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 March 31, 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 Number0-6966
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:
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).
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 May 2, 2023
Common, no par value
13,732,359
INDEX
Page
No.
Part I.
Financial Information:
Item 1 -
Financial Statements:
Consolidated Condensed Balance Sheets as of March 31, 2023, December 31, 2022, and March 19, 2022
3
Consolidated Condensed Statements of Operations for the Three Months Ended March 31, 2023 and March 19, 2022
4
Consolidated Condensed Statements of Stockholders’ Equity for the Three Months Ended March 31, 2023 and March 19, 2022
5
Consolidated Condensed Statements of Cash Flows for the Three Months Ended March 31, 2023 and March 19, 2022
6
Notes to Consolidated Condensed Financial Statements
7
Item 2 -
Management’s Discussion and Analysis of Financial Condition and Results of Operations
13
Item 3 -
Quantitative and Qualitative Disclosures About Market Risk
16
Item 4 -
Controls and Procedures
Part II.
Other Information
Item 1A -
Risk Factors
17
Unregistered Sales of Equity Securities and Use of Proceeds
Item 6 -
Exhibits
18
Signature
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
ESCALADE, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
All Amounts in Thousands Except Share Information
March 31,
2023
December 31,
2022
March 19,
(Unaudited)
(Audited)
Cash and cash equivalents
Receivables, less allowance of $490; $492; and $566; respectively
Inventories
Prepaid expenses
Prepaid income tax
TOTAL CURRENT ASSETS
Property, plant and equipment, net
Assets held for sale
Operating lease right-of-use assets
Intangible assets, net
Goodwill
Other assets
TOTAL ASSETS
Current portion of long-term debt
Trade accounts payable
Accrued liabilities
Income tax payable
Current operating lease liabilities
TOTAL CURRENT LIABILITIES
Other Liabilities:
Long‑term debt
Deferred income tax liability
Operating lease liabilities
Other liabilities
TOTAL LIABILITIES
Authorized 1,000,000 shares; no par value, none issued
Authorized 30,000,000 shares; no par value, issued and outstanding – 13,729,859; 13,594,407; and 13,585,096; shares respectively
Retained earnings
TOTAL STOCKHOLDERS' EQUITY
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
See notes to Consolidated Condensed Financial Statements.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
All Amounts in Thousands Except Per Share Data
Net sales
Cost of products sold
Selling, administrative and general expenses
Amortization
Operating Income
Interest expense
Other income
Income (Loss) Before Income Taxes
Provision (Benefit) for Income Taxes
Net Income (Loss)
Basic earnings (loss) per share
Diluted earnings (loss) per share
Dividends declared
CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED)
Common Stock
Retained
All Amounts in Thousands
Shares
Amount
Earnings
Total
Balances at December 25, 2021
Net income
Expense of restricted stock units
Settlement of restricted stock units
Balances at March 19, 2022
Balances at December 31, 2022
Net loss
Issuance of common stock for service
Balances at March 31, 2023
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended
March 31, 2023
March 19, 2022
Net income (loss)
Depreciation and amortization
Provision for doubtful accounts
Stock-based compensation
Common stock issued in lieu of bonus to officers
Adjustments necessary to reconcile net income to net cash provided by operating activities
Purchase of property and equipment
Acquisitions
Net cash used by investing activities
Payments on long-term debt
Deferred financing fees
Cash dividends paid
Net cash provided (used) by financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents, end of period
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 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.
Note B ‑ Seasonal Aspects
The results of operations for the three months ended March 31, 2023 and March 19, 2022 are not necessarily indicative of the results to be expected for the full year.
Note C ‑ Inventories
In thousands
Raw materials
Work in progress
Finished goods
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.
The following table presents estimated fair values of the Company’s financial instruments and the level within the fair value hierarchy in which the fair value measurements fall in accordance with FASB ASC 825 at March 31, 2023, December 31, 2022 and March 19, 2022.
Fair Value Measurements Using
Carrying
Quoted Prices in
Active Markets
for Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Long-term debt
December 31, 2022
Carrying Amount
Note E – Stock Compensation
The fair value of stock-based compensation is recognized in accordance with the provisions of FASB ASC 718, Stock Compensation.
