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ESCALADE INC - Quarter Report: 2021 October (Form 10-Q)

esca20211002_10q.htm
 
 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

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

For the quarterly period ended October 2, 2021 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 classTrading SymbolName of Exchange on which registered

Common Stock, No Par Value

ESCA

The NASDAQ Stock Market LLC

 

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

Yes ☒ No ☐

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

Yes ☒ No ☐

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

 

Large accelerated filer ☐

 

Accelerated filer ☒

Non-accelerated filer ☐

 

Smaller reporting company ☒

Emerging growth company ☐

 

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

 

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

Yes ☐ No ☒

 

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

 

Class

Outstanding at October 22, 2021

Common, no par value

13,489,332

 

1

 

 

 

INDEX

 

 

   

Page

No.

Part I.

Financial Information:

 
     

Item 1 -

Financial Statements:

 
     
 

Consolidated Condensed Balance Sheets as of October 2, 2021, December 26, 2020, and October 3, 2020

3

     
 

Consolidated Condensed Statements of Operations for the Three Months and Nine Months Ended October 2, 2021 and October 3, 2020

4

     
 

Consolidated Condensed Statements of Stockholders’ Equity for the Three Months and Nine Months Ended October 2, 2021 and October 3, 2020

5

     
 

Consolidated Condensed Statements of Cash Flows for the Nine Months Ended October 2, 2021 and October 3, 2020

6

     
 

Notes to Consolidated Condensed Financial Statements

7

     

Item 2 -

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

13

     

Item 3 -

Quantitative and Qualitative Disclosures About Market Risk

15

     

Item 4 -

Controls and Procedures

16

     

Part II.

Other Information

 
     

Item 2 -

Unregistered Sales of Equity Securities and Use of Proceeds

17

     

Item 6 -

Exhibits

18

     
 

Signature

18

 

2

 

 

PART I - FINANCIAL INFORMATION

 

Item 1. FINANCIAL STATEMENTS

 

ESCALADE, INCORPORATED AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

 

All Amounts in Thousands Except Share Information

 

October 2,

2021

  

December 26,

2020

  

October 3,

2020

 
  

(Unaudited)

  

(Audited)

  

(Unaudited)

 

ASSETS

            

Current Assets:

            

Cash and cash equivalents

 $6,492  $3,505  $6,811 

Receivables, less allowance of $636; $896; and $798; respectively

  68,849   65,280   63,750 

Inventories

  91,755   72,488   63,738 

Prepaid expenses

  6,527   4,068   2,580 

Prepaid income tax

  --   57   -- 

TOTAL CURRENT ASSETS

  173,623   145,398   136,879 
             

Property, plant and equipment, net

  24,000   18,232   16,029 

Operating lease right-of-use assets

  2,500   1,608   1,271 

Intangible assets, net

  21,207   22,645   17,739 

Goodwill

  32,695   32,695   26,749 

Other assets

  131   127   49 

TOTAL ASSETS

 $254,156  $220,705  $198,716 
             

LIABILITIES AND STOCKHOLDERS' EQUITY

            

Current Liabilities:

            

Current portion of long-term debt

 $7,143  $--  $-- 

Trade accounts payable

  25,071   20,947   32,102 

Accrued liabilities

  18,100   24,271   18,702 

Income tax payable

  124   --   1,675 

Current operating lease liabilities

  990   854   693 

TOTAL CURRENT LIABILITIES

  51,428   46,072   53,172 
             

Other Liabilities:

            

Long‑term debt

  51,874   30,073   -- 

Deferred income tax liability

  4,193   4,193   3,537 

Operating lease liabilities

  1,493   763   591 

Other liabilities

  448   448   387 

TOTAL LIABILITIES

  109,436   81,549   57,687 
             

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 – 13,557,879; 13,919,380; and 14,169,404; shares respectively

  13,558   13,919   14,169 

Retained earnings

  131,162   125,237   126,860 

TOTAL STOCKHOLDERS' EQUITY

  144,720   139,156   141,029 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 $254,156  $220,705  $198,716 

 

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 2, 2021

  

October 3, 2020

  

October 2, 2021

  

October 3, 2020

 
                 

Net sales

 $81,298  $78,069  $240,168  $198,882 
                 

Costs and Expenses

                

