 | % | 18.4 | % | 18.3 | % | ||||||||
| Amortization | 0.8 | % | 0.7 | % | 0.9 | % | 0.9 | % | ||||||||
| Operating income | 6.3 | % | 11.7 | % | 4.3 | % | 7.1 | % | ||||||||
Revenue and Gross Margin
Sales increased by 4.1% for the third quarter of 2019, compared with the same period in the prior year due primarily to increased sales in the Games category. The increase in sales from our Games category was partially offset by a continuing decline in archery vertical bow sales. For the first nine months of 2019, sales were up 7.0% compared to prior year.
The overall gross margin percentage decreased to 21.9% for the third quarter of 2019, compared to 28.0% for 2018 due to product mix. Gross margin percentage decreased to 23.6% for the first nine months of 2019, compared to 26.3% for the same period in the prior year. Gross margin was negatively impacted by customer allowances, lower factory utilization and sales mix.
Selling, General and Administrative Expenses
Selling, general and administrative expenses (SG&A) were $6.8 million for the third quarter of 2019 compared to $6.9 million for the same period in the prior year, a decrease of $0.1 million or 0.9%. SG&A as a percent of sales is 14.8% for the third quarter of 2019 compared with 15.6% for the same period in the prior year. For the first nine months of 2019, SG&A were $24.6 million compared to $22.9 million for the same period in 2019, an increase of $1.7 million or 7.2%, primarily driven by non-recurring costs of new basketball displayers and operating costs associated with Victory Tailgate. As a percent of sales, SG&A is 18.4% for the first nine months of 2019 compared with 18.3% for the same period in the prior year.
Other Income and Expense
During the first nine months of 2018, the Company sold its 50% equity interest in Stiga Sports AB (Stiga) for $33.7 million, resulting in a gain on sale of $13.0 million. This one time gain substantially increased the Company’s year to date earnings for 2018.
Provision for Income Taxes
The effective tax rate for the first nine months of 2019 was 14.6% compared to 21.4% for the same period last year. The 2018 tax rate was higher than 2019 due to the impact of the Tax Cuts and Jobs Act of 2017. Specifically, 2018 included the impact of the Section 965 Transition Tax paid on the untaxed foreign earnings of a controlled foreign corporation as if those earnings had been repatriated to the United States.
Financial Condition and Liquidity
Total debt at the end of the first nine months of 2019 was $5.4 million. Proceeds from the sale of the Company’s 50% interest in Stiga were used to pay off outstanding debt during 2018. The following schedule summarizes the Company’s total debt:
| In thousands | October 5, 2019 | December 29, 2018 | October 6, 2018 | |||||||||
| Note payable | $ | 135 | $ | 0 | $ | 0 | ||||||
| Long term debt | 5,221 | 0 | 0 | |||||||||
| Total | $ | 5,356 | $ | 0 | $ | 0 | ||||||
As a percentage of stockholders’ equity, total debt was 4.2%, zero and zero at October 5, 2019, December 29, 2018, and October 6, 2018 respectively.
16
On January 21, 2019, the Company entered into an Amended and Restated Credit Agreement (“2019 Restated Credit Agreement”) with its issuing bank, JP Morgan Chase Bank, N.A. (“Chase”), and the other lenders identified in the 2019 Restated Credit Agreement (collectively, the “Lender”). Under the terms of the 2019 Restated Credit Agreement, the Lender has made available to the Company a senior revolving credit facility with increased maximum availability of $50.0 million. The maturity date was extended to January 31, 2022. In addition to the increased borrowing amount and extended maturity date, other significant changes reflected in the 2019 Restated Credit Agreement include: more favorable interest rate provisions; increases in borrowing base availability; releases of existing mortgages on the Company’s real property; and increasing to $25.0 million the total consideration that the Company may use for acquisitions without obtaining the Lender’s consent, as long as no event of default exists.
The Company funds working capital requirements through operating cash flows and revolving credit agreements with its bank. Based on working capital requirements, the Company expects to have access to adequate levels of revolving credit to meet growth needs.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Required.
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Escalade maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based closely on the definition of “disclosure controls and procedures” in Rules 13a-15(e) and 15d-15(e). In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, could provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
Management of the Company has evaluated, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, changes in the Company’s internal controls over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the third quarter of 2019.
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 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 1. LEGAL PROCEEDINGS.
None.
17
Item 1A. RISK FACTORS.
In connection with the information set forth in this Quarterly Report on Form 10-Q, the factors discussed under Management’s Discussion and Analysis of Financial Condition and Results of Operations – Forward-Looking Statements (the “Forward-Looking Statements”) and under Item 1A. Risk Factors, in Part I of our Annual Report on Form 10-K for the fiscal year ended December 29, 2018 (the “Annual Report”), should be considered in addition to the discussion set forth below. All of these risks could materially and adversely affect our business, financial condition, and results of operations. In furtherance of, and not in limitation of, the more detailed discussion set forth in the Annual Report and/or in the Forward-Looking Statements, specific factors that may impact Escalade include the following additional risk factors.
The Company’s business is subject to risks associated with sourcing and manufacturing outside of the United States, and risks arising from tariffs and/or international trade wars.
The Company imports many of its raw materials and finished goods from countries outside of the United States, including but not limited to China and Mexico. The Company’s ability to import products in a timely and cost-effective manner may be affected by conditions, such as labor disputes, political unrest, and security requirements of the U.S. and other countries, that could result in the delayed importation of products or require us to locate alternative sources. Our import operations are subject to complex custom laws, regulations, tax requirements, and trade regulations, such as tariffs set by governments through mutual agreements or bilateral actions. Recent changes in U.S. tariffs on goods imported into the U.S., particularly goods from China, have increased the cost of goods purchased by the Company and the ongoing adverse effects of such tariffs potentially could become even more severe. In addition, the proposed trade deal between the U.S., Canada, and Mexico that would replace NAFTA, may or may not be ratified by the applicable legislative bodies in each country and the effects on the Company from the replacement or elimination of NAFTA are uncertain. The overall effect of these risks is that our costs may increase, which in turn may result in lower profitability if we are unable to offset such increases through higher prices, and/or that we may suffer a decline in sales if our customers do not accept price increases.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
c) Issuer Purchases of Equity Securities
| Period | (a) Total Number of Shares (or Units) Purchased | (b) Average Price Paid per Share (or Unit) | (c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | (d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs | ||||||||||||
| Share purchases prior to 7/13/2019 under the current repurchase program. | 998,733 | $ | 8.88 | 998,733 | $ | 2,100,456 | ||||||||||
| Third quarter purchases: | ||||||||||||||||
| 7/14/2019-8/10/2019 | 3,469 | $ | 10.96 | 1,002,202 | $ | 2,062,441 | ||||||||||
| 8/11/2019-9/7/2019 | 34,865 | $ | 10.49 | 1,037,067 | $ | 3,696,664 | ||||||||||
| 9/8/2019-10/5/2019 | 137,953 | $ | 10.98 | 1,175,020 | $ | 2,182,190 | ||||||||||
| Total share purchases under the current program | 1,175,020 | $ | 9.18 | 1,175,020 | $ | 2,182,190 | ||||||||||
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. From its inception date through October 5, 2019, the Company has repurchased 1,175,020 shares of its common stock under this repurchase program for an aggregate price of $10,784,638. 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.
18
Item 4. MINE SAFETY DISCLOSURES.
Not applicable.
Item 5. OTHER INFORMATION.
None.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| ESCALADE, INCORPORATED | |
| Date: October 31, 2019 | /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