ESCALADE INC 10-Q

esca20230630_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 June 30, 2023 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 class Trading Symbol Name of Exchange on which registered Common Stock, No Par Value ESCA The NASDAQ Stock Market LLC   Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ 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 July 26, 2023 Common, no par value 13,736,800   1       INDEX       Page No. Part I. Financial Information:         Item 1 - Financial Statements:           Consolidated Condensed Balance Sheets as of June 30, 2023, December 31, 2022, and July 9, 2022 3         Consolidated Condensed Statements of Operations for the Second Quarter and Two Quarters Ended June 30, 2023 and July 9, 2022 4         Consolidated Condensed Statements of Stockholders’ Equity for the Second Quarter and Two Quarters Ended June 30, 2023 and July 9, 2022 5         Consolidated Condensed Statements of Cash Flows for the Two Quarters Ended June 30, 2023 and July 9, 2022 6         Notes to Consolidated Condensed Financial Statements 7       Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations 14       Item 3 - Quantitative and Qualitative Disclosures About Market Risk 17       Item 4 - Controls and Procedures 17       Part II. Other Information         Item 1A - Risk Factors 18       Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds 18       Item 6 - Exhibits 19         Signature 19   2       PART I - FINANCIAL INFORMATION   Item 1. FINANCIAL STATEMENTS   ESCALADE, INCORPORATED AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS   All Amounts in Thousands Except Share Information   June 30, 2023     December 31, 2022     July 9, 2022       (Unaudited)     (Audited)     (Unaudited)   ASSETS                         Current Assets:                         Cash and cash equivalents   $ 577     $ 3,967     $ 6,195   Receivables, less allowance of $ 355 ; $ 492 ; and $ 726 ; respectively     54,975       57,419       60,011   Inventories     111,676       121,870       130,246   Prepaid expenses     3,925       4,942       7,263   Prepaid income tax     1,518       --       621   TOTAL CURRENT ASSETS     172,671       188,198       204,336                             Property, plant and equipment, net     24,261       24,751       28,344   Assets held for sale     2,823       2,823       --   Operating lease right-of-use assets     8,669       9,100       9,318   Intangible assets, net     29,880       31,120       35,353   Goodwill     42,326       42,326       39,226   Other assets     455       400       275   TOTAL ASSETS   $ 281,085     $ 298,718     $ 316,852                             LIABILITIES AND STOCKHOLDERS' EQUITY                         Current Liabilities:                         Current portion of long-term debt   $ 7,143     $ 7,143     $ 7,143   Trade accounts payable     14,680       9,414       24,650   Accrued liabilities     9,897       21,320       20,483   Income tax payable     --       71       --   Current operating lease liabilities     1,002       993       676   TOTAL CURRENT LIABILITIES     32,722       38,941       52,952                             Other Liabilities:                         Long‑term debt     76,809       87,738       94,040   Deferred income tax liability     4,516       4,516       4,759   Operating lease liabilities     8,222       8,641       8,660   Other liabilities     407       407       448   TOTAL LIABILITIES     122,676       140,243       160,859                             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 – 13,736,800 ; 13,594,407 ; and 13,590,407 ; shares respectively     13,737       13,594       13,590   Retained earnings     144,672       144,881       142,403   TOTAL STOCKHOLDERS' EQUITY     158,409       158,475       155,993   TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY   $ 281,085     $ 298,718     $ 316,852     See notes to Consolidated Condensed Financial Statements.   3       ESCALADE, INCORPORATED AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)       Second Quarter Ended     Two Quarters Ended   All Amounts in Thousands Except Per Share Data   June 30, 2023     July 9, 2022     June 30, 2023     July 9, 2022                                     Net sales   $ 67,771     $ 94,337     $ 124,702     $ 166,717                                     Costs and Expenses                                 Cost of products sold     51,124       70,613       97,003       122,874   Selling, administrative and general expenses     9,769       14,680       20,052       25,206   Amortization     620       855       1,240       1,425                                     Operating Income     6,258       8,189       6,407       17,212                                     Other Income (Expense)                                 Interest expense     ( 1,580 )     ( 948 )     ( 2,955 )     ( 1,508 ) Other income     7       29       25       72                                     Income Before Income Taxes     4,685       7,270       