Cost of products sold

  62,992   54,548   179,355   141,911 

Selling, administrative and general expenses

  10,202   10,374   33,888   29,752 

Amortization

  432   332   1,438   1,108 
                 

Operating Income

  7,672   12,815   25,487   26,111 
                 

Other Income (Expense)

                

Interest expense

  (414)  (44)  (1,035)  (148)

Other income

  68   40   124   108 
                 

Income Before Income Taxes

  7,326   12,811   24,576   26,071 
                 

Provision for Income Taxes

  1,360   2,625   5,042   5,224 
                 

Net Income

 $5,966  $10,186  $19,534  $20,847 
                 

Earnings Per Share Data:

                

Basic earnings per share

 $0.44  $0.72  $1.41  $1.48 

Diluted earnings per share

 $0.43  $0.71  $1.40  $1.47 
                 

Dividends declared

 $0.14  $0.140  $0.42  $0.390 

 

See notes to Consolidated Condensed Financial Statements.

 

4

 
 

 

ESCALADE, INCORPORATED AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED)

 

  

Common Stock

  

Retained

     

All Amounts in Thousands

 

Shares

  

Amount

  

Earnings

  

Total

 
                 

Balances at July 11, 2020

  14,154  $14,154  $118,410  $132,564 
                 

Net income

          10,186   10,186 

Expense of stock options and restricted stock units

          263   263 

Settlement of restricted stock units

  15   15   (15)  -- 

Dividends declared

          (1,984)  (1,984)
                 

Balances at October 3, 2020

  14,169  $14,169  $126,860  $141,029 
                 
                 

Balances at December 28, 2019

  14,215  $14,215  $111,955  $126,170 
                 

Net income

          20,847   20,847 

Expense of stock options and restricted stock units

          756   756 

Settlement of restricted stock units

  51   51   (51)  -- 

Issuance of restricted stock awards

  35   35   (35)  -- 

Dividends declared

          (5,515)  (5,515)

Purchase of stock

  (142)  (142)  (1,184)  (1,326)

Stock issued to directors as compensation

  10   10   87   97 
                 

Balances at October 3, 2020

  14,169  $14,169  $126,860  $141,029 

 

 

 

 

  

Common Stock

  

Retained

     

All Amounts in Thousands

 

Shares

  

Amount

  

Earnings

  

Total

 
                 

Balances at July 10, 2021

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

Net income

          5,966   5,966 

Expense of stock options and restricted stock units

          229   229 

Dividends declared

          (1,917)  (1,917)

Purchase of stock

  (221)  (221)  (4,470)  (4,691)

Stock issued to directors as compensation

                
                 

Balances at October 2, 2021

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

Balances at December 26, 2020

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

Net income

          19,534   19,534 

Expense of stock options and restricted stock units

          666   666 

Exercise of stock options

  10   10   134   144 

Settlement of restricted stock units

  46   46   (46)  -- 

Dividends declared

          (5,804)  (5,804)

Purchase of stock

  (423)  (423)  (8,688)  (9,111)

Stock issued to directors as compensation

  6   6   129   135 
                 

Balances at October 2, 2021

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

 

See notes to Consolidated Condensed Financial Statements.

 

5

 
 

 

ESCALADE, INCORPORATED AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

  

Nine Months Ended

 

All Amounts in Thousands

 

October 2, 2021

  

October 3, 2020

 
         

Operating Activities:

        

Net income

 $19,534  $20,847 

Depreciation and amortization

  3,935   3,252 

Provision for doubtful accounts

  (224)  394 

Stock-based compensation

  666   756 

Gain on disposal of property and equipment

  (27)  (2)

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

  (26,933)  (14,378)

Net cash provided (used) by operating activities

  (3,049)  10,869 
         

Investing Activities:

        

Purchase of property and equipment

  (8,281)  (3,064)

Proceeds from sale of property and equipment

  43   3 

Payment on note payable related to an acquisition

  --   (135)

Net cash used by investing activities

  (8,238)  (3,196)
         

Financing Activities:

        

Proceeds from issuance of long-term debt

  192,792   8,493 

Payments on long-term debt

  (163,849)  (8,493)

Proceeds from exercise of stock options

  144   -- 

Deferred financing fees

  (33)  -- 

Purchase of stock

  (9,111)  (1,326)

Cash dividends paid

  (5,804)  (5,515)

Director stock compensation

  135   97 

Net cash provided (used) by financing activities

  14,274   (6,744)

Net increase in cash and cash equivalents

  2,987   929 

Cash and cash equivalents, beginning of period

  3,505   5,882 

Cash and cash equivalents, end of period

 $6,492  $6,811 

 

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 26, 2020 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 2020 filed with the Securities and Exchange Commission.

