ESCALADE INC 10-Q

Item 1. FINANCIAL STATEMENTS     ESCALADE, INCORPORATED AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS   All Amounts in Thousands Except Share Information   October 1, 2022     December 25, 2021     October 2, 2021       (Unaudited)     (Audited)     (Unaudited)   ASSETS                         Current Assets:                         Cash and cash equivalents   $ 4,000     $ 4,374     $ 6,492   Receivables, less allowance of $ 729 ; $ 457 ; and $ 636 ; respectively     65,258       65,991       68,849   Inventories     134,957       92,382       91,755   Prepaid expenses     4,143       7,569       6,527   Prepaid income tax     1,075       739       --   TOTAL CURRENT ASSETS     209,433       171,055       173,623                             Property, plant and equipment, net     27,618       24,936       24,000   Operating lease right-of-use assets     9,074       2,210       2,500   Intangible assets, net     34,712       20,778       21,207   Goodwill     39,226       32,695       32,695   Other assets     261       124       131   TOTAL ASSETS   $ 320,324     $ 251,798     $ 254,156                             LIABILITIES AND STOCKHOLDERS' EQUITY                         Current Liabilities:                         Current portion of long-term debt   $ 7,143     $ 7,143     $ 7,143   Trade accounts payable     22,684       15,847       25,071   Accrued liabilities     19,060       24,385       18,100   Income tax payable     --       --       124   Current operating lease liabilities     816       818       990   TOTAL CURRENT LIABILITIES     49,703       48,193       51,428                             Other Liabilities:                         Long‑term debt     99,568       50,396       51,874   Deferred income tax liability     4,759       4,759       4,193   Operating lease liabilities     8,557       1,387       1,493   Other liabilities     448       448       448   TOTAL LIABILITIES     163,035       105,183       109,436                             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 13,557,879 ; shares respectively     13,590       13,493       13,558   Retained earnings     143,699       133,122       131,162   TOTAL STOCKHOLDERS' EQUITY     157,289       146,615       144,720   TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY   $ 320,324     $ 251,798     $ 254,156     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 1, 2022     October 2, 2021     October 1, 2022     October 2, 2021                                     Net sales   $ 74,904     $ 81,298     $ 241,621     $ 240,168                                     Costs and Expenses                                 Cost of products sold     61,273       62,992       184,147       179,355   Selling, administrative and general expenses     8,769       10,202       33,975       33,888   Amortization     642       432       2,067       1,438                                     Operating Income     4,220       7,672       21,432       25,487                                     Other Income (Expense)                                 Interest expense     ( 954 )     ( 414 )     ( 2,462 )     ( 1,035 ) Other income (expense)     ( 22 )     68       50       124                                     Income Before Income Taxes     3,244       7,326       19,020       24,576                                     Provision for Income Taxes     286       1,360       3,735       5,042                                     Net Income   $ 2,958     $ 5,966     $ 15,285     $ 19,534                                     Earnings Per Share Data:                                 Basic earnings per share   $ 0.22     $ 0.44     $ 1.13     $ 1.41   Diluted earnings per share   $ 0.22     $ 0.43     $ 1.12     $ 1.40                                     Dividends declared   $ 0.15     $ 0.14     $ 0.45     $ 0.42     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 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         Common Stock     Retained           All Amounts in Thousands   Shares     Amount     Earnings     Total                                     Balances at July 9, 2022     13,590     $ 13,590     $ 142,403     $ 155,993                                     Net income                     2,958       2,958   Expense of restricted stock units                     377       377   Dividends declared                     ( 2,039 )     ( 2,039 )                                   Balances at October 1, 2022     13,590     $ 13,590     $ 143,699     $ 157,289                                                                       Balances at December 25, 2021     13,493     $ 13,493     $ 133,122     $ 146,615                                     Net income                     