What changed in this filing

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Item 7. Management’s Discussion and Analysis

2025-03-10 compared with 2024-03-29 · 34 added, 71 removed, 111 unchanged (49% of the section changed)

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Forward-Looking Statements

This report contains forward-looking statements relating to present or future trends or factors that are subject to risks and uncertainties.

This report contains statements that we believe are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Rule 175 promulgated thereunder, and Section 21E of the Securities Exchange Act of 1934, as amended, and Rule 3b-6 promulgated thereunder.

All statements, other than statements of historical fact, are forward-looking statements.

These statements relate to our financial condition, results of operations, plans, objectives, future performance, capital actions or business.

They usually can be identified by the use of forward-looking language such as “will likely result,” “may,” “are expected to,” “is anticipated,” “potential,” “estimate,” “forecast,” “projected,” “intends to,” or may include other similar words or phrases such as “believes,” “plans,” “trend,” “objective,” “continue,” “remain,” or similar expressions, or future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” or similar verbs.

You should not place undue reliance on these statements, as they are subject to risks and uncertainties.

These risks include, but are not limited to:

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the continuation and development of key customer, supplier, licensing and other business relationships;

Escalade’s plans and expectations surrounding the transition to its new Chief Executive Officer and all potential related effects and consequences;

Escalade’s ability to develop and implement our own direct to consumer e-commerce distribution channel;

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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;

the impact of management’s conclusion, in consultation with the Audit Committee, that material weaknesses existed in the Company’s internal control procedures over financial reporting;

the evaluation and implementation of remediation efforts designed and implemented to enhance the Company’s control environment;

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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;

our international operations, including any related to political uncertainty and geopolitical tensions;

general economic conditions, including inflationary pressures;

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the potential impact of regulatory claims, proceedings or investigations involving our products;

potential residual impacts of the COVID-19 global pandemic on Escalade’s financial condition and results of operations;

and other risks detailed from time to time in Escalade’s filings with the Securities and Exchange Commission.

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Significant synergies are achieved through assimilation of acquired product lines into the existing Company structure.

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.

Management seeks acquisitions that strengthen the Company’s leadership in various product categories or provide entry into attractive new product categories.

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.

Consistent with that philosophy, the Company completed the discontinuance of its Mexico operations and sale of its Mexican facilities in 2024.

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.

The following table sets forth the annual percentage change in revenues and net income over the past three years:

The following table sets forth the annual percentage change in revenues and net income over the past two years:

Sporting Goods

As the most significant impacts of the COVID-19 pandemic appear to have waned, consumer demand for the Company’s products has slowed but remains above pre-COVID-19 demand.

General economic conditions, inflation, recessionary fears, rising interest rates, changes in the housing market and declining consumer confidence also may impact the Company adversely.

General economic conditions, inflation, recessionary fears, rising interest rates, changes in the housing market and declining consumer confidence may impact the Company adversely.

Management cannot predict the full impact of these factors on the Company.

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Selling, administrative and general expenses

Gain on sale of assets held

Operating income

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Net sales decreased 4.6% in 2024 compared to 2023.

The Company recognized declines in sales across multiple categories.

Many of our outdoor categories, including archery, playground and basketball, continue to slide back down from COVID-19 peak, but remain higher than pre-COVID-19 levels.

The overall gross margin decreased to 23.4% in 2023 compared with 23.5% in 2022.

Gross margins were unfavorably impacted by less absorption due to large reductions in inventory levels as well as ongoing inventory handling and storage costs.

The Company recognized declines in sales across multiple categories due to softer consumer demand, partially offset by improved demand in the archery, table tennis, and fitness categories.

The overall gross margin increased to 24.7% in 2024 compared with 23.4% in 2023.

Gross margins were favorably impacted by lower manufacturing and logistics costs.

Selling, General and Administrative Expenses

Selling, general and administrative expenses (SG&A) were $41.5 million in 2023 compared to $44.8 million in 2022, a decrease of $3.3 million or 7.3%.