 

 

 

Note B ‑ Seasonal Aspects


 

The results of operations for the three and nine month periods ended October 2, 2021 and October 3, 2020 are not necessarily indicative of the results to be expected for the full year.

 

 

 

Note C ‑ Inventories


 

In thousands

 

October 2,

2021

  

December 26,

2020

  

October 3,

2020

 
             

Raw materials

 $10,160  $9,121  $8,446 

Work in progress

  3,873   3,538   4,217 

Finished goods

  77,722   59,829   51,075 
  $91,755  $72,488  $63,738 

 

 

 

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.

 

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 2, 2021, December 26, 2020 and October 3, 2020.

 

7

 
 
      

Fair Value Measurements Using

 

October 2, 2021

In thousands

 

Carrying

Amount

  

Quoted Prices in

Active Markets

for Identical

Assets (Level 1)

  

Significant Other

Observable Inputs

(Level 2)

  

Significant

Unobservable

Inputs

(Level 3)

 

Financial assets

                

Cash and cash equivalents

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

Financial liabilities

                

Current portion of long-term debt

 $7,143  $--  $7,143  $-- 

Long-term debt

 $51,874  $--  $51,874  $-- 

 

      

Fair Value Measurements Using

 

December 26, 2020

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

 $3,505  $3,505  $--  $-- 
                 

Financial liabilities

                

Long-term debt

 $30,073  $--  $30,073  $-- 

 

      

Fair Value Measurements Using

 

October 3, 2020

In thousands

 

Carrying

Amount

  

Quoted Prices in

Active Markets

for Identical

Assets (Level 1)

  

Significant Other

Observable Inputs

(Level 2)

  

Significant

Unobservable

Inputs

(Level 3)

 

Financial assets

                

Cash and cash equivalents

 $6,811  $6,811  $--  $-- 

 

 

 

Note E – Stock Compensation


 

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

 

During the nine months ended October 2, 2021 and pursuant to the 2017 Incentive Plan, in lieu of cash payments of director fees, the Company awarded to certain directors 5,683 shares of common stock. During the nine months ended October 2, 2021, the Company awarded 13,332 restricted stock units to directors and 37,283 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 2021 restricted stock units awarded to employees time vest over three years (one-third one year from grant, one-third two years from grant and one-third three years from grant) provided that the employee is still employed by the Company on the vesting date.

 

For the three and nine months ended October 2, 2021, the Company recognized stock based compensation expense of $229 thousand and $666 thousand, respectively compared to stock based compensation expense of $263 thousand and $756 thousand for the same periods in the prior year. At October 2, 2021 and October 3, 2020, respectively, there was $0.9 million and $1.2 million in unrecognized stock-based compensation expense related to non-vested stock awards.

 

8

 

 

 

Note F ‑ Segment Information


 

  

For the Three Months

Ended October 2, 2021

 

In thousands

 

Sporting

Goods

  

Corp.

  

Total

 
             

Revenues from external customers

 $81,298  $--  $81,298 

Operating income (loss)

  8,087   (415)  7,672 

Net income

  5,614   352   5,966 

 

  

As of and for the Nine Months

Ended October 2, 2021

 

In thousands

 

Sporting

Goods

  

Corp.

  

Total

 
             

Revenues from external customers

 $240,168  $--  $240,168 

Operating income (loss)

  27,049   (1,562)  25,487 

Net income

  18,956   578   19,534 

Total assets

 $246,777  $7,379  $254,156 

 

  

For the Three Months

Ended October 3, 2020

 

In thousands

 

Sporting

Goods

  

Corp.

