ESCALADE INC 10-Q

Item 1. FINANCIAL STATEMENTS   ESCALADE, INCORPORATED AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS   All Amounts in Thousands Except Share Information   July 9, 2022     December 25, 2021     July 10, 2021       (Unaudited)     (Audited)     (Unaudited)   ASSETS                         Current Assets:                         Cash and cash equivalents   $ 6,195     $ 4,374     $ 10,641   Receivables, less allowance of $ 726 ; $ 457 ; and $ 717 ; respectively     60,011       65,991       52,248   Inventories     130,246       92,382       86,612   Prepaid expenses     7,263       7,569       4,775   Prepaid income tax     621       739       --   TOTAL CURRENT ASSETS     204,336       171,055       154,276                             Property, plant and equipment, net     28,344       24,936       20,792   Operating lease right-of-use assets     9,318       2,210       2,079   Intangible assets, net     35,353       20,778       21,638   Goodwill     39,226       32,695       32,695   Other assets     275       124       137   TOTAL ASSETS   $ 316,852     $ 251,798     $ 231,617                             LIABILITIES AND STOCKHOLDERS' EQUITY                         Current Liabilities:                         Current portion of long-term debt   $ 7,143     $ 7,143     $ 7,143   Trade accounts payable     24,650       15,847       14,705   Accrued liabilities     20,483       24,385       14,875   Income tax payable     --       --       180   Current operating lease liabilities     676       818       1,526   TOTAL CURRENT LIABILITIES     52,952       48,193       38,429                             Other Liabilities:                         Long‑term debt     94,040       50,396       42,857   Deferred income tax liability     4,759       4,759       4,193   Operating lease liabilities     8,660       1,387       557   Other liabilities     448       448       448   TOTAL LIABILITIES     160,859       105,183       86,484                             Stockholders' Equity:                         Preferred stock:                         Authorized 1,000,000 shares; no par value, none issued                         Common stock:                         Authorized 30,000,000 shares; no par value, issued and outstanding – 13,590,407 ; 13,493,332 ; and 13,779,489 ; shares respectively     13,590       13,493       13,779   Retained earnings     142,403       133,122       131,354   TOTAL STOCKHOLDERS' EQUITY     155,993       146,615       145,133   TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY   $ 316,852     $ 251,798     $ 231,617     See notes to Consolidated Condensed Financial Statements.   3       ESCALADE, INCORPORATED AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)       Three Months Ended     Six Months Ended   All Amounts in Thousands Except Per Share Data   July 9, 2022     July 10, 2021     July 9, 2022     July 10, 2021                                     Net sales   $ 94,337     $ 99,679     $ 166,717     $ 158,870                                     Costs and Expenses                                 Cost of products sold     70,613       74,606       122,874       116,363   Selling, administrative and general expenses     14,680       13,810       25,206       23,686   Amortization     855       577       1,425       1,006                                     Operating Income     8,189       10,686       17,212       17,815                                     Other Income (Expense)                                 Interest expense     ( 948 )     ( 387 )     ( 1,508 )     ( 621 ) Other income     29       21       72       56                                     Income Before Income Taxes     7,270       10,320       15,776       17,250                                     Provision for Income Taxes     1,597       2,194       3,449       3,682                                     Net Income   $ 5,673     $ 8,126     $ 12,327     $ 13,568                                     Earnings Per Share Data:                                 Basic earnings per share   $ 0.42     $ 0.59     $ 0.91     $ 0.98   Diluted earnings per share   $ 0.42     $ 0.58     $ 0.91     $ 0.97                                     Dividends declared   $ 0.15     $ 0.14     $ 0.30     $ 0.28     See notes to Consolidated Condensed Financial Statements.   4       ESCALADE, INCORPORATED AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED)         Common Stock     Retained           All Amounts in Thousands   Shares     Amount     Earnings     Total                                     Balances at March 20, 2021     13,925     $ 13,925     $ 127,975     $ 141,900                                     Net income                     8,126       8,126   Expense of stock options and restricted stock units                     326       326   Settlement of restricted stock units     1       1       ( 1 )     --   Dividends declared                     ( 1,937 )     ( 1,937 ) Purchase of stock     ( 153 )     ( 153 )     ( 3,264 )     ( 3,417 ) Stock issued to directors as compensation     6       6       129       135                                     Balances at July 10, 2021     13,779     $ 13,779     $ 131,354     $ 145,133                                                                       Balances at December 26, 2020     13,919     $ 13,919     $ 125,237     $ 139,156                                     Net income                     13,568       13,568   Expense of stock options and restricted stock units                     437       437   Exercise of stock options     10       10       134       