ESCALADE INC 10-Q

Item 1. FINANCIAL STATEMENTS   ESCALADE, INCORPORATED AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS   All Amounts in Thousands Except Share Information   March 19, 2022     December 25, 2021     March 20, 2021       (Unaudited)     (Audited)     (Unaudited)   ASSETS                         Current Assets:                         Cash and cash equivalents   $ 6,392     $ 4,374     $ 5,879   Receivables, less allowance of $ 566 ; $ 457 ; and $ 954 ; respectively     67,301       65,991       54,475   Inventories     114,605       92,382       91,425   Prepaid expenses     12,716       7,569       4,044   Prepaid income tax     --       739       --   TOTAL CURRENT ASSETS     201,014       171,055       155,823                             Property, plant and equipment, net     28,812       24,936       18,962   Operating lease right-of-use assets     1,896       2,210       2,147   Intangible assets, net     36,208       20,778       22,216   Goodwill     38,837       32,695       32,695   Other assets     294       124       117   TOTAL ASSETS   $ 307,061     $ 251,798     $ 231,960                             LIABILITIES AND STOCKHOLDERS' EQUITY                         Current Liabilities:                         Current portion of long-term debt   $ 7,143     $ 7,143     $ --   Trade accounts payable     27,378       15,847       22,708   Accrued liabilities     19,875       24,385       12,194   Income tax payable     1,087       --       1,456   Current operating lease liabilities     604       818       1,310   TOTAL CURRENT LIABILITIES     56,087       48,193       37,668                             Other Liabilities:                         Long‑term debt     92,850       50,396       46,907   Deferred income tax liability     4,759       4,759       4,193   Operating lease liabilities     1,298       1,387       844   Other liabilities     448       448       448   TOTAL LIABILITIES     155,442       105,183       90,060                             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 – 13,585,096 ; 13,493,332 ; and 13,924,754 ; shares respectively     13,585       13,493       13,925   Retained earnings     138,034       133,122       127,975   TOTAL STOCKHOLDERS' EQUITY     151,619       146,615       141,900   TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY   $ 307,061     $ 251,798     $ 231,960     See notes to Consolidated Condensed Financial Statements.   3       ESCALADE, INCORPORATED AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)       Three Months Ended   All Amounts in Thousands Except Per Share Data   March 19, 2022     March 20, 2021                     Net sales   $ 72,380     $ 59,191                     Costs and Expenses                 Cost of products sold     52,261       41,757   Selling, administrative and general expenses     10,526       9,876   Amortization     570       429                     Operating Income     9,023       7,129                     Other Income (Expense)                 Interest expense     ( 560 )     ( 234 ) Other income     43       35                     Income Before Income Taxes     8,506       6,930                     Provision for Income Taxes     1,852       1,488                     Net Income   $ 6,654     $ 5,442                     Earnings Per Share Data:                 Basic earnings per share   $ 0.49     $ 0.39   Diluted earnings per share   $ 0.49     $ 0.39                     Dividends declared   $ 0.15     $ 0.14     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 December 26, 2020     13,919     $ 13,919     $ 125,237     $ 139,156                                     Net income                     5,442       5,442   Expense of stock options and restricted stock units                     111       111   Exercise of stock options     10       10       134       144   Settlement of restricted stock units     45       45       ( 45 )     --   Dividends declared                     ( 1,950 )     ( 1,950 ) Purchase of stock     ( 49 )     ( 49 )     ( 954 )     ( 1,003 )                                   Balances at March 20, 2021     13,925     $ 13,925     $ 127,975     $ 141,900                                                                       Balances at December 25, 2021     13,493     $ 13,493     $ 133,122     $ 146,615                                     Net income                     6,654       6,654   Expense of restricted stock units                   388       388   Settlement of restricted stock units     92       92       ( 92 )     --   Dividends declared                     ( 2,038 )     ( 2,038 )                                   Balances at March 19, 2022     13,585     $ 13,585     $ 138,034     $ 151,619     See notes to Consolidated Condensed Financial Statements.   