  

Total

 
             

Revenues from external customers

 $78,069  $--  $78,069 

Operating income (loss)

  13,177   (362)  12,815 

Net income

  9,554   632   10,186 

 

  

As of and for the Nine Months

Ended October 3, 2020

 

In thousands

 

Sporting

Goods

  

Corp.

  

Total

 
             

Revenues from external customers

 $198,882  $--  $198,882 

Operating income (loss)

  27,640   (1,529)  26,111 

Net income

  20,017   830   20,847 

Total assets

 $190,309  $8,407  $198,716 

 

 

 

Note G – Dividend Payment


 

On September 14, 2021, the Company paid a quarterly dividend of $0.14 per common share to all shareholders of record on September 7, 2021. The total amount of the dividend was approximately $1.9 million and was charged against retained earnings.

 

On June 8, 2021, the Company paid a quarterly dividend of $0.14 per common share to all shareholders of record on June 1, 2021. The total amount of the dividend was approximately $1.9 million and was charged against retained earnings.

 

On March 24, 2021, the Company paid a quarterly dividend of $0.14 per common share to all shareholders of record on March 17, 2021 (the amount was funded to the transfer agent by the Company on March 19, 2021). The total amount of the dividend was approximately $1.9 million and was charged against retained earnings.

 

9

 

 

 

Note H ‑ Earnings Per Share


 

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

 

  

Three Months Ended

  

Nine Months Ended

 

In thousands

 

 

October 2,

2021

  

October 3,

2020

  

October 2,

2021

  

October 3,

2020

 
                 

Weighted average common shares outstanding

  13,706   14,128   13,821   14,117 

Dilutive effect of stock options and restricted stock units

  102   137   102   105 

Weighted average common shares outstanding, assuming dilution

  13,808   14,265   13,923   14,222 

 

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 2021 and 2020 were 11,900 and 57,569, respectively.

 

 

 

Note I – 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 months ended October 2, 2021, as compared to the recent accounting pronouncements described in the Company’s Annual Report on Form 10-K for the fiscal year ended December 26, 2020, that are of significance, or potential significance to the Company.

 

In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12, Income Taxes (Topic 740): Simplifying Accounting for Income Taxes, which removes certain exceptions to the general principles of Topic 740, Accounting for Income Taxes (“ASC 740”) and is intended to improve consistency and simplify GAAP in several other areas of ASC 740 by clarifying and amending existing guidance. The Company adopted this standard on December 27, 2020 and the adoption did not have a material impact on its consolidated financial statements.

 

 

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.

 

10

 
 

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.

 

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 2, 2021

  

October 3, 2020

  

October 2, 2021

  

October 3, 2020

 
                 

Gross Sales by Channel:

                

Mass Merchants

 $41,792  $36,234  $93,298  $77,418 

Specialty Dealers

  19,170   21,741   73,347   57,666 

E-commerce

  25,116   25,172   86,053   78,242 

International

  2,259   2,637   9,182   6,129 

Other

  883   598   2,469   1,669 

Total Gross Sales

  89,220   86,382   264,349   221,124 
                 

Less: Gross-to-Net Sales Adjustments

                

Returns

  1,283   2,117   5,531   5,538 

Warranties

  590   376   1,703   1,152 

Customer Allowances

  6,049   5,820   16,947   15,552 

Total Gross-to-Net Sales Adjustments

  7,922   8,313   24,181   22,242 

Total Net Sales

 $81,298  $78,069  $240,168  $198,882 

 

 

 

Note K – Leases


 

We have operating leases for office, manufacturing and distribution facilities as well as for certain equipment. Our commenced leases have remaining lease terms of 1 year to 6 years. As of October 2, 2021, 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.

 

11

 

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:

 

  

Three Months Ended

  

Nine Months Ended

 

All Amounts in Thousands

 

October 2,

2021

  

October 3,

2020

  

October 2,

2021

  

October 3,

2020

 
                 

Lease Expense

                

Operating Lease Cost

 $433  $197  $1,151  $610 

Short-term Lease Cost

  330   137   1,361   411 

Variable Lease Cost

  101   52   304   169 

Total Operating Lease Cost

 $864   386  $2,816  $1,190 
                 

Operating Lease – Operating Cash Flows

 $434  $182  $1,050  $557 

New ROU Assets – Operating Leases

 $1,189  $56  $2,329  $744 

 

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

 

  