3,477       15,776                                     Provision for Income Taxes     1,043       1,597       787       3,449                                     Net Income   $ 3,642     $ 5,673     $ 2,690     $ 12,327                                     Earnings Per Share Data:                                 Basic earnings per share   $ 0.27     $ 0.42     $ 0.20     $ 0.91   Diluted earnings per share   $ 0.26     $ 0.42     $ 0.20     $ 0.91                                     Dividends declared   $ 0.15     $ 0.15     $ 0.30     $ 0.30     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 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           Common Stock     Retained           All Amounts in Thousands   Shares     Amount     Earnings     Total                                     Balances at March 31, 2023     13,730     $ 13,730     $ 142,588     $ 156,318                                     Net income                     3,642       3,642   Expense of restricted stock units                     458       458   Settlement of restricted stock units     3       3       ( 3 )     --   Dividends declared                     ( 2,061 )     ( 2,061 ) Stock issued to directors as compensation     4       4       48       52                                     Balances at June 30, 2023     13,737     $ 13,737     $ 144,672     $ 158,409                                                                       Balances at December 31, 2022     13,594     $ 13,594     $ 144,881     $ 158,475                                     Net income                     2,690       2,690   Expense of restricted stock units                     917       917   Settlement of restricted stock units     108       108       ( 108 )     --   Dividends declared                     ( 4,120 )     ( 4,120 ) Stock issued to directors as compensation     4       4       48       52   Issuance of common stock for service     31       31       364       395                                     Balances at June 30, 2023     13,737     $ 13,737     $ 144,672     $ 158,409       See notes to Consolidated Condensed Financial Statements.   5       ESCALADE, INCORPORATED AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)       Two Quarters Ended   All Amounts in Thousands   June 30, 2023     July 9, 2022                     Operating Activities:                 Net income   $ 2,690     $ 12,327   Depreciation and amortization     2,798       3,603   Provision for doubtful accounts     35       258   Stock-based compensation     917       1,076   Common stock issued in lieu of bonus to officers     395       --   Director stock compensation     52       51   Adjustments necessary to reconcile net income to net cash provided by operating activities     6,009       ( 17,589 )          Net cash provided (used) by operating activities     12,896       ( 274 )                   Investing Activities:                 Purchase of property and equipment     ( 1,068 )     ( 1,536 ) Acquisitions     --       ( 35,757 ) Net cash used by investing activities     ( 1,068 )     ( 37,293 )                   Financing Activities:                   Proceeds from issuance of long-term debt     62,196       124,571    Payments on long-term debt     ( 73,125 )     ( 80,927 )  Deferred financing fees     ( 169 )     ( 180 )  Cash dividends paid     ( 4,120 )     ( 4,076 )  Net cash provided (used) by financing activities     ( 15,218 )     39,388   Net increase (decrease) in cash and cash equivalents     ( 3,390 )     1,821    Cash and cash equivalents, beginning of period     3,967       4,374   Cash and cash equivalents, end of period   $ 577     $ 6,195     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 31, 2022 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 2022 filed with the Securities and Exchange Commission.   On August 10, 2022, Escalade’s Board of Directors approved a change in its fiscal year end from the last Saturday in December of each year to December 31 of each year. Escalade’s fiscal quarters will end on March 31, June 30, and September 30. The second quarter of 2023 is a traditional calendar quarter with 91 days, whereas the 2022 quarter was four four-week periods constituting a total of 112 days. The fiscal year change is effective beginning with Escalade’s 2023 fiscal calendar, which began on January 1, 2023. Consistent with SEC guidance, no transition report is required in connection with the change in Escalade’s fiscal year end.   Reclassifications – Certain reclassifications have been made to prior year financial statements to conform to the current year financial statement presentation. These reclassifications had no effect on net earnings.       Note B ‑ Seasonal Aspects   The results of operations for the second quarter and two quarter periods ended June 30, 2023 and July 9, 2022 are not necessarily indicative of the results to be expected for the full year.       Note C ‑ Inventories   In thousands   June 30, 2023     December 31, 2022     July 9, 2022                             Raw materials   $ 6,537     $ 7,789     $ 9,821   Work in progress     2,910       3,478       4,653   Finished goods     102,229       110,603       115,772       $ 111,676     $ 121,870     $ 130,246         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 June 30, 2023, December 31, 2022 and July 9, 2022.               Fair Value Measurements Using   June 30, 2023 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   $ 577     $ 577     $ --     $ --                                     Financial liabilities                                 Current portion of long-term debt   $ 7,143     $ --     $ 7,143     $ --   Long-term debt   $ 76,809     $ --     $ 76,809     $ --                 Fair Value Measurements Using   December 31, 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   $ 3,967     $ 3,967     $ --     $ --                                     Financial liabilities                                 Current portion of long-term debt   $ 7,143     $ --     $ 7,143     $ --   Long-term debt   $ 87,738     $ --     $ 87,738     $ --                 Fair Value Measurements Using   July 9, 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   $ 6,195     $ 6,195     $ --     $ --                                     Financial liabilities                                 Current portion of long-term debt   $ 7,143     $ --     $ 7,143     $ --   Long-term debt   $ 94,040     $ --     $ 94,040     $ --         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 two quarters ended June 30, 2023, and pursuant to the 2017 Incentive Plan, the Company issued 30,921 shares of common stock with a fair market value of $ 395 thousand in lieu of accrued and unpaid annual cash incentives for fiscal year 2022 to certain officers. During the two quarters ended June 30, 2023 and pursuant to the 2017 Incentive Plan, in lieu of cash payments of director fees, the Company awarded to certain directors 4,441 shares of common stock.   During the two quarters ended June 30, 2023, the Company awarded 21,200 restricted stock units to directors and 145,563 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 2023 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.   8     For the second quarter and two quarters ended June 30, 2022, the Company recognized stock based compensation expense of $ 458 thousand and $ 917 thousand, respectively compared to stock based compensation expense of $ 688 thousand and $ 1,076 thousand for the same periods in the prior year. At June 30, 2023 and July 9, 2022, respectively, there was $ 2.5 million and $ 2.6 million in unrecognized stock-based compensation expense related to non-vested stock awards.       Note F ‑ Segment Information       For the Second Quarter Ended June 30, 2023   In thousands   Sporting Goods     Corp.     Total                             Revenues from external customers   $ 67,771     $ --     $ 67,771   Operating income (loss)     6,837       ( 579 )     6,258   Net income (loss)     3,817       ( 175 )     3,642         As of and for the Two Quarters Ended June 30, 2023   In thousands   Sporting Goods     Corp.     Total                             Revenues from external customers   $ 124,702     $ --     $ 124,702   Operating income (loss)     7,527       ( 1,120 )     6,407   Net income (loss)     3,333       ( 643 )     2,690   Total assets   $ 278,734     $ 2,351     $ 281,085           For the Second Quarter 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 Two Quarters 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         Note G – Dividend Payment On June 19, 2023, the Company paid a quarterly dividend of $ 0.15 per common share to all shareholders of record on June 12, 2023. The total amount of the dividend was approximately $ 2.1 million and was charged against retained earnings.   On March 20, 2023, the Company paid a quarterly dividend of $ 0.15 per common share to all shareholders of record on March 13, 2023. The total amount of the dividend was approximately $ 2.1 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:       Second Quarter Ended     Two Quarters Ended   In thousands   June 30, 2023     July 9, 2022     June 30, 2023     July 9, 2022                                     Weighted average common shares outstanding     13,733       13,588       13,691       13,554   Dilutive effect of stock options and restricted stock units     109       55       102       62   Weighted average common shares outstanding, assuming dilution     13,842       13,643       13,793       13,616         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 second quarter and two quarters ended June 30, 2023, as compared to the recent accounting pronouncements described in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022, that are of significance, or potential significance to the Company.   In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This amendment requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss model which requires the use of forward-looking information to calculate credit loss estimates. It also eliminates the concept of other-than-temporary impairment and requires credit losses related to available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. These changes will result in earlier recognition of credit losses.   The Company adopted this standard on January 1, 2023. The adoption of this standard did not have a material impact on the financial statements of 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.   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:       Second Quarter Ended     Two Quarters Ended   All Amounts in Thousands   June 30, 2023     July 9, 2022     June 30, 2023     July 9, 2022                                     Gross Sales by Channel:                                 Mass Merchants   $ 19,480     $ 28,925     $ 36,170     $ 55,955   Specialty Dealers     23,850       28,990       45,465       54,333   E-commerce     27,135       38,495       47,727       61,351   International     3,187       4,531       6,228       8,611   Other     1,279       1,492       2,314       2,266   Total Gross Sales     74,931       102,433       137,904       182,516                                     Less: Gross-to-Net Sales Adjustments                                 Returns     2,034       678       3,546       2,848   Warranties     190       697       630       1,322   Customer Allowances     4,936       6,721       9,026       11,629   Total Gross-to-Net Sales Adjustments     7,160       8,096       13,202       15,799   Total Net Sales   $ 67,771     $ 94,337     $ 124,702     $ 166,717         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 9 years. As of June 30, 2023, 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.   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 is as follows:       Second Quarter Ended     Two Quarters Ended   All Amounts in Thousands   June 30, 2023     July 9, 2022     June 30, 2023     July 9, 2022                                     Lease Expense                                 Operating Lease Cost   $ 375     $ 342     $ 749     $ 680   Short-term Lease Cost     611       723       1,223       1,224   Variable Lease Cost     169       130       298       312   Total Operating Lease Cost   $ 1,155     $ 1,195     $ 2,270     $ 2,216                                     Operating Lease – Operating Cash Flows   $ 248     $ 309     $ 493     $ 612   New ROU Assets – Operating Leases   $ 83     $ 7,743     $ 83     $ 7,743     Other information about lease amounts recognized in our consolidated financial statements is summarized as follows:       Two Quarters Ended   All Amounts in Thousands   June 30, 2023     July 9, 2022                     Weighted Average Remaining Lease Term – Operating Leases (in years)   8.57     9.47   Weighted Average Discount Rate – Operating Leases     5.09 %     5.00 %   Future minimum lease payments under non-cancellable leases as of June 30, 2023 were as follows:   All Amounts in Thousands                   Year 1   $ 738   Year 2     1,422   Year 3     1,387   Year 4     1,343   Year 5     1,257   Thereafter     5,283   Total future minimum lease payments     11,430   Less imputed interest     ( 2,206 ) Total   $ 9,224             Reported as of June 30, 2023         Current operating lease liabilities     1,002   Long-term operating lease liabilities     8,222   Total   $ 9,224         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       Note M – 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 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.   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.   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.   On May 8, 2023, the Company entered into the Third Amendment (the “Third Amendment”) to the Restated Credit Agreement. The Third Amendment adjusted the funded debt to EBITDA ratio financial covenant to 4:25 to 1:00 as of the end of the Company’s second fiscal quarter of 2023, 3:00 to 1:00 as of the end of the Company’s third fiscal quarter of 2023, and 2:75 to 1:00 as of the end of the Company’s fourth fiscal quarter of 2023 and thereafter. The Third Amendment adjusted the fixed charge coverage ratio covenant to 1:10 to 1:00 commencing as of the Company’s fourth fiscal quarter of 2023 and 1:25 to 1:00 as of the end of the Company’s first fiscal quarter of 2024 and thereafter. For the Company’s second and third fiscal quarters in 2023, the Third Amendment suspended the fixed charge coverage ratio covenant and added a minimum EBITDA covenant of $ 22.5 million as of the end of each such fiscal quarter. Under the terms of the Third Amendment, the Company and the Lender also agreed to decrease the maximum availability under the senior revolving credit facility from $ 90.0 million to $ 75.0 million, upon the consummation of the sale of the Company’s Mexican subsidiary and the dissolution of Escalade Insurance, Inc. The proceeds from such sale and dissolution, respectively, will be used to partially prepay the amounts outstanding under the revolving credit facility.   As of June 30, 2023, the outstanding principal amount of the term loan was $ 36.3 million and total amount drawn under the Revolving Facility was $ 47.7 million.   13       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 and residual effects of the COVID-19 global pandemic on Escalade’s financial condition and results of operations; the impact of competitive products and pricing; product demand and market acceptance; new product development; Escalade’s ability to achieve its business objectives; 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, including inflationary pressures; fluctuation in operating results; changes in foreign currency exchange rates; changes in the securities markets; continued listing of the Company’s common stock on the NASDAQ Global Market; the Company’s inclusion or exclusion from certain market indices; 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; the potential impact of actual or perceived defects in, or safety of, our products, including any impact of product recalls or legal or regulatory claims, proceedings or investigations involving our products; risks related to data security of privacy breaches; the potential impact of regulatory claims, proceedings or investigations involving our products; 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, billiards, indoor and outdoor game recreation and fitness products. Strong brands and on-going investment in product development provide a solid foundation for building customer loyalty and continued growth.   Within the sporting goods industry, the Company has successfully built a robust market presence in several niche markets. This strategy is heavily dependent on expanding our customer base, barriers to entry, strong brands, excellent customer service and a commitment to innovation. A key strategic advantage is the Company’s established relationships with major customers that allow the Company to bring new products to market in a cost effective manner while maintaining a diversified portfolio of products to meet the demands of consumers. In addition to strategic customer relations, the Company has substantial manufacturing and import experience that enable it to be a low cost supplier.   To enhance growth opportunities, the Company has focused on promoting new product innovation and development and brand marketing. In addition, the Company has embarked on a strategy of acquiring companies or product lines that complement or expand the Company's existing product lines or provide expansion into new or emerging categories in sporting goods. A key objective is the acquisition of product lines with barriers to entry that the Company can take to market through its established distribution channels or through new market channels. Significant synergies are achieved through assimilation of acquired product lines into the existing Company structure.   14     In October 2020, the Company acquired the assets of the billiard table, game room, and recreational product lines of American Heritage Billiards, including the related intellectual property. In December 2020, the Company acquired substantially all of the business and assets of Revel Match LLC, dba RAVE Sports, a brand known for its innovative and high-quality water recreation products. In January 2022, the Company acquired the assets of the Brunswick Billiards® business, complementing its existing portfolio of billiards brands and other offerings in the Company’s indoor recreation market. These and other acquisitions strengthen the Company’s leadership in various product categories, while providing exciting new opportunities within the growing water sports market. The Company also sometimes divests or discontinues certain operations, assets, 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.   Notwithstanding that the World Health Organization has declared that COVID-19 no longer constitutes a public health emergency, the impact of the COVID-19 pandemic continues to evolve and the Company continues to respond to the challenges and opportunities arising from the residual effects of the pandemic. Even though the pandemic may not have had a material adverse direct effect on the Company, the pandemic’s effects on the global supply chain, higher freight and materials costs, supplier product delays, workforce availability and labor costs have caused operational challenges for the Company. 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. Consumer demand for the Company’s products may be slowing due to additional factors such as general economic conditions, inflation, recessionary fears, rising interest rates, changes in the housing market and declining consumer confidence. Management cannot predict the full impact of these factors on the Company. Due to the above circumstances and as described generally in this Form 10-Q, the Company’s results of operations for the period ended June 30, 2023 are not necessarily indicative of the results to be expected for fiscal year 2023.   Results of Operations   The following schedule sets forth certain consolidated statement of operations data as a percentage of net revenue:       Second Quarter Ended     Two Quarters Ended       June 30, 2023     July 9, 2022     June 30, 2023     July 9, 2022   Net revenue     100.0 %     100.0 %     100.0 %     100.0 % Cost of products sold     75.4 %     74.8 %     77.8 %     73.7 % Gross margin     24.6 %     25.2 %     22.2 %     26.3 % Selling, administrative and general expenses     14.5 %     15.6 %     16.1 %     15.1 % Amortization     0.9 %     0.9 %     1.0 %     0.9 % Operating income     9.2 %     8.7 %     5.1 %     10.3 %   Revenue and Gross Margin   Sales decreased by 28.2% for the second quarter of 2023, compared with the same period in the prior year. The decrease in sales was due to a combination of reduced post-pandemic consumer demand across most product categories, together with 21 fewer days in the Company’s new reporting calendar, when compared to the year-ago period. Excluding the impact of the change in the Company’s reporting calendar, sales declined 9.5% on a year-over-year basis. For the two quarters ended June 30, 2023, sales were down 25.2% on a year-over-year basis in the first half of 2023 due mainly to reduced post-pandemic demand, particularly in archery, basketball, and indoor/outdoor games categories as well as excess inventory levels in the retail channel.   The overall gross margin percentage decreased to 24.6% for the second quarter of 2023 compared to 2022, primarily driven by higher-cost inventory, elevated inventory storage and handling costs, and lower operating leverage on a comparably lower revenue base partially offset by improved margins in several categories and expense reductions implemented through the second quarter.   Gross margin percentage decreased to 22.2% for the first two quarters ended June 30, 2023, compared to 26.3% for the same period in the prior year. The decline was primarily due to less favorable product mix, ongoing inventory storage and handling costs, and lower operating leverage with the lower sales level.   15     Selling, General and Administrative Expenses   Selling, general and administrative expenses (SG&A) were $9.8 million for the second quarter of 2023 compared to $14.7 million for the same period in the prior year, a decrease of $4.9 million or 33.5%. SG&A as a percent of sales is 14.5% for the second quarter of 2023 compared with 15.6% for the same period in the prior year. For the first half of 2023, SG&A were $20.1 million compared to $25.2 million for the same period in 2022, a decrease of $5.1 million or 20.4%. As a percent of sales, SG&A is 16.1% for the first half of 2023 compared with 15.1% for the same period in the prior year.   Provision (Benefit) for Income Taxes   The effective tax rate for the first half of 2023 was 22.6% compared to 21.9% for the same period last year.   Financial Condition and Liquidity   Total debt as of June 30, 2023 was $84.0 million, a decrease of $10.9 million from December 31, 2022. The following schedule summarizes the Company’s total debt:   In thousands   June 30, 2023     December 31, 2022     July 9, 2022                             Current portion of long-term debt   $ 7,143     $ 7,143     $ 7,143   Long term debt     76,809       87,738       94,040   Total Debt   $ 83,952     $ 94,881     $ 101,183     As a percentage of stockholders’ equity, total debt was 53.0%, 59.9% and 64.9% at June 30, 2023, December 31, 2022, and July 9, 2022 respectively.   On January 21, 2022, the Company and its wholly owned subsidiary, Indian Industries, Inc. (“Indian”), entered into an Amended and Restated Credit Agreement (the “2022 Restated Credit Agreement”) with its issuing bank, JPMorgan Chase Bank, N.A. (“Chase”), and the other lenders identified in the Restated Credit Agreement (collectively, the “Lenders”). The 2022 Restated Credit Agreement amended and restated the Amended and Restated Credit Agreement dated as of January 21, 2019, as amended, in its entirety, and continues the existing Company’s credit facilities which have been in place since April 30, 2009. The Company’s indebtedness under the 2022 Restated 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). Under the terms of the 2022 Restated Credit Agreement, Old National Bank was added as a Lender. The Lenders made available to Escalade and Indian 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 2022 Restated Credit Agreement further extended the maturity date for the existing $50.0 million term loan facility to January 21, 2027.   In addition to the increased borrowing amount and extended maturity date, the 2022 Restated Credit Agreement provided a $7.5 million swingline commitment by Chase, replaced LIBOR with the replacement benchmark secured overnight financing rate, and adjusted certain financial covenants relating to the fixed charge coverage ratio.   On July 18, 2022, the Company entered into the First Amendment to the 2022 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 2022 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.   On October 26, 2022, the Company entered into the Second Amendment ("Second Amendment”) to the 2022 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 2022 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.   16     On May 8, 2023, the Company entered into the Third Amendment (the “Third Amendment”) to the Restated Credit Agreement. The Third Amendment adjusted the funded debt to EBITDA ratio financial covenant to 4:25 to 1:00 as of the end of the Company’s second fiscal quarter of 2023, 3:00 to 1:00 as of the end of the Company’s third fiscal quarter of 2023, and 2:75 to 1:00 as of the end of the Company’s fourth fiscal quarter of 2023 and thereafter. The Third Amendment adjusted the fixed charge coverage ratio covenant to 1:10 to 1:00 commencing as of the Company’s fourth fiscal quarter of 2023 and 1:25 to 1:00 as of the end of the Company’s first fiscal quarter of 2024 and thereafter. For the Company’s second and third fiscal quarters in 2023, the Third Amendment suspended the fixed charge coverage ratio covenant and added a minimum EBITDA covenant of $22.5 million as of the end of each such fiscal quarter. Under the terms of the Third Amendment, the Company and the Lender also agreed to decrease the maximum availability under the senior revolving credit facility from $90.0 million to $75.0 million, upon the consummation of the sale of the Company’s Mexican subsidiary and the dissolution of Escalade Insurance, Inc. The proceeds from such sale and dissolution, respectively, will be used to partially prepay the amounts outstanding under the revolving credit facility.   As of June 30, 2023, the outstanding principal amount of the term loan was $36.3 million and total amount drawn under the Revolving Facility was $47.7 million.   The Company funds working capital requirements, shareholder dividends, and stock repurchases through operating cash flows and revolving credit agreements with its Lenders. The Company expects that cash generated from its 2023 operations and its access to adequate levels of revolving credit will provide it with sufficient cash flows for its operations and to meet growth needs.   Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK   Not Required.   Item 4. CONTROLS AND PROCEDURES   Evaluation of Disclosure Controls and Procedures   Escalade maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based closely on the definition of “disclosure controls and procedures” in Rules 13a-15(e) and 15d-15(e). In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, could provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.   The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.   Changes in Internal Control over Financial Reporting   Management of the Company has evaluated, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, changes in the Company’s internal controls over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the second quarter of 2023.   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 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.   17     PART II. OTHER INFORMATION   Item 1. LEGAL PROCEEDINGS.   None.   Item 1A. RISK FACTORS.   In addition to the other information set forth in this report, you should carefully consider the risks and uncertainties disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022. These risks and uncertainties could materially and adversely affect our business, consolidated financial condition, results of operations, or cash flows. Our operations could also be affected by additional risks or uncertainties that are not presently known to us or that we currently do not consider material to our business. As of the date of this filing, there have been no material changes in our risk factors from those disclosed in the above-referenced Form 10-K, which risk factors are incorporated herein by reference.   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 3/31/2023 under the current repurchase program.     2,153,132     $ 13.38       2,153,132     $ 4,153,252   Second quarter purchases:                                 4/1/2023-4/30/2023   None     None     No Change     No Change   5/1/2023-5/31/2023   None     None     No Change     No Change   6/1/2023-6/30/2023   None     None     No Change     No Change   Total share purchases under the current program     2,153,132     $ 13.38       2,153,132     $ 4,153,252     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 June 30, 2023, the Company has repurchased 2,153,132 shares of its common stock under this repurchase program for an aggregate price of $28,812,686. 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.   18     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 August 10, 2022. Incorporated by reference from the Company’s 2022 Third 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 (embedded within the 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:         July 27, 2023    /s/ Stephen R. Wawrin   Vice President and Chief Financial Officer   (On behalf of the registrant and in his   capacities as Principal Financial Officer   and Principal Accounting Officer)   19