5       ESCALADE, INCORPORATED AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)       Three Months Ended   All Amounts in Thousands   March 19, 2022     March 20, 2021                     Operating Activities:                 Net income   $ 6,654     $ 5,442   Depreciation and amortization     1,473       1,134   Provision for doubtful accounts     99       55   Stock-based compensation     388       111   Loss (gain) on disposal of property and equipment     --       ( 26 ) Adjustments necessary to reconcile net income to net cash provided by operating activities     ( 11,486 )     ( 16,958 ) Net cash used by operating activities     ( 2,872 )     ( 10,242 )                   Investing Activities:                 Purchase of property and equipment     ( 730 )     ( 1,451 ) Proceeds from sale of property and equipment     --       42   Acquisitions     ( 34,616 )     --   Net cash used by investing activities     ( 35,346 )     ( 1,409 )                   Financing Activities:                 Proceeds from issuance of long-term debt     72,830       49,072   Payments on long-term debt     ( 30,376 )     ( 32,238 ) Proceeds from exercise of stock options     --       144   Purchase of stock     --       ( 1,003 ) Deferred financing fees     ( 180 )     --   Cash dividends paid     ( 2,038 )     ( 1,950 ) Net cash provided by financing activities     40,236       14,025   Net increase in cash and cash equivalents     2,018       2,374   Cash and cash equivalents, beginning of period     4,374       3,505   Cash and cash equivalents, end of period   $ 6,392     $ 5,879     See notes to Consolidated Condensed Financial Statements.   6     ESCALADE, INCORPORATED AND SUBSIDIARIES   NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)     Note A – Summary of Significant Accounting Policies   Presentation of Consolidated Condensed Financial Statements – The significant accounting policies followed by the Company and its wholly owned subsidiaries for interim financial reporting are consistent with the accounting policies followed for its annual financial reporting. All adjustments that are of a normal recurring nature and are in the opinion of management necessary for a fair statement of the results for the periods reported have been included in the accompanying consolidated condensed financial statements. The consolidated condensed balance sheet of the Company as of December 25, 2021 has been derived from the audited consolidated balance sheet of the Company as of that date. Certain information and note disclosures normally included in the Company’s annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) have been condensed or omitted. These consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 10 -K annual report for 2021 filed with the Securities and Exchange Commission.       Note B ‑ Seasonal Aspects   The results of operations for the three months ended March 19, 2022 and March 20, 2021 are not necessarily indicative of the results to be expected for the full year.       Note C ‑ Inventories   In thousands   March 19, 2022     December 25, 2021     March 20, 2021                             Raw materials   $ 9,395     $ 9,142     $ 9,749   Work in progress     4,318       3,529       4,074   Finished goods     100,892       79,711       77,602       $ 114,605     $ 92,382     $ 91,425         Note D – Fair Values of Financial Instruments The following methods were used to estimate the fair value of all financial instruments recognized in the accompanying balance sheets at amounts other than fair values.   Cash and Cash Equivalents   Fair values of cash and cash equivalents approximate cost due to the short period of time to maturity.   Long-term Debt   Fair values of long-term debt is estimated based on borrowing rates currently available to the Company for bank loans with similar terms and maturities and determined through the use of a discounted cash flow model.   7     The following table presents estimated fair values of the Company’s financial instruments and the level within the fair value hierarchy in which the fair value measurements fall in accordance with FASB ASC 825 at March 19, 2022, December 25, 2021 and March 20, 2021.               Fair Value Measurements Using   March 19, 2022 In thousands   Carrying Amount     Quoted Prices in Active Markets for Identical Assets (Level 1)     Significant Other Observable Inputs (Level 2)     Significant Unobservable Inputs (Level 3)   Financial assets                                 Cash and cash equivalents   $ 6,392     $ 6,392     $ --     $ --                                     Financial liabilities                                 Current portion of long-term debt   $ 7,143     $ --     $ 7,143     $ --   Long-term debt   $ 92,850     $ --     $ 92,850     $ --                 Fair Value Measurements Using   December 25, 2021 In thousands   Carrying Amount     Quoted Prices in Active Markets for Identical Assets (Level 1)     Significant Other Observable Inputs (Level 2)     Significant Unobservable Inputs (Level 3)   Financial assets                                 Cash and cash equivalents   $ 4,374     $ 4,374     $ --     $ --                                     Financial liabilities                                 Current portion of long-term debt   $ 7,143     $ --     $ 7,143     $ --   Long-term debt   $ 50,396     $ --     $ 50,396     $ --                 Fair Value Measurements Using   March 20, 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   $ 5,879     $ 5,879     $ --     $ --                                     Financial liabilities                                 Long-term debt   $ 46,907     $ --     $ 46,907     $ --         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 three months ended March 19, 2022, the Company awarded 15,000 restricted stock units to directors and 196,254 restricted stock units to employees. The restricted stock units awarded to directors time vest over two years ( one -half one year from grant date and one -half two years from grant date) provided that the director is still a director of the Company at the vest date. Director restricted stock units are subject to forfeiture, except for termination of services as a result of retirement, death or disability, if on the vesting date the director no longer holds a position with the Company. The 2022 restricted stock units awarded to employees time vest over three years ( one - third one year from grant, one - third two years from grant and one - third three years from grant) provided that the employee is still employed by the Company on the vesting date.   For the three months ended March 19, 2022 and March 20, 2021, the Company recognized stock based compensation expense of $ 388 thousand and $ 111 thousand, respectively. At March 19, 2022 and March 20, 2021, respectively, there was $ 3.2 million and $ 1.5 million in unrecognized stock-based compensation expense related to non-vested stock awards.   8         Note F ‑ Segment Information       As of and for the Three Months Ended March 19, 2022   In thousands   Sporting Goods     Corp.     Total                             Revenues from external customers   $ 72,380     $ --     $ 72,380   Operating income (loss)     9,535       ( 512 )     9,023   Net income     6,541       113       6,654   Total assets   $ 300,074     $ 6,987     $ 307,061         As of and for the Three Months Ended March 20, 2021   In thousands   Sporting Goods     Corp.     Total                             Revenues from external customers   $ 59,191     $ --     $ 59,191   Operating income (loss)     7,595       ( 466 )     7,129   Net income (loss)     5,362       80       5,442   Total assets   $ 225,183     $ 6,777     $ 231,960         Note G – Dividend Payment   On March 21, 2022, the Company paid a quarterly dividend of $ 0.15 per common share to all shareholders of record on March 14, 2022 ( the amount was funded to the transfer agent by the Company on March 17, 2022). The total amount of the dividend was approximately $ 2.0 million and was charged against retained earnings.       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   In thousands   March 19, 2022     March 20, 2021                     Weighted average common shares outstanding     13,509       13,880   Dilutive effect of stock options and restricted stock units     138       97   Weighted average common shares outstanding, assuming dilution     13,647       13,977     Stock options that are anti-dilutive as to earnings per share and unvested restricted stock units which have a market condition for vesting that has not been achieved are ignored in the computation of dilutive earnings per share. The number of stock options and restricted stock units that were excluded in 2022 and 2021 were zero and 11,900 , respectively.       Note I – New Accounting Standards and Changes in Accounting Principles   There have been no recent accounting pronouncements or changes in accounting pronouncements during the three months ended March 19, 2022, as compared to the recent accounting pronouncements described in the Company’s Annual Report on Form 10 -K for the fiscal year ended December 25, 2021, that are of significance, or potential significance to the Company.   9         Note J – Revenue from Contracts with Customers   Revenue Recognition – Revenue is recognized when obligations under the terms of a contract with our customer are satisfied; generally this occurs with the transfer of control of our goods at a point in time based on shipping terms and transfer of title. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods. Sales, value add, and other taxes we collect concurrent with revenue-producing activities are excluded from revenue. Shipping and handling fees charged to customers are reported within revenue.   Gross-to-net sales adjustments – We recognize revenue net of various sales adjustments to arrive at net sales as reported on the statement of operations. These adjustments are referred to as gross-to-net sales adjustments and primarily fall into one of three categories: returns, warranties and customer allowances.   Returns – The Company records an accrued liability and reduction in sales for estimated product returns based upon historical experience. An accrued liability and reduction in sales is also recorded for approved return authorizations that have been communicated by the customer.   Warranties – Limited warranties are provided on certain products for varying periods. We record an accrued liability and reduction in sales for estimated future warranty claims based upon historical experience and management’s estimate of the level of future claims. Changes in the estimated amounts recognized in prior years are recorded as an adjustment to the accrued liability and sales in the current year.   