144   Settlement of restricted stock units     46       46       ( 46 )     --   Dividends declared                     ( 3,887 )     ( 3,887 ) Purchase of stock     ( 202 )     ( 202 )     ( 4,218 )     ( 4,420 ) Stock issued to directors as compensation     6       6       129       135                                     Balances at July 10, 2021     13,779     $ 13,779     $ 131,354     $ 145,133               Common Stock     Retained           All Amounts in Thousands   Shares     Amount     Earnings     Total                                     Balances at March 19, 2022     13,585     $ 13,585     $ 138,034     $ 151,619                                     Net income                     5,673       5,673   Expense of restricted stock units                     688       688   Settlement of restricted stock units     1       1       ( 1 )     --   Dividends declared                     ( 2,038 )     ( 2,038 ) Stock issued to directors as compensation     4       4       47       51                                     Balances at July 9, 2022     13,590     $ 13,590     $ 142,403     $ 155,993                                                                       Balances at December 25, 2021     13,493     $ 13,493     $ 133,122     $ 146,615                                     Net income                     12,327       12,327   Expense of restricted stock units                     1,076       1,076   Settlement of restricted stock units     93       93       ( 93 )     --   Dividends declared                     ( 4,076 )     ( 4,076 ) Stock issued to directors as compensation     4       4       47       51                                     Balances at July 9, 2022     13,590     $ 13,590     $ 142,403     $ 155,993     See notes to Consolidated Condensed Financial Statements.   5       ESCALADE, INCORPORATED AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)       Six Months Ended   All Amounts in Thousands   July 9, 2022     July 10, 2021                     Operating Activities:                 Net income   $ 12,327     $ 13,568   Depreciation and amortization     3,603       2,709   Provision for doubtful accounts     258       ( 152 ) Stock-based compensation     1,076       437   Gain on disposal of property and equipment     --       ( 26 ) Adjustments necessary to reconcile net income to net cash used by operating activities     ( 17,589 )     ( 17,030 ) Net cash used by operating activities     ( 325 )     ( 494 )                   Investing Activities:                 Purchase of property and equipment     ( 1,536 )     ( 4,278 ) Proceeds from sale of property and equipment     --       42   Acquisitions     ( 35,757 )     --   Net cash used by investing activities     ( 37,293 )     ( 4,236 )                   Financing Activities:                 Proceeds from issuance of long-term debt     124,571       162,666   Payments on long-term debt     ( 80,927 )     ( 142,739 ) Proceeds from exercise of stock options     --       144   Purchase of stock     --       ( 4,420 ) Director stock compensation     51       135   Deferred financing fees     ( 180 )     ( 33 ) Cash dividends paid     ( 4,076 )     ( 3,887 ) Net cash provided by financing activities     39,439       11,866   Net increase in cash and cash equivalents     1,821       7,136   Cash and cash equivalents, beginning of period     4,374       3,505   Cash and cash equivalents, end of period   $ 6,195     $ 10,641     See notes to Consolidated Condensed Financial Statements.   6     ESCALADE, INCORPORATED AND SUBSIDIARIES   NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)     Note A – Summary of Significant Accounting Policies   Presentation of Consolidated Condensed Financial Statements – The significant accounting policies followed by the Company and its wholly owned subsidiaries for interim financial reporting are consistent with the accounting policies followed for its annual financial reporting. All adjustments that are of a normal recurring nature and are in the opinion of management necessary for a fair statement of the results for the periods reported have been included in the accompanying consolidated condensed financial statements. The consolidated condensed balance sheet of the Company as of December 25, 2021 has been derived from the audited consolidated balance sheet of the Company as of that date. Certain information and note disclosures normally included in the Company’s annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) have been condensed or omitted. These consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 10-K annual report for 2021 filed with the Securities and Exchange Commission.       Note B ‑ Seasonal Aspects   The results of operations for the three and six month periods ended July 9, 2022 and July 10, 2021 are not necessarily indicative of the results to be expected for the full year.       Note C ‑ Inventories   In thousands   July 9, 2022     December 25, 2021     July 10, 2021                             Raw materials   $ 9,821     $ 9,142     $ 10,291   Work in progress     4,653       3,529       4,070   Finished goods     115,772       79,711       72,251       $ 130,246     $ 92,382     $ 86,612         Note D – Fair Values of Financial Instruments   The following methods were used to estimate the fair value of all financial instruments recognized in the accompanying balance sheets at amounts other than fair values.   Cash and Cash Equivalents   Fair values of cash and cash equivalents approximate cost due to the short period of time to maturity.   