15,285       15,285   Expense of restricted stock units                     1,453       1,453   Settlement of restricted stock units     93       93       ( 93 )     --   Dividends declared                     ( 6,115 )     ( 6,115 ) Stock issued to directors as compensation     4       4       47       51                                     Balances at October 1, 2022     13,590     $ 13,590     $ 143,699     $ 157,289     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 1, 2022     October 2, 2021                     Operating Activities:                 Net income   $ 15,285     $ 19,534   Depreciation and amortization     5,207       3,935   Provision for doubtful accounts     258       ( 224 ) Stock-based compensation     1,453       666   Gain on disposal of property and equipment     ( 22 )     ( 27 ) Adjustments necessary to reconcile net income to net cash used by operating activities     ( 27,974 )     ( 26,933 ) Net cash used by operating activities     ( 5,793 )     ( 3,049 )                   Investing Activities:                 Purchase of property and equipment     ( 1,792 )     ( 8,281 ) Proceeds from sale of property and equipment     40       43   Acquisitions     ( 35,757 )     --   Net cash used by investing activities     ( 37,509 )     ( 8,238 )                   Financing Activities:                 Proceeds from issuance of long-term debt     180,355       192,792   Payments on long-term debt     ( 131,183 )     ( 163,849 ) Proceeds from exercise of stock options     --       144   Purchase of stock     --       ( 9,111 ) Director stock compensation     51       135   Deferred financing fees     ( 180 )     ( 33 ) Cash dividends paid     ( 6,115 )     ( 5,804 ) Net cash provided by financing activities     42,928       14,274   Net increase (decrease) in cash and cash equivalents     ( 374 )     2,987   Cash and cash equivalents, beginning of period     4,374       3,505   Cash and cash equivalents, end of period   $ 4,000     $ 6,492     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 nine month periods ended October 1, 2022 and October 2, 2021 are not necessarily indicative of the results to be expected for the full year.     Note C ‑ Inventories   In thousands   October 1, 2022     December 25, 2021     October 2, 2021                             Raw materials   $ 9,988     $ 9,142     $ 10,160   Work in progress     4,537       3,529       3,873   Finished goods     120,432       79,711       77,722       $ 134,957     $ 92,382     $ 91,755       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 October 1, 2022, December 25, 2021 and October 2, 2021.               Fair Value Measurements Using   October 1, 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   $ 4,000     $ 4,000     $ --     $ --                                     Financial liabilities                                 Current portion of long-term debt   $ 7,143     $ --     $ 7,143     $ --   Long-term debt   $ 99,568     $ --     $ 99,568     $ --                 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   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     $ --       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 1, 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 nine months ended October 1, 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 nine months ended October 1, 2022, the Company recognized stock based compensation expense of $ 377 thousand and $ 1,453 thousand, respectively compared to stock based compensation expense of $ 229 thousand and $ 666 thousand for the same periods in the prior year. At October 1, 2022 and October 2, 2021, respectively, there was $ 1,937 thousand and $ 865 thousand in unrecognized stock-based compensation expense related to non-vested stock awards.   8       Note F ‑ Segment Information       For the Three Months Ended October 1, 2022   In thousands   Sporting Goods     Corp.     Total                             Revenues from external customers   $ 74,904     $ --     $ 74,904   Operating income (loss)     4,661       ( 441 )     4,220   Net income (loss)     2,387       571       2,958         As of and for the Nine Months Ended October 1, 2022   In thousands   Sporting Goods     Corp.     Total                             Revenues from external customers   $ 241,621     $ --     $ 241,621   Operating income (loss)     23,026       ( 1,594 )     21,432   Net income     14,665       620       15,285   Total assets   $ 312,418     $ 7,906     $ 320,324         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       Note G – Dividend Payment   On September 13, 2022, the Company paid a quarterly dividend of $ 0.15 per common share to all shareholders of record on September 6, 2022. The total amount of the dividend was approximately $ 2.0 million and was charged against retained earnings.   