Nine Months Ended

 

All Amounts in Thousands

 

October 2,

2021

  

October 3,

2020

 
         

Weighted Average Remaining Lease Term – Operating Leases (years)

  3.93   2.40 

Weighted Average Discount Rate – Operating Leases

  5.00%  5.00%

 

Future minimum lease payments under non-cancellable leases as of October 2, 2021 were as follows:

 

All Amounts in Thousands

    
     

Year 1

 $325 

Year 2

  884 

Year 3

  405 

Year 4

  336 

Year 5

  312 

Thereafter

  486 

Total future minimum lease payments

  2,748 

Less imputed interest

  (265)

Total

 $2,483 
     

Reported as of October 2, 2021

    

Current operating lease liabilities

  990 

Long-term operating lease liabilities

  1,493 

Total

 $2,483 

 

As of October 2, 2021, we have entered into a lease for additional warehouse and operations which has not yet commenced. Although the location is currently under construction, we do not control the building during construction, and are thus not deemed to be the owner during construction. Amounts in the table above exclude legally binding minimum lease payments for the lease signed but not yet commenced of $9.9 million.

 

 

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.

 

12

 
 

 

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; Escalade’s plans and expectations surrounding the transition to its Interim Chief Executive Officer and all potential related effects and consequences; 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; 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, pickleball, billiards, indoor and outdoor game recreation, water sports, 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 enables 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.

 

13

 

 

COVID-19 Pandemic

 

The novel coronavirus (COVID-19) pandemic continued to affect the Company’s operations through the third quarter of 2021 and may continue to do so indefinitely thereafter. Increased customer demand the Company experienced through 2020, likely caused in part by consumers remaining home to limit the spread of COVID-19, has carried over into the 2021 fiscal year. While the Company continues to meet these demands through accelerated ordering schedules and increased inventory, a substantial decrease in customer demand or slower payments by the Company’s mass merchants, specialty dealers or other customers could adversely impact the Company’s liquidity. All of these factors may have far reaching impacts on the Company’s business, operations, and financial results and conditions, directly and indirectly, including without limitation impacts on the health of the Company’s management and employees, manufacturing, distribution, marketing and sales operations, customer and consumer behaviors, and on the overall economy. The scope and nature of these impacts, most of which are beyond the Company’s control, continue to evolve and the outcomes are uncertain. In particular, uncertainty concerning the ongoing severity of the pandemic, potential government actions in response to the pandemic, the length of time it takes for normal economic operating conditions to resume, and potential changes in consumer habits following the lifting of COVID restrictions, all contribute to a volatile environment for conducting business.

 

Due to the above circumstances and as described generally in this Form 10-Q, the Company’s results of operations for the period ended October 2, 2021 are not necessarily indicative of the results to be expected for fiscal year 2021. 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.

 

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 2,

2021

   

October 3,

2020

   

October 2,

2021

   

October 3,

2020

 

Net revenue

    100.0 %     100.0 %     100.0 %     100.0 %

Cost of products sold

    77.5 %     69.9 %     74.7 %     71.4 %

Gross margin

    22.5 %     30.1 %     25.3 %     28.6 %

Selling, administrative and general expenses

    12.6 %     13.3 %     14.1 %     15.0 %

Amortization

    0.5 %     0.4 %     0.6 %     0.5 %

Operating income

    9.4 %     16.4 %     10.6 %     13.1 %

 

Revenue and Gross Margin

Sales increased by 4.1% for the third quarter of 2021, compared with the same period in the prior year. The increase in sales was driven by continued demand for our products, primarily in the archery and games product lines. For the first nine months of 2021, sales were up 20.8% compared to prior year.

 

The overall gross margin percentage decreased to 22.5% for the third quarter of 2021, compared to 30.1% for 2020. Gross margin was negatively impacted by higher transportation expenses, raw material costs, currency exchange rates, increased wage pressure, and inventory handling costs.

 

Gross margin percentage decreased to 25.3% for the first nine months of 2021, compared to 28.6% for the same period in the prior year.

 

Selling, General and Administrative Expenses

Selling, general and administrative expenses (SG&A) were $10.2 million for the third quarter of 2021 compared to $10.4 million for the same period in the prior year, a decrease of $0.2 million or 1.7%. SG&A as a percent of sales is 12.6% for the third quarter of 2021 compared with 13.3% for the same period in the prior year. For the first nine months of 2021, SG&A were $33.9 million compared to $29.8 million for the same period in 2020, an increase of $4.1 million or 13.9%. As a percent of sales, SG&A is 14.1% for the first nine months of 2021 compared with 15.0% for the same period in the prior year.

 

Provision for Income Taxes

The effective tax rate for the first nine months of 2021 was 20.5% compared to 20.0% for the same period last year.

 

14

 

 

Financial Condition and Liquidity

Total debt at the end of the first nine months of 2021 was $59.0 million, an increase of $28.9 million from December 26, 2020. The following schedule summarizes the Company’s total debt:

 

In thousands

 

October 2,

2021

   

December 26,

2020

   

October 3,

2020

 
                         

Current portion of long-term debt

  $ 7,143     $ --     $ --  

Long term debt

  $ 51,874     $ 30,073     $ --  

 

As a percentage of stockholders’ equity, total debt was 40.8%, 21.6% and zero at October 2, 2021, December 26, 2020, and October 3, 2020 respectively.

 

On July 7, 2021, the Company and its wholly owned subsidiary, Indian Industries, Inc. (“Indian”) entered into the Fourth Amendment dated as of July 7, 2021 (the “Fourth Amendment”) to the 2019 Restated Credit Agreement dated as of January 21, 2019 among the Company, Indian, each of their domestic subsidiaries, and Chase, as Administrative Agent and as Lender (the “Lender”). Under the terms of the Fourth Amendment, the Lender extended a $50.0 million term loan to the Company and reduced the maximum availability under the senior revolving credit facility from $75.0 million to $50.0 million. The maturity date of the term loan is July 7, 2026 and the maturity date of the revolving credit facility likewise was extended to July 7, 2026. The Company may prepay the revolving credit facility, in whole or in part, and reborrow prior to the revolving loan maturity date. The Company’s indebtedness under the Credit Agreement continues to be collateralized by liens on all of the present and future equity of each of the Company’s domestic subsidiaries and substantially all of the assets of the Company (excluding real estate).

 

The Company funds working capital requirements, shareholder dividends, and stock repurchases through operating cash flows and revolving credit agreements with its bank. 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.

 

15

 

 

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 Interim 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 Interim 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 Interim 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 Interim 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 2021.

 

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 2021 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.

 

As of the date of this filing, 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 26, 2020.

 

16

 

 

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 7/10/2021 under the current repurchase program.

    1,862,975       $12.24       1,862,975       $10,167,563  

Third quarter purchases:

                               

7/11/2021-8/7/2021

    46,046       $22.90       1,909,021       $9,113,132  

8/8/2021-9/4/2021

    33,222       $22.95       1,942,243       $8,350,693  

9/5/2021-10/2/2021

    142,342       $20.20       2,084,585       $5,475,786  

Total share purchases under the current program

    2,084,585       $13.19       2,084,585       $5,475,786  

 

The Company has one stock repurchase program which was established in February 2003 by the Board of Directors and which initially authorized management to expend up to $3,000,000 to repurchase shares on the open market as well as in private negotiated transactions. In February 2005, February 2006, August 2007 and February 2008 the Board of Directors increased the remaining balance on this plan to its original level of $3,000,000. In September 2019, the Board of Directors increased the stock repurchase program from $3,000,000 to $5,000,000. In December 2020, the Board of Directors increased the stock repurchase program to $15,000,000. From its inception date through October 2, 2021, the Company has repurchased 2,084,585 shares of its common stock under this repurchase program for an aggregate price of $27,490,151. 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.

 

17

 

 

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.

   

31.1

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

   

31.2

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

   

32.1

Chief Executive Officer Section 1350 Certification.

   

32.2

Chief Financial Officer Section 1350 Certification.

   

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document

   

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document

   

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document

   

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document

   

101.INS

Inline XBRL Instance Document

   

101.SCH

Inline XBRL Taxonomy Extension Schema Document

   

104

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

 

 

SIGNATURE

 

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

 

 

ESCALADE, INCORPORATED

 

 

 

 

 

 

       
       

Date:         October 28, 2021 

 

/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)  

 

18