Selling, general and administrative expenses (SG&A) were $43.3 million in 2024 compared to $41.5 million in 2023, an increase of $1.8 million or 4.4%.

The increase in SG&A was primarily related to increased professional service costs during 2024.

SG&A as a percent of sales is 17.2% in 2024 compared with 15.7% in 2023.

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The effective tax rate for 2024 and 2023 was 26.9% and 21.3%, respectively.

The 2023 effective tax rate is slightly higher than the federal statutory rate primarily due to the impact of state taxes partially offset by captive insurance premiums being tax exempt and federal income tax credits.

The 2022 effective tax rate is slightly lower than the federal statutory rate primarily due to the captive insurance premiums being tax exempt, with federal income tax credits helping to offset the impact of the state taxes and lower the statutory rate.

The 2024 effective tax rate is higher than the federal statutory rate primarily due to state income tax expense, nondeductible expenses, and the sale of Harvard Sports, partially offset by federal income tax credits.

The 2023 effective tax rate was slightly higher than the federal statutory rate primarily due to the impact of state taxes partially offset by captive insurance premiums being tax exempt and federal income tax credits.

Sporting Goods

Net sales, operating income, and net income for the Sporting Goods segment for the three years ended December 31, 2023 were as follows:

Net sales, operating income, and net income for the Sporting Goods segment for the two years ended December 31, 2024 were as follows:

Operating income

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Gross margin in 2024 was 24.7% compared to 23.4% in 2023.

Operating income, as a percentage of net sales, decreased to 6.6% in 2023 compared to 8.3% in 2022.

Operating income, as a percentage of net sales, increased to 9.2% in 2024 compared to 6.6% in 2023.

Financial Condition and Liquidity

The current ratio, a basic measure of liquidity (current assets divided by current liabilities), for 2024 was 3.9, compared to 4.4 in 2023.

Receivable levels decreased to $50.0 million in 2023 compared with $57.4 million in 2022 and net inventory decreased $29.4 million to $92.5 million in 2023 from $121.9 million in 2022, due to company-wide objectives to right size our on hand inventory.

Trade accounts payable and accrued liabilities decreased $5.6 million to $25.1 million from $30.7 million in 2022.

Receivable levels decreased to $48.8 million in 2024 compared with $50.0 million in 2023 as a result of lower sales.

Net inventory decreased $16.5 million to $76.0 million in 2024 from $92.5 million in 2023, due to continued efforts to right size our on hand inventory.

Trade accounts payable and accrued liabilities increased $1.8 million to $26.9 million from $25.1 million in 2023.

The Company’s working capital requirements are primarily funded through cash flows from operations and revolving credit agreements with its bank.

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(“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 have now 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.

Pursuant to the October 11, 2024 amendments to the 2022 Restated Credit Agreement, the Lenders have now made available to Escalade and Indian a senior revolving credit facility with maximum availability of $60.0 million (the “Revolving Facility”), which includes a $7.5 million swingline commitment by Chase, plus an accordion feature that would allow borrowings up to $85.0 million under the Revolving Facility subject to certain terms and conditions.

The maturity date of the revolving credit facility is 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.

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 reflected in the Fourth Amendment to the Restated Credit Agreement effective September 1, 2023, the maximum availability of the senior revolving credit facility was reduced to $85.0 million following the dissolution of Escalade Insurance, Inc.

As of December 31, 2023, the outstanding principal amount of the term loan was $32.7 million and total amount drawn under the Revolving Facility was $18.2 million.

Cash flows from operations and revolving credit agreements were used to fund acquisitions, to pay shareholder dividends, and to fund stock repurchases.

In 2024, the Company estimates capital expenditures to be approximately $4.0 million.

The 2022 Restated Credit Agreement further extended the maturity date for the Company’s existing $50.0 million term loan facility to January 21, 2027.