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     Nine Months Ended   In thousands   October 1, 2022     October 2, 2021     October 1, 2022     October 2, 2021                                     Weighted average common shares outstanding     13,590       13,706       13,565       13,821   Dilutive effect of stock options and restricted stock units     62       102       82       102   Weighted average common shares outstanding, assuming dilution     13,652       13,808       13,647       13,923     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 nine months ended October 1, 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     Nine Months Ended   All Amounts in Thousands   October 1, 2022     October 2, 2021     October 1, 2022     October 2, 2021                                     Gross Sales by Channel:                                 Mass Merchants   $ 29,849     $ 41,792     $ 85,804     $ 93,298   Specialty Dealers     20,298       19,170       74,631       73,347   E-commerce     26,090       25,116       87,441       86,053   International     4,032       2,259       12,643       9,182   Other     1,188       883       3,454       2,469   Total Gross Sales     81,457       89,220       263,973       264,349                                     Less: Gross-to-Net Sales Adjustments                                 Returns     892       1,283       3,740       5,531   Warranties     663       590       1,985       1,703   Customer Allowances     4,998       6,049       16,627       16,947   Total Gross-to-Net Sales Adjustments     6,553       7,922       22,352       24,181   Total Net Sales   $ 74,904     $ 81,298     $ 241,621     $ 240,168       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 October 1, 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     Nine Months Ended   All Amounts in Thousands   October 1, 2022     October 2, 2021     October 1, 2022     October 2, 2021                                     Lease Expense                                 Operating Lease Cost   $ 393     $ 433     $ 1,073     $ 1,151   Short-term Lease Cost     658       692       1,882       2,339   Variable Lease Cost     81       101       393       304   Total Operating Lease Cost   $ 1,132     $ 1,226     $ 3,348     $ 3,794                                     Operating Lease – Operating Cash Flows   $ 100     $ 434     $ 712     $ 1,050   New ROU Assets – Operating Leases   $ 30     $ 1,189     $ 7,773     $ 2,329     11     Other information about lease amounts recognized in our consolidated financial statements is summarized as follows:       Nine Months Ended   All Amounts in Thousands   October 1, 2022     October 2, 2021                     Weighted Average Remaining Lease Term – Operating Leases (in years)     9.29       3.93   Weighted Average Discount Rate – Operating Leases     5.00 %     5.00 %   Future minimum lease payments under non-cancellable leases as of October 1, 2022 were as follows:   All Amounts in Thousands                   Year 1   $ 146   Year 2     1,364   Year 3     1,313   Year 4     1,294   Year 5     1,283   Thereafter     6,467   Total future minimum lease payments     11,867   Less imputed interest     ( 2,494 ) Total   $ 9,373             Reported as of October 1, 2022         Current operating lease liabilities     816   Long-term operating lease liabilities     8,557   Total   $ 9,373       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     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.   As of October 1, 2022, the outstanding principal amount of the term loan was $ 41.7 million and total amount drawn under the Revolving Facility was $ 65.0 million.     Note O – Subsequent Events   On October 26, 2022, the Company entered into the Second Amendment ("Second Amendment”) to the Restated Credit Agreement. Under the terms of the Second Amendment, the Lender increased the maximum availability under the senior revolving credit facility from $ 75.0 million to $ 90.0 million pursuant to the accordion feature in the Restated Credit Agreement. The Second Amendment adjusted the funded debt to EBITDA ratio financial covenant to 3:25 to 1:00 as of the end of the Company’s third and fourth fiscal quarters of 2022 and 3:00 to 1:00 as of the end of the Company’s first fiscal quarter of 2023. The Second Amendment also modified the EBITDA definition to permit add-backs of a) up to $2.0 million for disposition related expenses; and b) up to $2.0 million for unusual or non-recurring expenses which are incurred prior to the end of fiscal year 2023 and which are subject to the approval of the Administrative Agent.   13