Customer Allowances – Customer allowances are common practice in the industries in which the Company operates. These agreements are typically in the form of advertising subsidies, volume rebates and catalog allowances and are accounted for as a reduction to gross sales. The Company reviews such allowances on an ongoing basis and accruals are adjusted, if necessary, as additional information becomes available.   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   All Amounts in Thousands   March 19, 2022     March 20, 2021                     Gross Sales by Channel:                 Mass Merchants   $ 27,030     $ 18,396   Specialty Dealers     25,343       22,560   E-commerce     22,856       21,226   International     4,080       2,727   Other     774       571   Total Gross Sales     80,083       65,480                     Less: Gross-to-Net Sales Adjustments                 Returns     2,170       1,615   Warranties     625       582   Customer Allowances     4,908       4,092   Total Gross-to-Net Sales Adjustments     7,703       6,289   Total Net Sales   $ 72,380     $ 59,191     10         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 5 years. As of March 19, 2022, the Company has not entered into any lease arrangements classified as a finance lease.   We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, current operating lease liabilities and operating lease liabilities on our consolidated balance sheet. The Company has elected an accounting policy to not recognize short-term leases ( one year or less) on the balance sheet. The Company also elected the package of practical expedients which applies to leases that commenced before the adoption date. By electing the package of practical expedients, the Company did not need to reassess the following; whether any existing contracts are or contain leases, the lease classification for any existing leases and initial direct costs for any existing leases.   ROU assets and operating lease liabilities are recognized based on the present value of future minimum lease payments over the lease term at commencement date. When the implicit rate of the lease is not provided or cannot be determined, we use our incremental borrowing rate based on the information available at the commencement date to determine the present value of future payments. Lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise those options. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. Components of lease expense and other information as follows:       Three Months Ended   All Amounts in Thousands   March 19, 2022     March 20, 2021                     Lease Expense                 Operating Lease Cost   $ 338     $ 311   Short-term Lease Cost     501       523   Variable Lease Cost     182       86   Total Operating Lease Cost   $ 1,021     $ 920                     Operating Lease – Operating Cash Flows   $ 303     $ 255   New ROU Assets – Operating Leases (non-cash)   $ --     $ 827   Weighted Average Remaining Lease Term – Operating Leases (in years)     4.12       1.90   Weighted Average Discount Rate – Operating Leases     5.00 %     5.00 %   Future minimum lease payments under non-cancellable leases as of March 19, 2022 were as follows:   All Amounts in Thousands                   Year 1   $ 563   Year 2     412   Year 3     341   Year 4     312   Year 5     289   Thereafter     197   Total future minimum lease payments     2,114   Less imputed interest     ( 212 ) Total   $ 1,902             Reported as of March 19, 2022         Current operating lease liabilities     604   Long-term operating lease liabilities     1,298   Total   $ 1,902     As of March 19, 2022, 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 leases signed but not yet commenced of $ 9.9 million.   11         Note L – Commitments and Contingencies   The Company is involved in litigation arising in the normal course of business. The Company does not believe that the disposition or ultimate resolution of existing claims or lawsuits will have a material adverse effect on the business or financial condition of the Company.       Note M – Acquisition   On January 21, 2022, the Company completed its acquisition of the assets constituting the Brunswick Billiards business of Life Fitness, LLC. The estimated purchase price of the acquisition is $ 34.6 million, subject to final adjustment for net working capital as of the closing date. The acquisition was funded by cash and the Company’s revolving credit facility. The Company has not yet finalized the purchase price or its final evaluation of the fair value of certain items, including net working capital. The current estimates of fair value for the more significant assets acquired and liabilities assumed were receivables ($ 1.2 million), inventory ($ 14.5 million), fixed assets, including building and land ($ 4.0 million), accounts payable ($ 4.7 million), other accrued liabilities ($ 2.6 million), goodwill ($ 6.1 million) and other intangible assets ($ 16.0 million).   12