Long-term Debt   Fair values of long-term debt is estimated based on borrowing rates currently available to the Company for bank loans with similar terms and maturities and determined through the use of a discounted cash flow model.   7     The following table presents estimated fair values of the Company’s financial instruments and the level within the fair value hierarchy in which the fair value measurements fall in accordance with FASB ASC 825 at July 9, 2022, December 25, 2021 and July 10, 2021.               Fair Value Measurements Using   July 9, 2022   Carrying     Quoted Prices in Active Markets for Identical     Significant Other Observable Inputs     Significant Unobservable Inputs   In thousands   Amount     Assets (Level 1)     (Level 2)     (Level 3)   Financial assets                                 Cash and cash equivalents   $ 6,195     $ 6,195     $ --     $ --                                     Financial liabilities                                 Current portion of long-term debt   $ 7,143     $ --     $ 7,143     $ --   Long-term debt   $ 94,040     $ --     $ 94,040     $ --                 Fair Value Measurements Using   December 25, 2021   Carrying     Quoted Prices in Active Markets for Identical     Significant Other Observable Inputs     Significant Unobservable Inputs   In thousands   Amount     Assets (Level 1)     (Level 2)     (Level 3)   Financial assets                                 Cash and cash equivalents   $ 4,374     $ 4,374     $ --     $ --                                     Financial liabilities                                 Current portion of long-term debt   $ 7,143     $ --     $ 7,143     $ --   Long-term debt   $ 50,396     $ --     $ 50,396     $ --                 Fair Value Measurements Using   July 10, 2021   Carrying     Quoted Prices in Active Markets for Identical     Significant Other Observable Inputs     Significant Unobservable Inputs   In thousands   Amount     Assets (Level 1)     (Level 2)     (Level 3)   Financial assets                                 Cash and cash equivalents   $ 10,641     $ 10,641     $ --     $ --                                     Financial liabilities                                 Current portion of long-term debt   $ 7,143     $ --     $ 7,143     $ --   Long-term debt   $ 42,857     $ --     $ 42,857     $ --         Note E – Stock Compensation   The fair value of stock-based compensation is recognized in accordance with the provisions of FASB ASC 718, Stock Compensation .   During the six months ended July 9, 2022 and pursuant to the 2017 Incentive Plan, in lieu of cash payments of director fees, the Company awarded to certain directors 3,886 shares of common stock. During the six months ended July 9, 2022, the Company awarded 20,000 restricted stock units to directors and 196,254 restricted stock units to employees. The restricted stock units awarded to directors time vest over two years (one-half one year from grant date and one-half two years from grant date) provided that the director is still a director of the Company at the vest date. Director restricted stock units are subject to forfeiture, except for termination of services as a result of retirement, death or disability, if on the vesting date the director no longer holds a position with the Company. The 2022 restricted stock units awarded to employees time vest over three years (one-third one year from grant, one-third two years from grant and one-third three years from grant) provided that the employee is still employed by the Company on the vesting date.   For the three and six months ended July 9, 2022, the Company recognized stock based compensation expense of $ 688 thousand and $ 1,076 thousand, respectively compared to stock based compensation expense of $ 326 thousand and $ 437 thousand for the same periods in the prior year. At July 9, 2022 and July 10, 2021, respectively, there was $ 2.6 million and $ 1.1 million in unrecognized stock-based compensation expense related to non-vested stock awards.   8       Note F ‑ Segment Information       For the Three Months Ended July 9, 2022   In thousands   Sporting Goods     Corp.     Total                             Revenues from external customers   $ 94,337     $ --     $ 94,337   Operating income (loss)     8,830       ( 641 )     8,189   Net income (loss)     5,737       ( 64 )     5,673           As of and for the Six Months Ended July 9, 2022   In thousands   Sporting Goods     Corp.     Total                             Revenues from external customers   $ 166,717     $ --     $ 166,717   Operating income (loss)     18,365       ( 1,153 )     17,212   Net income     12,278       49       12,327   Total assets   $ 307,941     $ 8,911     $ 316,852           For the Three Months Ended July 10, 2021   In thousands   Sporting Goods     Corp.     Total                             Revenues from external customers   $ 99,679     $ --     $ 99,679   Operating income (loss)     11,367       ( 681 )     10,686   Net income     7,980       146       8,126           As of and for the Six Months Ended July 10, 2021   In thousands   Sporting Goods     Corp.     Total                             Revenues from external customers   $ 158,870     $ --     $ 158,870   Operating income (loss)     18,962       ( 1,147 )     17,815   Net income     13,342       226       13,568   Total assets   $ 220,712     $ 10,905     $ 231,617         Note G – Dividend Payment   On June 7, 2022, the Company paid a quarterly dividend of $ 0.15 per common share to all shareholders of record on May 31, 2021. The total amount of the dividend was approximately $ 2.0 million and was charged against retained earnings.   On March 21, 2022, the Company paid a quarterly dividend of $ 0.15 per common share to all shareholders of record on March 14, 2022 (the amount was funded to the transfer agent by the Company on March 17, 2022). The total amount of the dividend was approximately $ 2.0 million and was charged against retained earnings.   9       Note H ‑ Earnings Per Share   The shares used in computation of the Company’s basic and diluted earnings per common share are as follows:       Three Months Ended     Six Months Ended   In thousands   July 9, 2022     July 10, 2021     July 9, 2022     July 10, 2021                                     Weighted average common shares outstanding     13,588       13,863       13,554       13,871   Dilutive effect of stock options and restricted stock units     55       93       62       91   Weighted average common shares outstanding, assuming dilution     13,643       13,956       13,616       13,962     Stock options that are anti-dilutive as to earnings per share and unvested restricted stock units which have a market condition for vesting that has not been achieved are ignored in the computation of dilutive earnings per share. The number of stock options and restricted stock units that were excluded in 2022 and 2021 were zero and 11,900 , respectively.       Note I – New Accounting Standards and Changes in Accounting Principles   There have been no recent accounting pronouncements or changes in accounting pronouncements during the three and six months ended July 9, 2022, as compared to the recent accounting pronouncements described in the Company’s Annual Report on Form 10-K for the fiscal year ended December 25, 2021, that are of significance, or potential significance to the Company.       Note J – Revenue from Contracts with Customers   Revenue Recognition – Revenue is recognized when obligations under the terms of a contract with our customer are satisfied; generally this occurs with the transfer of control of our goods at a point in time based on shipping terms and transfer of title. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring goods. Sales, value add, and other taxes we collect concurrent with revenue-producing activities are excluded from revenue. Shipping and handling fees charged to customers are reported within revenue.   Gross-to-net sales adjustments – We recognize revenue net of various sales adjustments to arrive at net sales as reported on the statement of operations. These adjustments are referred to as gross-to-net sales adjustments and primarily fall into one of three categories: returns, warranties and customer allowances.   Returns – The Company records an accrued liability and reduction in sales for estimated product returns based upon historical experience. An accrued liability and reduction in sales is also recorded for approved return authorizations that have been communicated by the customer.   Warranties – Limited warranties are provided on certain products for varying periods. We record an accrued liability and reduction in sales for estimated future warranty claims based upon historical experience and management’s estimate of the level of future claims. Changes in the estimated amounts recognized in prior years are recorded as an adjustment to the accrued liability and sales in the current year.   Customer Allowances – Customer allowances are common practice in the industries in which the Company operates. These agreements are typically in the form of advertising subsidies, volume rebates and catalog allowances and are accounted for as a reduction to gross sales. The Company reviews such allowances on an ongoing basis and accruals are adjusted, if necessary, as additional information becomes available.   10     Disaggregation of Revenue – We generate revenue from the sale of widely recognized sporting goods brands in basketball goals, archery, indoor and outdoor game recreation and fitness products. These products are sold through multiple sales channels that include: mass merchants, specialty dealers, key on-line retailers (“E-commerce”) and international. The following table depicts the disaggregation of revenue according to sales channel:       Three Months Ended     Six Months Ended   All Amounts in Thousands   July 9, 2022     July 10, 2021     July 9, 2022     July 10, 2021                                     Gross Sales by Channel:                                 Mass Merchants   $ 28,925     $ 33,110     $ 55,955     $ 51,506   Specialty Dealers     28,990       31,617       54,333       54,177   E-commerce     38,495       39,711       61,351       60,937   International     4,531       4,196       8,611       6,923   Other     1,492       1,015       2,266       1,586   Total Gross Sales     102,433       109,649       182,516       175,129                                     Less: Gross-to-Net Sales Adjustments                                 Returns     678       2,633       2,848       4,248   Warranties     697       531       1,322       1,113   Customer Allowances     6,721       6,806       11,629       10,898   Total Gross-to-Net Sales Adjustments     8,096       9,970       15,799       16,259   Total Net Sales   $ 94,337     $ 99,679     $ 166,717     $ 158,870         Note K – Leases   We have operating leases for office, manufacturing and distribution facilities as well as for certain equipment. Our leases have remaining lease terms of 1 year to 10 years. As of July 9, 2022, the Company has not entered into any lease arrangements classified as a finance lease.   We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, current operating lease liabilities and operating lease liabilities on our consolidated balance sheet. The Company has elected an accounting policy to not recognize short-term leases (one year or less) on the balance sheet. The Company also elected the package of practical expedients which applies to leases that commenced before the adoption date. By electing the package of practical expedients, the Company did not need to reassess the following; whether any existing contracts are or contain leases, the lease classification for any existing leases and initial direct costs for any existing leases.   ROU assets and operating lease liabilities are recognized based on the present value of future minimum lease payments over the lease term at commencement date. When the implicit rate of the lease is not provided or cannot be determined, we use our incremental borrowing rate based on the information available at the commencement date to determine the present value of future payments. Lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise those options. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. Components of lease expense and other information is as follows:       Three Months Ended     Six Months Ended   All Amounts in Thousands   July 9, 2022     July 10, 2021     July 9, 2022     July 10, 2021                                     Lease Expense                                 Operating Lease Cost   $ 342     $ 407     $ 680     $ 718   Short-term Lease Cost     723       655       1,224       1,031   Variable Lease Cost     130       117       312       203   Total Operating Lease Cost   $ 1,195     $ 1,179     $ 2,216     $ 1,952                                     Operating Lease – Operating Cash Flows   $ 309     $ 361     $ 612     $ 616   New ROU Assets – Operating Leases   $ 7,743     $ 313     $ 7,743     $ 1,140     11     Other information about lease amounts recognized in our consolidated financial statements is summarized as follows:       Six Months Ended   All Amounts in Thousands   July 9, 2022     July 10, 2021                     Weighted Average Remaining Lease Term – Operating Leases (in years)     9.47       1.66   Weighted Average Discount Rate – Operating Leases     5.00 %     5.00 %   Future minimum lease payments under non-cancellable leases as of July 9, 2022 were as follows:   All Amounts in Thousands                   Year 1   $ 253   Year 2     1,358   Year 3     1,306   Year 4     1,287   Year 5     1,276   Thereafter     6,464   Total future minimum lease payments     11,944   Less imputed interest     ( 2,608 ) Total   $ 9,336             Reported as of July 9, 2022         Current operating lease liabilities     676   Long-term operating lease liabilities     8,660   Total   $ 9,336         Note L – Commitments and Contingencies   The Company is involved in litigation arising in the normal course of business. The Company does not believe that the disposition or ultimate resolution of existing claims or lawsuits will have a material adverse effect on the business or financial condition of the Company.       Note M – Acquisition   On January 21, 2022, the Company completed its acquisition of the assets constituting the Brunswick Billiards business of Life Fitness, LLC. The purchase price of the acquisition is $ 35.8 million. The acquisition was funded by cash and the Company’s revolving credit facility. The Company has not yet finalized its final evaluation of the fair value of certain items. The current estimates of fair value for the more significant assets acquired and liabilities assumed were receivables ($1.3 million), inventory ($13.6 million), fixed assets, including building and land ($4.1 million), accounts payable ($3.2 million), other accrued liabilities ($2.5 million), goodwill and other intangible assets ($22.5 million).       Note N – Debt   On January 21, 2022, the Company entered into an Amended and Restated Credit Agreement (“Restated Credit Agreement”) with its issuing bank, JP Morgan Chase Bank, N.A. (“Chase”), and the other lenders identified in the Restated Credit Agreement (collectively, the “Lender”). Under the terms of the Restated Credit Agreement, Old National Bank has been added as a Lender. The Lenders have now made available to the Company a senior revolving credit facility with increased maximum availability of $ 65.0 million (the “Revolving Facility”), up from $ 50.0 million, plus an accordion feature that would allow borrowings up to $ 90.0 million under the Revolving Facility subject to certain terms and conditions. The maturity date of the revolving credit facility was extended to January 21, 2027. The Company may prepay the Revolving Facility, in whole or in part, and reborrow prior to the revolving loan maturity date. The Restated Credit Agreement further extended the maturity date for the term loan facility to January 21, 2027.   12     As of July 9, 2022, the outstanding principal amount of the term loan was $ 43.5 million and total amount drawn under the Revolving Facility was $ 57.7 million.     Note O – Subsequent Events   On July 18, 2022, the Company entered into the First Amendment to the Restated Credit Agreement. Under the terms of the First Amendment, the Lender increased the maximum availability under the senior revolving credit facility from $ 65.0 million to $ 75.0 million pursuant to the accordion feature in the Restated Credit Agreement. The First Amendment also adjusted the funded debt to EBITDA ratio financial covenant to 3:00 to 1:00 as of the end of the Company’s third and fourth fiscal quarters of 2022.   13