During the three months ended March 31, 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 three months ended March 31, 2023, the Company awarded 145,563 restricted stock units to employees. 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.
For the three months ended March 31, 2023 and March 19, 2022, the Company recognized stock based compensation expense of $459 thousand and $388 thousand, respectively. At March 31, 2023 and March 19, 2022, respectively, there was $2,816 thousand and $3,235 thousand in unrecognized stock-based compensation expense related to non-vested stock awards.
Note F ‑ Segment Information
As of and for the Three Months
Ended March 31, 2023
Sporting Goods
Corp.
Revenues from external customers
Operating income (loss)
Total assets
Ended March 19, 2022
Note G – Dividend Payment
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.
Note H ‑ Earnings Per Share
The shares used in computation of the Company’s basic and diluted earnings per common share are as follows:
Weighted average common shares outstanding
Dilutive effect of stock options and restricted stock units
Weighted average common shares outstanding, assuming dilution
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 three months ended March 31, 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.
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:
Mass Merchants
Specialty Dealers
E-commerce
International
Other
Total Gross Sales
Returns
Warranties
Customer Allowances
Total Gross-to-Net Sales Adjustments
Total Net Sales
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 March 31, 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. 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:
Operating Lease Cost
Short-term Lease Cost
Variable Lease Cost
Total Operating Lease Cost
Operating Lease – Operating Cash Flows
New ROU Assets – Operating Leases (non-cash)
Weighted Average Remaining Lease Term – Operating Leases (in years)
8.79
4.12
Weighted Average Discount Rate – Operating Leases
Future minimum lease payments under non-cancellable leases as of March 31, 2023 were as follows:
Year 1
Year 2
Year 3
Year 4
Year 5
Thereafter
Total future minimum lease payments
Less imputed interest
Long-term operating lease liabilities
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 – 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.
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.
As of March 31, 2023, the outstanding principal amount of the term loan was $38.1 million and total amount drawn under the Revolving Facility was $57.1 million.
Note N – Subsequent Event
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. The Third Amendment waived compliance with the funded debt to EBITDA ratio financial covenant and the minimum fixed charge coverage ratio requirements for the Company’s first fiscal quarter of 2023. 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.
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 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, especially with respect to its Sporting Goods business on which it has chosen to focus; 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.
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.
As the impact of the COVID-19 pandemic evolves and may be waning, the Company continues to respond to the challenges and opportunities arising from 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 March 31, 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:
Net revenue
Gross margin
Operating income
Revenue and Gross Margin
Sales decreased by 21.3% for the first quarter of 2023, compared with the same period in the prior year. Sales declined given a combination of changing post-pandemic consumer demand, excess inventories in the retail channel and unfavorable weather conditions in the quarter which delayed the start of the spring business.
Gross margin declined to 19.4% for the first quarter of 2023 compared to 27.8% for the same period in 2022 primarily driven by less favorable product mix, ongoing additional inventory storage and handling costs, and lower operating leverage with the lower sales level.
Selling, General and Administrative Expenses
Selling, general and administrative expenses (SG&A) were $10.3 million for the first quarter of 2023 compared to $10.5 million for the same period in the prior year, a decrease of $0.2 million or 2.3%. SG&A as a percent of sales is 18.0% for the first quarter of 2023 compared with 14.5% for the same period in the prior year.
The effective tax rate for the first three months of 2023 was 21.2% compared to 21.8% for the same period last year.
Financial Condition and Liquidity
Total debt at the end of the first three months of 2023 was $95.2 million, an increase of $0.3 million from December 31, 2022. The following schedule summarizes the Company’s total debt:
Long term debt
Total Debt
As a percentage of stockholders’ equity, total debt was 60.9%, 59.9% and 66.0% at March 31, 2023, December 31, 2022, and March 19, 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.
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 first 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.
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 12/31/2022 under the current repurchase program.
First quarter purchases:
1/1/2023-1/31/2023
None
No Change
2/1/2023-2/28/2023
3/1/2023-3/31/2023
Total share purchases under the current program
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 March 31, 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.
DEFAULTS UPON SENIOR SECURITIES.
MINE SAFETY DISCLOSURES.
Not applicable.
Item 5.
OTHER INFORMATION.
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
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.