The October 11, 2024 amendments also eliminated the fixed charge coverage ratio covenant and related provisions.

The fixed charge ratio covenant was replaced by a new minimum interest coverage ratio covenant of 3.50 to 1:00 effective September 30, 2024.

The amendments further revised the restricted payments covenant to provide that if at any time the Company’s Funded Debt to EBITDA Ratio would exceed 1.75 to 1.0, then the aggregate combined total of cash dividends and Company share repurchases may not exceed $12.0 million in any trailing twelve month period.

The Company was in compliance with the debt covenants set forth in the Restated Credit Agreement as of December 31, 2024.

As of December 31, 2024, the outstanding principal amount of the term loan was $25.6 million and total amount drawn under the Revolving Facility was zero.

Cash flows from operations and revolving credit agreements were used to pay shareholder dividends and to fund stock repurchases.

The Company believes cash generated from its projected 2025 operations and the commitment of borrowings from its primary lender will provide it with sufficient cash flows for its operations.

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Minimum payments under purchase, royalty and license agreements

(1) Assumes that the Company will not increase borrowings under its long-term credit agreements and that the effective interest rate experienced in 2023 of 6.3% will continue for the life of the agreements.

(1) Assumes that the Company will not increase borrowings under its long-term credit agreements, the fixed term loan rate of 2.97% was used to calculate future interest payments.

Critical Accounting Estimates

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The most critical accounting estimates are described below and in the Notes to the Consolidated Financial Statements.

Product Warranty

The Company provides limited warranties on certain of its products for varying periods.

Generally, the warranty periods range from 30 days to one year.

However, some products carry extended warranties of three-year, five-year, seven-year, ten-year, fifteen-year, and lifetime warranties.

The Company records 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.

To the extent there are product defects in current products that are unknown to management and do not fall within historical defect rates, the product warranty reserve could be understated and the Company could be required to accrue additional product warranty costs thus negatively affecting gross margin.

Inventory Valuation Reserves

The Company evaluates inventory for obsolescence and excess quantities based on demand forecasts over specified time frames, usually one year.

The demand forecast is based on historical usage, sales forecasts and current as well as anticipated market conditions.

All amounts in excess of the demand forecast are deemed to be potentially excess or obsolete and a reserve is established based on the anticipated net realizable value.

To the extent that demand forecasts are greater than actual demand and the Company fails to reduce manufacturing output accordingly, the Company could be required to record additional inventory reserves which would have a negative impact on gross margin.

Allowance for Credit Losses

The Company provides an allowance for credit losses based upon a review of outstanding receivables, historical collection information and existing economic conditions.

Accounts receivable are ordinarily due between 30 and 60 days after the issuance of the invoice.

Accounts are considered delinquent when more than 90 days past due.

Delinquent receivables are reserved or written off based on individual credit evaluation and specific circumstances of the customer.

To the extent that actual bad debt losses exceed the allowance recorded by the Company, additional reserves would be required which would increase selling, general and administrative costs.

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.

Impairment of Goodwill

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Of the total recorded goodwill of $42.3 million at December 31, 2024, the entire amount was allocated to the Escalade Sports reporting unit.

The results of the qualitative impairment assessment of the Escalade Sports reporting unit indicated that it was not “more likely than not” that the fair value of the reporting unit was less than the carrying value as of December 31, 2023.

Long Lived Assets

The Company evaluates the recoverability of certain long-lived assets whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

Estimates of future cash flows used to test recoverability of long-lived assets include separately identifiable undiscounted cash flows expected to arise from the use and eventual disposition of the assets.

Where estimated future cash flows are less than the carrying value of the assets, impairment losses are recognized based on the amount by which the carrying value exceeds the fair value of the assets.

The results of the quantitative impairment assessment of the Escalade Sports reporting unit indicated that the fair value of the reporting unit was greater than the carrying value as of November 1, 2024.

Capital Expenditures

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis