Sources of Supplies
Raw materials for Escalade's various product lines consist of, but are not limited to, wood, steel, aluminum, plastics, fiberglass and packaging. Escalade relies upon suppliers in various countries and upon various third party Asian manufacturers for many of its products. The Company believes that these sources will continue to provide adequate supplies as needed and that all other materials needed for the Company’s various operations are available in adequate quantities from a variety of domestic and foreign sources. From time to time, Escalade may experience disruptions in its supply chain due to circumstances beyond its control, such as the outbreak of the coronavirus or other public health crises and limited availability of shipping containers and other third party logistics, which disruptions could adversely impact Escalade currently and in the future. To alleviate these concerns, Escalade continues to accelerate its timing for placing orders with its suppliers and continues its efforts to develop other potential sources of products and raw materials. In recent years, Escalade has increased its sourcing of some products and raw materials from Brazil and Vietnam. Escalade’s acquisition of the Brunswick Billiards® business may open additional sourcing opportunities.
SEC Reports
The Company’s Internet site (www.escaladeinc.com) makes available free of charge to all interested parties the Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, and all amendments to those reports, as well as all other reports and schedules filed electronically with the Securities and Exchange Commission (the Commission), as soon as reasonably practicable after such material is electronically filed with or furnished to the Commission. Interested parties may also find reports, proxy and information statements and other information on issuers that file electronically with the Commission at the Commission's Internet site at www.sec.gov.
Operating results may be impacted by changes in the economy that influence business and consumer spending.OPERATIONAL RISKS TO THE COMPANY AND OUR BUSINESS
Operating results are directly impacted by the health of the North American and to a lesser extent, European and Asian economies. We cannot predict how robust the economy will be or whether or not it will be sustained. If the economic recovery slows, or if the economy experiences a prolonged period of decelerating or negative growth, the Company’s results of operations may be negatively impacted. In general, the Company’s sales depend on discretionary spending by consumers. Business and financial performance may be adversely affected by current and future economic conditions, including unemployment levels, energy costs, interest rates, recession, inflation, the impact of natural disasters and terrorist activities, and other matters that influence business and consumer spending.
Fluctuation in economic conditions could prevent the Company from accurately forecasting demand for its products which could adversely affect its operating results or market share.
Fluctuation in economic conditions and market instability in the United States and globally makes it difficult for the Company, customers and suppliers to accurately forecast future product demand trends, which could cause the Company to produce excess products that can increase inventory carrying costs and result in obsolete inventory. Alternatively, this forecasting difficulty could cause a shortage of products, or materials used in products, that could result in an inability to satisfy demand for products and a loss of market share.
Markets are highly competitive which could limit the Company’sCompany’s growth and reduce profitability.
The market for sporting goods is highly fragmented and intensely competitive. A majority of the Company’s products are in markets that are experiencing low growth rates. Escalade competes with a variety of regional, national and international manufacturers for customers, employees, products, services and other important aspects of the business. The Company has historically sold a large percentage of its sporting goods products to mass merchandisers and has increasingly attempted to expand sales to specialty retailer and dealer markets and to on-line retailers. In addition to competition for sales into those distribution channels, vendors also must compete in sporting goods with large format sporting goods stores, traditional sporting goods stores and chains, warehouse clubs, discount stores and department stores. Competition from on-line retailers may also impact sales. Some of the current and potential competitors are larger than Escalade and have substantially greater financial resources that may be devoted to sourcing, promoting and selling their products, and may discount prices more heavily than the Company can afford.
If the Company is unable to predict or effectively react to changes in consumer demand, it may lose customers and sales may decline.
Success depends in part on the ability to anticipate and respond in a timely manner to changing consumer demand and preferences regarding sporting goods. Products must appeal to a broad range of consumers whose preferences cannot be predicted with certainty and are subject to change. The Company often makes commitments to manufacture products months in advance of the proposed delivery to customers. If Escalade misjudges the market for products, sales may decline significantly. The Company may have to take significant inventory markdowns on unpopular products that are overproduced and/or miss opportunities for other products that may rise in popularity, both of which could have a negative impact on profitability. A major shift in consumer demand away from sporting goods products could also have a material adverse effect on the Company’s business, results of operations and financial condition.
The Company derives a substantial portion of its revenue from a few significant customers and loss of any of these customers could materially affect our results of operations and financial condition.has been experiencing higher inventory levels, which adversely impacts the Company’s operating results.
TheIn response to supply chain issues and other factors, the Company has two major customers, eachaccelerated its product purchases to meet expected demand. Although the Company endeavors to accurately predict changes in customer demands and consumer spending patterns with respect to the Company’s products, demand for products can change significantly between the time inventory is ordered and the date of which accounted for more than ten percent of consolidated gross sales and more than ten percent of total accounts receivable. Thesale. While the Company also has several other large customers, none of which represent more than ten percent of consolidated gross sales, and historically has derived substantial revenues from these customers. Our customers continuecontinues to experience industry consolidation, which increases our risk that we may be unable to find sufficient alternative customers. The Company needs to continue to expand its customer base to minimize the effectsproduct demand in excess of the loss of any single customer in the future. If sales to one or more of the large customers would be lost or materially reduced, there can be no assurance that the Company will be able to replace such revenues, which could have a material adverse effect on the Company's business, results of operations and financial condition.
The Company’s customers may experience financial difficulties that could result in losses to the Company.
From time to time, one or more ofhistorical levels, the Company’s customers have experienced, are experiencing, or may ininventories throughout 2022 were higher than desired. In some instances, product was received after the future experience financial difficulties that impair their abilitypeak sales season had occurred, thereby further contributing to pay all amounts owed to the Company. In such instances, the customer may file bankruptcy or take other actions to restructure the amounts owed to secured and unsecured creditors, including unsecured trade creditors such as the Company. When this occurs, the Company may not be able to collect the full amount owed to it by the customer, and in severe situations may have to write off all or a substantial portion of those customer receivables. Any significant resulting losses incurred by the Company relating to these or other customers could have a material adverse effect onabove normal inventory levels. Accordingly, increased costs associated with inventory adversely impacted the Company’s business, results of operation, and financial condition.
Quarterly operating results are subject to fluctuation.
Operating results have fluctuated from quarter to quarter in the past,2022 and the Company expects that they willmay continue to do so in the future. Factors that could cause these quarterly fluctuations include the following:international, national and local general economic and market conditions; the size and growth of the overall sporting goods markets; intense competition among manufacturers, marketers, distributors and sellers of products; demographic changes; changes in consumer preferences; popularity of particular designs, categories of products and sports; seasonal demand for products; the size, timing and mix of purchases of products; fluctuations and difficulty in forecasting operating results; ability to sustain, manage or forecast growth and inventories; new product development and introduction; ability to secure and protect trademarks, patents and other intellectual property; performance and reliability of products; customer service; the loss of significant customers or suppliers; dependence on distributors; business disruptions; increased costs of freight and transportation to meet delivery deadlines; changes in business strategy or development plans; general risks associated with doing business outside the United States, including, without limitation: exchange rates, import duties, tariffs, quotas and political and economic instability; changes in government regulations; any liability and other claims asserted against the Company; ability to attract and retain qualified personnel; and other factors referenced or incorporated by reference in this Form 10-K and any other filings with the Securities and Exchange Commission.until inventories are optimized.
The Company may pursue strategic acquisitions, divestitures, or investments and the failure of a strategic transaction to produce anticipated results or the inability to fully integrate an acquired company could have an adverse impact on the Company’sCompany’s business.
The Company has made acquisitions of complementary companies or businesses, which have been part of the strategic plan, and may continue to pursue acquisitions in the future from time to time. Acquisitions may result in difficulties in assimilating acquired companies, and may result in the diversion of capital and management’s attention from other business issues and opportunities. The Company may not be able to successfully integrate operations that it acquires, including personnel, financial and information systems, cybersecurity measures, distribution, and operating procedures. If the Company fails to successfully integrate acquisitions, the Company’s business could suffer. In addition, acquisitions may result in the incurrence of debt, contingent liabilities, amortization expense or write-offs of goodwill or other intangibles, any of which could affect the Company’s financial position. The Company also has sometimes divested or discontinued certain operations, assets, and products that did not perform to the Company’s expectations or no longer fit with the Company’s strategic objectives.
Divestitures may result in gains, losses, contingent liabilities, write-offs, tax consequences, or other related costs and expenses that could affect the Company’s financial position. Escalade will consider acquisitions, divestitures, and investments in the future, one or more of which, individually or in the aggregate, could be material to the Company’s overall business, operations or financial position.
Growth may strain resources, which could adversely affect the Company’sCompany’s business and financial performance.
The Company has grown in the past through strategic acquisitions, and continues to make acquisitions in its Sporting Goods business. Our growth strategy also depends on our ability to grow our e-commerce business.business, including continued expansion and development of our own direct to consumer e-commerce distribution channel. Growth places additional demands on management and operational systems. If the Company is not successful in continuing to support operational and financial systems, expanding the management team and increasing and effectively managing customers and suppliers, growth may result in operational inefficiencies and ineffective management of the Company’s business, which could adversely affect its business and financial performance.
The Company’sCompany’s ability to operate and expand its business and to respond to changing business and economic conditions will be dependent upon the availability of adequate capital.
The rate of expansion will also depend on the availability of adequate capital, which in turn will depend in large part on cash flow generated by the business and the availability of equity and debt capital. The Company can make no assurances that it will be able to obtain equity or debt capital on acceptable terms or at all. Our current senior secured revolving credit facility contains provisions that limit our ability to incur additional indebtedness or make substantial asset sales, which might otherwise be used to finance our operations. In the event of our insolvency, liquidation, dissolution or reorganization, the lenders under our senior secured revolving credit facility would be entitled to payment in full from our assets before distributions, if any, to our stockholders.
The Company could suffer if it fails to attract and retain skilled management and key personnel.
The Company’s success depends in large part on its ability to attract and retain highly qualified management executives and key personnel. Significant competition for qualified candidates exists in the Company’s business lines and geographic locations. If the Company is not able to hire and retain its executives and key personnel, or if the compensation costs required to attract and retain such individuals becomes more expensive, the Company may suffer adverse consequences to its business, operations, and financial condition.
The Company derives a substantial portion of its revenue from a few significant customers and loss of any of these customers could materially affect our results of operations and financial condition.
The Company has two major customers, each of which accounted for more than ten percent of consolidated gross sales in the Company’s 2022 fiscal year. The Company also has several other large customers, none of which represent more than ten percent of consolidated gross sales, and historically has derived substantial revenues from these customers. Our customers continue to experience industry consolidation, which increases our risk that we may be unable to find sufficient alternative customers. The Company needs to continue to expand its customer base, including sales of new product offerings to existing customers, in order to minimize the effects of the loss of any single customer in the future. If sales to one or more of the large customers would be lost or materially reduced, there can be no assurance that the Company will be able to replace such revenues, which could have a material adverse effect on the Company's business, results of operations and financial condition.
The Company’s customers may experience financial difficulties that could result in losses to the Company.
From time to time, one or more of the Company’s customers have experienced, are experiencing, or may in the future experience financial difficulties that impair their ability to pay all amounts owed to the Company. In such instances, the customer may file bankruptcy or take other actions to restructure the amounts owed to secured and unsecured creditors, including unsecured trade creditors such as the Company. When this occurs, the Company may not be able to collect the full amount owed to it by the customer, and in severe situations may have to write off all or a substantial portion of those customer receivables. Any significant resulting losses incurred by the Company relating to these or other customers could have a material adverse effect on the Company’s business, results of operation, and financial condition.
The Company’s business may be adversely affected by the actions of and risks associated with third-party suppliers.
The raw materials that the Company purchases for manufacturing operations and many of the products that it sells are sourced from a wide variety of third-party suppliers. The Company cannot control the supply, design, function or cost of many of the products that are offered for sale and are dependent on the availability and pricing of key materials and products. Disruptions in the availability of raw materials used in production of these products may adversely affect sales and result in customer dissatisfaction. Price increases in raw materials adversely impacted the Company’s net income in fiscal year 2022. In addition, global sourcing of many of the products sold is an important factor in the Company’s financial performance. The ability to find qualified suppliers and to access products in a timely and efficient manner is a significant challenge, especially with respect to goods sourced outside the United States. Political instability, financial instability of suppliers, merchandise quality issues, trade restrictions, tariffs, currency exchange rates, transport capacity and costs, inflation and other factors relating to foreign trade are beyond the Company’s control.
Historically, instability in the political and economic environments of the countries in which the Company or its suppliers obtain products and raw materials has not had a material adverse effect on operations. However, the Company cannot predict the effect that future changes in economic or political conditions in the United States and in such foreign countries may have on operations. In the event of disruptions or delays in supply due to economic or political conditions, such disruptions or delays could adversely affect results of operations unless and until alternative supply arrangements could be made. In addition, products and materials purchased from alternative sources may be of lesser quality or more expensive than the products and materials currently purchased abroad.
Deterioration in relationships with suppliers or in the financial condition of suppliers could adversely affect liquidity, results of operations and financial position.
Access to materials, parts and supplies is dependent upon close relationships with suppliers and the ability to purchase products from the principal suppliers on competitive terms. The Company does not enter into long-term supply contracts with these suppliers, and has no current plans to do so in the future. These suppliers are not required to sell to the Company and are free to change the prices and other terms. Any deterioration or change in the relationships with or in the financial condition of the Company’s significant suppliers could have an adverse impact on its ability to procure materials and parts necessary to produce products for sale and distribution. If the Company or any of the significant suppliers terminated or significantly curtailed its relationship with a significant supplier or the Company, respectively, or if a significant supplier ceased operations, the Company would be forced to expand relationships with other suppliers, seek out new relationships with new suppliers or risk a loss in market share due to diminished product offerings and availability. Any change in one or more of these suppliers’ willingness or ability to continue to supply the Company with their products could have an adverse impact on the Company’s liquidity, results of operations and financial position.
Disruptions to our supply chain could have an adverse impact on our operations.
Many of the Company’s products are manufactured outside the United States. Those products must be transported by third parties over large geographic distances. Delays in the shipment or delivery of our products could occur due to work stoppages, port strikes, lack of availability of transportation, and other factors beyond the Company’s control. The Company continues to experience increased shipping costs for products obtained from overseas due to a shortage of available shipping containers. If the Company experiences any significant disruption in its supply chain or sharply rising costs, for any reason, such as the coronavirus pandemic, the Company may be unable to satisfy customer demand for our products resulting in lost sales. Such delays and increased costs could impair our ability to timely and efficiently deliver our products, and could adversely impact our operating results.
The Company may be subject to product warranty claims that require the replacement or repair of the product sold. Such warranty claims could adversely affect the Company’s financial position and relationships with its customers.
The Company manufactures and/or distributes a variety of products. From time to time, such products may contain manufacturing defects or design flaws that are not detected prior to sale, particularly as to new product introductions or upon design changes to existing products. The failure to identify and correct manufacturing defects and product design issues prior to the sale of those products could result in product warranty claims that result in costs to replace or repair any such defective products. Because many of the Company’s products are sold to retailers for broad consumer distribution and/or to customers who buy in large quantities, the costs associated with product warranty claims could have a material adverse effect on the Company’s results of operations and financial position. Product warranty claims also could cause customer dissatisfaction that may have a material adverse effect on the Company’s reputation and on the Company’s relationships with its customers, which may result in lost or reduced sales.
The Company may be subject to various types of litigation and the Company’s insurance may not be sufficient to cover damages related to those claims.
From time to time the Company or its subsidiaries may be involved in lawsuits or other claims arising in the course of business, including those related to product liability, consumer protection, employment, intellectual property, torts and other matters. In addition, it may be subject to lawsuits relating to the design, manufacture or distribution of its products. The Company may be subject to lawsuits resulting from injuries associated with the use of sporting goods equipment that it sells and information security and print finishing products that it sold prior to divesting that business. The Company may incur losses relating to these claims or the defense of these claims. There is a risk that claims or liabilities will exceed the Company’s insurance coverage. In addition, the Company may be unable to retain adequate liability insurance in the future. Further, the Company is subject to regulation by the Consumer Product Safety Commission and similar state regulatory agencies. If the Company fails to comply with government and industry safety standards, it may be subject to claims, lawsuits, fines, product recalls and adverse publicity that could have a material adverse effect on the Company’s business, results of operations and financial condition.
Intellectual property rights are valuable, and any inability to protect them could reduce the value of products.
The Company obtains patents, trademarks and copyrights for intellectual property, including its brand names, which represent important assets to the Company. If the Company fails to adequately protect intellectual property through patents, trademarks and copyrights, its intellectual property rights may be misappropriated by others, invalidated or challenged, and our competitors could duplicate the Company’s products or may otherwise limit any competitive design or manufacturing advantages. The Company believes that success is likely to depend upon continued innovation, technical expertise, marketing skills, andbranding, customer support and services rather than on legal protection of intellectual property rights. However, the Company intends to aggressively assert its intellectual property rights when necessary.
The expiration or termination of our material trademarks, brand names and licensing agreements could have a material adverse effect on the Company’sCompany’s business.
The Company has invested substantial resources in developing and marketing the Company’s brands and products over many years. The expiration or termination of one or more of the Company’s material trademarks, patents or licensing agreements could result in the loss of such intellectual property. In such event, the Company may not be able to recoup its investments in, and continue to benefit from the affected brand names or products. The loss of such intellectual property and related rights could have a material adverse effect on the Company.
The Company is subject to risks associated with laws and regulations related to health, safety and environmental protection.
Products, and the production and distribution of products, are subject to a variety of laws and regulations relating to health, safety and environmental protection. Laws and regulations relating to health, safety and environmental protection have been passed in several jurisdictions in which the Company operates in the United States and abroad. Although the Company does not anticipate any material adverse effects based on the nature of operations and the thrust of such laws, there is no assurance such existing laws or future laws will not have a material adverse effect on the Company’s business, results of operations and financial condition.
International operations expose the Company to the unique risks inherent in foreign operations.
The Company has operations in Mexico. Foreign operations encounter risks similar to those faced by U.S. operations, as well as risks inherent in foreign operations, such as local customs and regulatory constraints, control over product quality and content, foreign trade policies, competitive conditions, foreign currency fluctuations and unstable political and economic conditions. The Company’s business relationships in Asia and joint venture in Sweden further increase its exposure to these foreign operating risks, which could have an adverse impact on the Company’s income and profitability.
The Company could be adversely affected by changes in currency exchange rates and/or the value of the United States dollar.
The Company is exposed to risks related to the effects of changes in foreign currency exchange rates and the value of the United States dollar. Changes in currency exchange rates and the value of the United States dollar can have a significant impact on earnings. While the Company carefully watches fluctuations in currency exchange rates, these types of changes can have material adverse effects on the Company’s business, results of operations and financial condition.
Failure to improve and maintain the quality of internal controls over financial reporting could materially and adversely affect the ability to provide timely and accurate financial information, which could harm the Company’s reputation and share price.
Management is responsible for establishing and maintaining adequate internal controls over financial reporting for the Company to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles. Management cannot be certain that weaknesses and deficiencies in internal controls will not arise or be identified or that the Company will be able to correct and maintain adequate controls over financial processes and reporting in the future. Any failure to maintain adequate controls or to adequately implement required new or improved controls could harm operating results or cause failure to meet reporting obligations in a timely and accurate manner. Ineffective internal controls over financial reporting could also cause investors to lose confidence in reported financial information, which could adversely affect the trading price of the Company’s common stock.
Disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives. However, management, including the Chief Executive Officer and Chief Financial Officer, does not expect that disclosure controls and procedures will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.
Problems with the Company’s information system software or hardware could disrupt operations and negatively impact financial results and materially adversely affect the Company’s business operations.
The Company relies on a suite of applications and third party software to receive and process customer orders and for the core of its manufacturing, distribution, and accounting systems. These systems, if not functioning properly, could disrupt its operations, including the Company’s ability to receive and ship orders and to process financial information or engage in similar normal business activities. Any material disruption, malfunction, cyber-attack or other similar problems in or with these systems could negatively impact our financial results and materially adversely affect our business operations.
Breaches of data or technology security could damage the Company’sCompany’s reputation, cause the Company to incur additional expense, expose the Company to litigation, and adversely affect the Company’sCompany’s business.
A breach of our data or technology security could result in an unauthorized transfer or release of Company proprietary, employee, customer and other Company related information, or the loss of valuable business data or technology, that could cause a disruption in our business. Hackers are increasingly sophisticated and operate large scale and complex cyber security attacks. In the event of such an attack, we may expend significant capital and other resources to protect against, respond to, and/or alleviate problems caused by a breach. Such an event could also result in unwanted negative media attention, damage to the Company’s reputation, damage to our customers, and result in lost sales and lawsuits. The Company also must comply with increasingly complex regulatory cyber security and privacy standards, which can be costly and negatively impact the Company’s profitability.
The preparation of the Company’s financial statements requires the use of estimates that may vary from actual results.
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make significant estimates that may affect financial statements. Due to the inherent nature of making estimates, actual results may vary substantially from such estimates, which could materially adversely affect the Company’s business, results of operations and financial condition. For more information on the Company’s critical accounting estimates, please see the Critical Accounting Estimates section of this Form 10-K.
Changes in accounting standards could impact reported earnings and financial condition.
The accounting standard setters, including the Financial Accounting Standards Board and the Securities and Exchange Commission, periodically change the financial accounting and reporting standards that govern the preparation of the Company’s consolidated financial statements. These changes can be hard to predict and apply and can materially affect how the Company records and reports its financial condition and results of operations. In some cases, the Company could be required to apply a new or revised standard retrospectively, which may result in the restatement of prior period financial statements.
The potential effects of the 2017 U.S. tax reform legislation, as well as possible future tax law changes, on the Company are uncertain and could adversely impact the Company’s business operations or otherwise adversely affect the Company.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “2017 U.S. Tax Reforms”) was signed into law. The 2017 U.S. Tax Reforms significantly change the U.S. federal income taxation of U.S. businesses and their owners. Many of the changes included in the 2017 U.S. Tax Reforms are effective immediately, without transition periods or grandfathering provisions. The details of the 2017 U.S. Tax Reforms may be unclear in various respects and could be subject to amendments, technical corrections, IRS interpretations, implementing rules and regulations, and litigation, any of which could increase or lessen the impact of such tax law changes. While some of the changes made in the 2017 U.S. Tax Reforms appear to benefit the Company in 2017 and future years, other changes may be adverse on a going forward basis. The Company intends to work with its tax and other advisors to determine the full impact that the U.S. 2017 Tax Reforms may have on the Company and to utilize the potential benefits that may be applicable to the Company, but there can be no assurances that the Company will be successful in doing so or that potential negative consequences might not outweigh the benefits.
The Company’s effective tax rate may fluctuate.
The Company is a multi-channel provider of sporting goods. As a result, the Company’s effective tax rate is derived from a combination of applicable tax rates in the various countries, states and other jurisdictions in which the Company operates. In addition to the effects of the 2017 U.S. Tax Reforms, the effective tax rate may be lower or higher than its tax rates have been in the past due to numerous factors, including the sources of income, any agreement with taxing authorities in various jurisdictions, the tax filing positions taken in various jurisdictions and changes in the political environment in the jurisdictions in which the Company operates. The Company bases estimates of an effective tax rate at any given point in time upon a calculated mix of the tax rates applicable to the Company and to estimates of the amount of business likely to be done in any given jurisdiction. The loss of one or more agreements with taxing jurisdictions, a change in the mix of business from year to year and from country to country, changes in rules related to accounting for income taxes, changes in tax laws and any of the multiple jurisdictions in which the Company operates, or adverse outcomes from tax audits that the Company may be subject to in any of the jurisdictions in which the Company operates, could result in an unfavorable change in the effective tax rate which could have an adverse effect on the Company’s business and results of operations.
The market price of the Company’s common stock is likely to be highly volatile as the stock market in general can be highly volatile.
The public trading of the Company’s common stock is based on many factors which could cause fluctuation in the Company’s stock price. These factors may include, among other things:
Many of these factors are beyond the Company’s control. These factors may cause the market price of the Company’s common stock to decline, regardless of operating performance.
If we are unable to pay quarterly dividends at intended levels, our reputation and stock price may be harmed.
Our quarterly cash dividend is currently $0.115 per common share. The dividend program requires the use of a portion of our cash flow. Our ability to pay dividends will depend on our ability to generate sufficient cash flows from operations in the future. This ability may be subject to certain economic, financial, competitive and other factors that are beyond our control. Our Board of Directors (Board) may, at its discretion, increase or decrease the intended level of dividends or entirely discontinue the payment of dividends at any time. Any failure to pay dividends after we have announced our intention to do so may negatively impact our reputation, investor confidence in us and negatively impact our stock price.
Unauthorized disclosure of sensitive or confidential customer information could harm the Company’sCompany’s business and its standing with its customers.
Through sales and marketing activities, the Company collects and stores certain information that customers provide to purchase products or services or otherwise communicate and interact with the Company. Despite instituted safeguards for the protection of such information, the Company cannot be certain that all of its systems are entirely free from vulnerability to attack. Computer hackers may attempt to penetrate the Company’s network security and, if successful, misappropriate confidential customer or business information. In addition, an employee, a contractor or other third party with whom the Company does business may attempt to circumvent the Company’s security measures in order to obtain such information or inadvertently cause a breach involving such information. Loss of customer or business information could disrupt operations, damage the Company’s reputation, and expose the Company to claims from customers, financial institutions, payment card associations and other persons, any of which could have an adverse effect on the Company’s business, results of operations and financial condition. In addition, compliance with tougher privacy and information security laws and standards may result in significant expense due to increased investment in technology and the development of new operational processes.
Terrorist attacks, actsCybersecurity breaches or other data security incidents could result in unauthorized access, theft, modification, or destruction of war or natural disasterCompany assets, including bank accounts, intellectual property, and confidential information, which may seriously harmadversely affect the Company’sCompany’s business.
AmongThe Company has experienced an increase in cybersecurity threats and attempts to breach the chief uncertainties facing the nationCompany’s security networks. The techniques used to conduct cyber attacks, including phishing, hacking, and malicious software, are increasingly sophisticated and the worldsources and astargets of these attacks change frequently. Cyber attacks may not be recognized until after attacks have been launched successfully or have been in place for a result, our business, isperiod of time. From time to time, the instabilityCompany has been, and conflict inlikely will continue to be, the Middle East and uncertainties regarding North Korea, Russia, Chinatarget of cyber and other Asian and European countries. Obviously, no one can predict with certainty whatsecurity threats. To the overall economic impact will be as a result of these circumstances. Terrorist attacks may cause damage or disruption toCompany’s knowledge, the Company employees, facilities and customers, which could significantlyhas not experienced a significant cybersecurity breach that had a material impact net sales, costs and expenses and financial condition. The potential for future terrorist attacks,on the national and international responsesCompany’s business or operating results, although there can be no assurance that the Company’s efforts to terrorist attacks, and other acts of war and hostility may cause greater uncertainty and cause business to suffer in waysmaintain the Company currently cannot predict.
In addition, any natural disaster or other serious disruption to onesecurity of the Company’s manufacturinginformation technology networks and related systems will be effective or distribution sights duethat attempted security breaches will not be damaging in the future. The Company maintains cyber liability insurance, however, such insurance may not be sufficient to fire, tornado, earthquakecover the financial, legal, business or any other causesreputational losses that could damageresult from a material portionbreach of inventory or impair our ability to provide product to our customers and could negatively affect our sales and profitability.the Company’s systems.
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New laws, policies, regulations, rulemaking and oversight, as well as changes to those currently in effect, could adversely impact our earnings, cash flows and operations.
Our assets and operations are subject to regulation and oversight by federal, state, and local regulatory authorities. Legislative changes, as well as regulatory actions taken by these agencies, haves business involves the potential toforproductrecalls, warranty liability,productliability, and other claims against us, which could adversely affect our profitability. In addition,reputation, earnings and financial condition.
As a certain degreemanufacturer, marketer and distributor of regulatory uncertaintyconsumer products, the Company is createdsubject to the United States Consumer Products Safety Act of 1972, as amended by the U.S. political climate. It remains unclear specifically whatConsumer Product Safety Improvement Act of 2008, which empowers the current presidential administration and Congress may do with respectConsumer Products Safety Commission (“CPSC”) to future policies and regulationsrecall or exclude from the market products that may affect us. Regulation affects many aspectsare found to be unsafe or hazardous. Although recalls of our businessproducts have been infrequent, the Company’s subsidiaries voluntarily recalled the Ping Pong Avenger table tennis table in 2021 due to concerns that it could create a potential fall risk to consumers and extendscertain Goalsetter wall-mounted basketball goals in 2022 that could detach and fall to such matters as (i) federal, state,the ground unexpectedly if not installed correctly. Notwithstanding that we extensively and local taxation; (ii) rates (which include tax, commodity, surchargesrigorously test our products, there can be no assurance we will be able to detect, prevent, or fix all defects and fuel); (iii)safety concerns. Under certain circumstances, the integrity,CPSC could require us to repurchase or recall additional products, even if we disagree with the defect determination or have data that shows the actual safety risk to be nominal. Any repurchase or recall of our products, monetary judgment, fine or other penalty could be costly and securitydamaging to our reputation and/or adversely affect our brands. Furthermore, the occurrence of facilitiesany material defects in our products could expose us to liability for warranty claims in excess of our current reserves, and/or to product liability claims that could exceed the limits of our insurance coverage, to the extent coverage may exist. If our warranty reserves and/or insurance coverage are inadequate to cover future warranty claims and/or potential product liability claims, our financial condition and operations; (iv) the acquisition of other businesses; (v) the acquisition, extension, disposition or abandonment of services or facilities; (vi) reporting and information requirements; and (vii) the maintenance of accounts and records.operating results may be harmed.
FailureThe Company may be subject to sustainvarious types of litigation, and our insurance may not be sufficient to cover damages related to those claims.
From time-to-time the Company may be involved in lawsuits or other claims arising in the ordinary course of business, including those related to product liability, consumer protection, employment, intellectual property, tort, privacy and data protection, and other matters. The Company may incur losses relating to claims filed against it, including costs associated with defending against such claims, and there is risk that any such claims or liabilities will exceed its insurance coverage, or affect the Company’s ability to retain adequate liability insurance in the future. Even if a continuingclaim is unsuccessful or is not fully pursued, the negative publicity surrounding any such assertions could adversely affect the Company’s reputation. Due to the inherent uncertainties of litigation and other claims, we cannot accurately predict the ultimate outcome of any such matters.
Unseasonable or extreme weather conditions, alone or together with natural disasters, as well as other catastrophic events, could adversely affect the Company’s business and results of operations.
Unseasonable or extreme weather conditions, natural disasters and other catastrophic events could negatively impact consumer shopping patterns, consumer confidence and disposable income, or otherwise could have a negative effect on the company’s financial performance. The Company’s business is susceptible to unseasonable weather conditions, particularly as it relates to sports equipment and recreational outdoor products, which could lead to lost sales or greater than expected markdowns. For example, extended periods of unseasonably warm temperatures during the winter season or cool weather during the summer season could reduce demand for a portion of the Company’s inventory and thereby reduce sales and profitability. In addition, extreme weather conditions, natural disasters and other catastrophic events could damage or destroy our facilities, cause staffing shortages or make it difficult for customers to travel to stores and dealers where the Company’s products are sold. Such events and circumstances could negatively affect the Company’s business and results of operations from time to time.
The COVID-19 pandemic continues to affect the Company’s business. Additional factors couldexacerbate such consequences and/or cause materially adverse effects.
While the COVID-19 pandemic did not materially adversely affect the Company’s financial results and business operations in the Company’s fiscal year ended December 31, 2022, economic recoveryand health conditions in the United States and elsewhere could have a substantial adverse effect on our business.
Our business is tied to general economic and industry conditions as demand for sporting goods depends largely on the strengthacross most of the economy, employment levels, consumer confidence levelsglobe changed rapidly during 2020, 2021 and 2022. Demand for the availabilityCompany’s products increased substantially in fiscal years 2020, 2021 and cost2022 compared to pre-pandemic sales. Such increased demand may not continue. Although the Company has largely resumed normal operations, continuing impacts of credit. These factors have hadthe pandemic may result in future business and manufacturing disruption, inventory shortages, delivery delays, and reduced sales and operations, any of which could continue to have a substantial impact onmaterially affect our business.business, financial condition, and results of operations.
Certain political developmentsThe Company cannot predict the long-term impact of the COVID-19 pandemic on its customers, suppliers, vendors, and other business partners.
The COVID-19 pandemic has affected the Company’s customers, suppliers, vendors, and other business partners, but the Company is not able to predict the ultimate consequences that will result therefrom. Although the Company’s largest customer performed well throughout the pandemic, it remains to be seen if consumer demand for online purchasers will continue unabated and/or permanently change the way in recent years have providedwhich consumers make purchasing decisions. The Company’s second largest customer and many of the Company’s other mass merchant customers experienced increased online orders and reduced foot traffic into their physical stores. In general, many retailers experienced severe financial difficulties and bankruptcies. If those trends persist over the long-term, the Company’s strategies in distributing and marketing its products may need to change accordingly. If the Company’s sales channels are substantially impaired for an extended period of time or fail to adapt to changing consumer preferences, the Company’s sales will be materially reduced.
The ultimate magnitude of the COVID-19 pandemic is unpredictable, volatile and uncertain.
The COVID-19 pandemic created significant public health concerns and economic uncertainty.disruption and may continue to do so indefinitely. We cannot predict the full impact of the pandemic nor can we predict with any certainty whether and to what degree the disruptions caused by the pandemic and reactions thereto will continue. Much is still unknown, including the duration and severity of the pandemic, the amount of time it may take for more normalized economic activity to resume, future government actions that may be taken, the effects on the Company’s customers and suppliers, including their ability to pay for our products, the effects on operations of the Company’s logistics providers, and the impact on the ability of the Company’s employees to work and travel. Continuing and potential new governmental actions may further cause the Company to modify its business operations or otherwise adversely impact the Company. While the Company has taken numerous steps to mitigate the potential negative effects of the COVID-19 pandemic, there can be no assurance that the Company will be able to respond quickly enough or appropriately to circumstances that may change rapidly and/or that are outside of our control. The United Kingdom's decision to exitlong-term impact of the European Unionpandemic on the Company’s business is unknown and political conflicts in the U.S. bothultimately could result in economicmaterial adverse effects on the Company’s business, financial performance and trade policy actions that would impact economic conditionsresults of operations.
The market price of the Company’s common stock is likely to be highly volatile as the stock market in various countries, the cost of importing into the U.S. and the competitive landscape of our customers, suppliers and competitors.general can be highly volatile.
Adverse global economic conditionsThe public trading of the Company’s common stock is based on many factors which could also cause our customers and suppliers to experience severe economic constraintsfluctuation in the future, including bankruptcy,Company’s stock price. These factors may include, among other things:
● | General economic and market conditions; |
● | Actual or anticipated variations in quarterly operating results; |
● | Limited research coverage by securities analysts; |
● | Relatively low market capitalization resulting in low trading volume in the Company’s stock; |
● | If securities analysts provide coverage, our inability to meet or exceed securities analysts' estimates or expectations; |
● | Conditions or trends in the Company’s industries; |
● | Changes in the market valuations of other companies in the Company’s industries; |
● | Announcements by the Company or the Company’s competitors of significant acquisitions, strategic partnerships, divestitures, joint ventures or other strategic initiatives; |
● | Capital commitments; |
● | Additions or departures of key personnel; |
● | Tariffs, quotas, customs, import and export restrictions, and other trade barriers; |
● | Global events, including acts or threats of war or terrorism, international conflicts, political instability, natural disasters, and public health crises (such as the COVID 19 pandemic); |
● | Sales and repurchases of the Company’s common stock; and |
● | The ability to maintain listing of the Company’s common stock on the NASDAQ Global Market and/or inclusion in market indices such as the Russell 2000. |
Many of these factors are beyond the Company’s control. These factors may cause the market price of the Company’s common stock to decline, regardless of operating performance.
If we are unable to pay quarterly dividends at intended levels, our reputation and stock price may be harmed.
Our quarterly cash dividend is currently $0.15 per common share. The dividend program requires the use of a portion of our cash flow. Our ability to pay dividends will depend on our ability to generate sufficient cash flows from operations in the future. This ability may be subject to certain economic, financial, competitive and other factors that are beyond our control. Our Board of Directors (Board) may, at its discretion, increase or decrease the intended level of dividends or entirely discontinue the payment of dividends at any time. Any failure to pay dividends after we have announced our intention to do so may negatively impact our reputation, investor confidence in us and negatively impact our stock price.
RISKS OF INTERNATIONAL OPERATIONS
International operations expose the Company to the unique risks inherent in foreign operations.
The Company sources many of its products and raw materials from Mexico, Brazil, China, Vietnam and other Asian countries. Foreign operations encounter risks similar to those faced by U.S. operations, as well as risks inherent in foreign operations, such as local customs and regulatory constraints, control over product quality and content, foreign trade policies, competitive conditions, foreign currency fluctuations and unstable political and economic conditions. Additionally, our international operations may be adversely affected by political events, domestic or international terrorist events and hostilities, complications due to natural, nuclear or other disasters, or public health crises. For instance, recent government changes in Mexico have yielded requirements that call for increases in minimum wages at the border as well as the interior of Mexico. In addition, beginning in 2020 and continuing into 2021 and 2022, the coronavirus outbreak has resulted in increased travel restrictions and extended shutdown of certain businesses in Mexico, China and other countries in which the Company does business or has suppliers. These or any further political or governmental developments or health concerns in locations in which the Company conducts business could result in social, economic and labor instability. These uncertainties could have a material adverse impacteffect on our financial positionthe continuity of the Company’s operations and results of operations.on the Company’s income and profitability.
The Company
’Ours business is subject to risks associated with sourcing and manufacturing overseas.outside of the United States, and risks arising from tariffs and/or international trade wars.
We import bothThe Company imports many of its raw materials and finished goods into our operating facilities. Ourfrom countries outside of the United States, including but not limited to China and Mexico. The Company’s ability to import products in a timely and cost-effective manner may be affected by conditions, at ports or issues that otherwise affect transportation and warehousing providers, such as port and shipping capacity,public health crises, labor disputes, and work stoppages, political unrest, severe weather, orand security requirements inof the United StatesU.S. and other countries. These issuescountries that could delay importation of products or require us to locate alternative portssources. Our import operations are subject to complex custom laws, regulations, tax requirements, and trade regulations, such as tariffs set by governments through mutual agreements or warehousing providers to avoid disruption tobilateral actions. U.S. tariffs on goods imported into the U.S., particularly goods from China, have increased the cost of goods purchased by the Company and the ongoing adverse effects of such tariffs potentially could become even more severe. The overall effect of these risks is that our customers. These alternativescosts may not be available on short notice or couldincrease, which in turn may result in lower profitability if we are unable to offset such increases through higher transportation costs,prices, and/or that we may suffer a decline in sales if our customers do not accept price increases.
The United States, Mexico and Canada have entered into the United States-Mexico-Canada Agreement ("USMCA"), the successor agreement to the North American Free Trade Agreement ("NAFTA") which became effective on July 1, 2020. In January 2020, the United States entered into a "Phase 1" trade agreement with China. The Phase 1 agreement expired December 31, 2021 and has not been extended or replaced. Trade negotiations between the United States and China regarding a potential new trade agreement have not progressed and prospects for a new agreement are highly uncertain. Accordingly, it remains unclear what the U.S. administration or foreign governments, including China, specifically will or will not do with respect to tariffs, the USMCA or other international trade agreements and policies. A trade war, other governmental action related to tariffs or international trade agreements, changes in U.S. social, political, regulatory and economic conditions or in laws and policies governing foreign trade, manufacturing, development and investment in the territories and countries where we currently manufacture and sell products or any resulting negative sentiments towards the United States could have an adverse impact on ourmaterially adversely affect the Company’s business, and financial condition, specifically our gross marginoperating results and overall profitability.cash flows.
Substantially all of our import operations are subject to customs and tax requirements as well as trade regulations, such as tariffs and quotas set by governments through mutual agreements or bilateral actions. In addition, the countries in which our products are manufactured or imported may from time to time impose additional quotas, duties, tariffs or other restrictions on our imports or adversely modify existing restrictions. Adverse changes in these import costs and restrictions, or our suppliers' failure to comply with customs regulations or similar laws, could harm our business. In this regard, possible changes in U.S. policies and the potential effects of Brexit have introduced greater uncertainty with respect to future tax and trade regulations. Changes in tax policy or trade regulations, such as the disallowance of tax deductions on imported merchandise or the imposition of new tariffs on imported products, could have a material adverse effect on our business and results of operations.
Our operations are also subject to the effects of international trade agreements and regulations that impose requirements that could adversely affect our business, such as setting quotas on products that may be imported from a particular country.
The Company could be adversely affected by changes in currency exchange rates and/or the value of the United States dollar.
The Company is exposed to risks related to the effects of changes in foreign currency exchange rates and the value of the United States dollar. Changes in currency exchange rates and the value of the United States dollar can have a significant impact on earnings. While the Company carefully watches fluctuations in currency exchange rates, these types of changes can have material adverse effects on the Company’s business, results of operations and financial condition.
LEGAL, TAX, ACCOUNTING AND REGULATORY RISKS
The Company is subject to risks associated with laws and regulations related to health, safety and environmental protection.
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Products, and the production and distribution of products, are subject to a variety of laws and regulations relating to health, safety and environmental protection. Laws and regulations relating to health, safety and environmental protection have been passed in several jurisdictions in which the Company operates in the United States and abroad. Although the Company does not anticipate any material adverse effects based on the nature of operations and the thrust of such laws, there is no assurance such existing laws or future laws will not have a material adverse effect on the Company’s business, results of operations and financial condition.
New laws, policies, regulations, rulemaking and oversight, as well as changes to those currently in effect, could adversely impact our earnings, cash flows and operations.
Our assets and operations are subject to regulation and oversight by federal, state, and local regulatory authorities. Legislative changes, as well as regulatory actions taken by these agencies, have the potential to adversely affect our profitability. In addition, a certain degree of regulatory uncertainty is created by the U.S. political climate. It remains unclear specifically what the current presidential administration, Congress and the courts may do with respect to future policies, regulations and legal decisions that may affect us. Regulation affects many aspects of our business and extends to such matters as (i) federal, state, and local taxation; (ii) rates (which include tax, commodity, surcharges and fuel); (iii) the integrity, safety and security of facilities and operations; (iv) environmental, social and governance issues that could impact the way we conduct our business; (v) the acquisition of other businesses; (vi) the acquisition, extension, disposition or abandonment of services or facilities; (vii) reporting and information requirements; and (viii) the maintenance of accounts and records.
The preparation of the Company’s financial statements requires the use of estimates that may vary from actual results.
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make significant estimates that may affect financial statements. Due to the inherent nature of making estimates, actual results may vary substantially from such estimates, which could materially adversely affect the Company’s business, results of operations and financial condition. For more information on the Company’s critical accounting estimates, please see the Critical Accounting Estimates section of this Form 10-K.
Changes in accounting standards could impact reported earnings and financial condition.
The accounting standard setters, including the Financial Accounting Standards Board and the Securities and Exchange Commission, periodically change the financial accounting and reporting standards that govern the preparation of the Company’s consolidated financial statements. These changes can be hard to predict and apply and can materially affect how the Company records and reports its financial condition and results of operations. In some cases, the Company could be required to apply a new or revised standard retrospectively, which may result in the restatement of prior period financial statements.
MACROECONOMIC AND GENERAL BUSINESS RISKS
Operating results may be impacted by changes in the economy that influence business and consumer spending.
Operating results are directly impacted by the health of the North American and to a lesser extent, European and Asian economies. We cannot predict how robust the economy will be or whether or not it will be sustained. If economic recovery is slow to occur, or if the economy experiences a prolonged period of decelerating or negative growth, the Company’s results of operations may be negatively impacted. In general, the Company’s sales depend on discretionary spending by consumers. Business and financial performance may be adversely affected by current and future economic conditions, including unemployment levels, energy costs, interest rates, recession, inflation, the impact of natural disasters and terrorist activities, public health crisis, and other matters that influence business and consumer spending.
Fluctuation in economic conditions could prevent the Company from accurately forecasting demand for its products which could adversely affect its operating results or market share.
Fluctuation in economic conditions and market instability in the United States and globally makes it difficult for the Company, customers and suppliers to accurately forecast future product demand trends, which could cause the Company to produce and/or purchase excess products that can increase inventory carrying costs and result in obsolete inventory. Alternatively, this forecasting difficulty could cause a shortage of products, or materials used in products, that could result in an inability to satisfy demand for products and a loss of market share.
Failure to sustain a continuing economic recovery in the United States and elsewhere could have a substantial adverse effect on our business.
Our business is tied to general economic and industry conditions as demand for sporting goods depends largely on the strength of the economy, employment levels, consumer confidence levels and the availability and cost of credit. These factors have had and could continue to have a substantial impact on our business.
Adverse global economic conditions could also cause our customers and suppliers to experience severe economic constraints in the future, including bankruptcy, which could have a material adverse impact on our financial position and results of operations.
Quarterly operating results are subject to fluctuation.
Operating results have fluctuated from quarter to quarter in the past, and the Company expects that they will continue to do so in the future. Factors that could cause these quarterly fluctuations include the following: international, national and local general economic and market conditions; the size and growth of the overall sporting goods markets; intense competition among manufacturers, marketers, distributors and sellers of products; demographic changes; changes in consumer preferences; popularity of particular designs, categories of products and sports; seasonal demand for products; adverse weather conditions that may create fluctuations in demand for certain of our products; the size, timing and mix of purchases of products; fluctuations and difficulty in forecasting operating results; ability to sustain, manage or forecast growth and inventories; new product development and introduction; ability to secure and protect trademarks, patents and other intellectual property; performance and reliability of products; customer service; the loss of significant customers or suppliers; dependence on distributors; business disruptions; disruptions or delays in our supply chain, including potential disruptions or delays arising from political unrest, war, labor strikes, natural disasters, and public heath crises such as the coronavirus pandemic; increased costs of freight and transportation to meet delivery deadlines; changes in business strategy or development plans; general risks associated with doing business outside the United States, including, without limitation: exchange rates, import duties, tariffs, quotas and political and economic instability; changes in government regulations; any liability and other claims asserted against the Company; ability to attract and retain qualified personnel; and other factors referenced or incorporated by reference in this Form 10-K and any other filings with the Securities and Exchange Commission.
Terrorist attacks, acts of war, natural disasters, and public health crises may seriously harm the Company’s business.
Among the chief uncertainties facing the nation and the world and, as a result, our business, is the instability and conflict in the Middle East and uncertainties regarding North Korea, Russia, China and other Asian and European countries. Obviously, no one can predict with certainty what the overall economic impact will be as a result of these circumstances. Terrorist attacks may cause damage or disruption to the Company, employees, facilities and customers, which could significantly impact net sales, costs and expenses and financial condition. The potential for future terrorist attacks, the national and international responses to terrorist attacks, and other acts of war and hostility may cause greater uncertainty and cause business to suffer in ways the Company currently cannot predict.
In addition, any natural disaster or other serious disruption to one of the Company’s manufacturing or distribution sites due to fire, tornado, earthquake or other natural disasters in countries where the Company conducts business, or political unrest, war, labor strikes, work stoppages or public health crises, such as outbreaks of the coronavirus in countries where our suppliers are located could result in the disruption of the Company’s shipments and supply chain of products and raw materials. Although we have continued to obtain product shipments from China and other countries notwithstanding the coronavirus pandemic, product shipments from China and/or other countries may be delayed in the future. Although we are monitoring the situation and have adapted our ordering practices in our attempt to minimize the effects of potential disruptions, the Company cannot predict whether, for how long, or the extent to which the pandemic may disrupt the Company’s supply chain, manufacturing operations, and/or product shipments. Any significant disruption resulting from similar events on a large scale or over a prolonged period could cause significant delays until the Company would be able to resume normal operations or shift to other third party suppliers, if needed. There can be no assurance that alternative capacity could be obtained on favorable terms, if at all, and could negatively affect the Company’s sales and profitability.
These risks are not exhaustive.
Other sections of this Form 10-K may include additional factors which could adversely impact the Company’s business and financial performance. Moreover, the Company operates in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for management to predict all risk factors, nor can the Company assess the impact of all factors on business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.
ITEM 1B—UNRESOLVED STAFF COMMENTS
None.
At December 30, 2017,31, 2022, the Company owned or operated from the following locations:
Location | Square Footage | Owned or Leased | Use | |||
Evansville, Indiana, USA | 771,000 | Owned | Distribution; sales and marketing; engineering; administration | |||
Rosarito, Mexico | 161,139 | Owned | Manufacturing and distribution | |||
Gainesville, Florida, USA | 154,200 | Owned | Manufacturing and distribution | |||
Orlando, Florida, USA | 143,000 | Leased | Marketing; manufacturing and distribution | |||
Bristol, WI, USA | 118,350 | Owned | Distribution; sales and | |||
Olney, Illinois, USA | 108,500 | Owned | Distribution; sales and marketing; | |||
Olney, Illinois, USA | 30,000 | Owned | Distribution | |||
Eagan, MN, USA | 41,600 | Leased | Distribution; sales and marketing; engineering | |||
Shanghai, China | 6,674 | Leased | Sales and sourcing |
The Company believes that its facilities are in satisfactory and suitable condition for their respective operations. The Company also believes that it is in material compliance with all applicable environmental regulations and is not subject to any proceeding by any federal, state or local authorities regarding such matters. The Company provides regular maintenance and service on its plants and machinery as required. During 2016, the Company sold its Wabash, INAs of December 31, 2022, our Rosarito, Mexico location, including land, buildings and buildinglong-lived assets, were classified as assets held for a purchase price of approximately $2.1 million. The sale resulted in a gain of approximately $1.9 million, recognized within operating income.sale.
The Company is involved in litigation arising in the normal course of its business, but the Company does not believe that the disposition or ultimate resolution of such claims or lawsuits will have a material adverse effect on the business or financial condition of the Company.
The Company is not aware of any probable or levied penalties against the Company relating to the American Jobs Creation Act.
ITEM 4—MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5—MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company's common stock is traded under the symbol “ESCA” on the NASDAQ Global Market. The following table sets forth, for the calendar periods indicated, the high and low sales prices of the Common Stock as reported by the NASDAQ Global Market:
| Prices | High | Low | ||||||
| 2017 | ||||||||
| Fourth quarter ended December 30, 2017 | $ | 14.00 | $ | 12.30 | ||||
| Third quarter ended October 7, 2017 | 13.90 | 11.85 | ||||||
| Second quarter ended July 15, 2017 | 14.15 | 11.50 | ||||||
| First quarter ended March 25, 2017 | 13.65 | 12.25 | ||||||
| 2016 | ||||||||
| Fourth quarter ended December 31, 2016 | $ | 14.45 | $ | 12.05 | ||||
| Third quarter ended October 1, 2016 | 12.78 | 9.82 | ||||||
| Second quarter ended July 9, 2016 | 12.74 | 9.79 | ||||||
| First quarter ended March 19, 2016 | 13.69 | 11.04 | ||||||
The closing market price on February 21, 2018 was $12.05 per share.
During 2013, the Company’s Board of Directors adopted a dividend policy under which the Company intends to pay quarterly cash dividends on its common stock. At the August 2014 meeting of the Board of Directors, the Company established the annual rate to be $0.40 per share, or $0.10 per share quarterly. At the April 2015 meeting of the Board of Directors, the Company increased the quarterly rate to $0.11 per share. At the February 2017 meeting of the Board of Directors, the Company increased the quarterly rate to $0.115 per share. Dividends issued/declared during 2016 and 2017 are as follows:
| Record Date | Payment Date | Amount per Common Share | ||||
| March 14, 2016 | March 21, 2016 | $ | 0.11 | |||
| June 10, 2016 | June 17, 2016 | $ | 0.11 | |||
| September 12, 2016 | September 19, 2016 | $ | 0.11 | |||
| December 12, 2016 | December 19, 2016 | $ | 0.11 | |||
| March 13, 2017 | March 20, 2017 | $ | 0.115 | |||
| June 8, 2017 | June 15, 2017 | $ | 0.115 | |||
| September 11, 2017 | September 18, 2017 | $ | 0.115 | |||
| December 11, 2017 | December 18, 2017 | $ | 0.115 | |||
As of February 21, 2018,17, 2023, there were approximately 12597 stockholders of record of our common stock, although there is a significantly larger number of beneficial owners of our common stock.
SHAREHOLDER RETURN PERFORMANCE GRAPH
Set forth below is a graph comparing the yearly percentage change in the cumulative total shareholder return on the Company’s common stock with that of the cumulative total return on the NASDAQ 100 and the NASDAQ US Benchmark TR Index for the five year period ended December 31, 2017. The following information is based on an investment of $100, on December 31, 2012, in the Company’s common stock, the NASDAQ 100 and the NASDAQ US Benchmark TR Index, with dividends reinvested.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
| 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | |||||||||||||||||||
| Escalade Common Stock | 100 | 226 | 290 | 254 | 253 | 236 | ||||||||||||||||||
| NASDAQ 100 (OMX) | 100 | 137 | 163 | 179 | 192 | 256 | ||||||||||||||||||
| NASDAQ US Benchmark TR Index (OMX) | 100 | 133 | 150 | 151 | 170 | 207 | ||||||||||||||||||
The performance graph does not constitute soliciting material and should not be deemed filed or incorporated by reference into any other Company filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent the Company specifically incorporates the performance graph by reference therein.
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 10/7/2017 under the current repurchase program. | 982,916 | $ | 8.84 | 982,916 | $ | 2,273,939 | ||||||||||
| Fourth quarter purchases: | ||||||||||||||||
| 10/8/2017 – 11/4/2017 | None | None | None | No Change | ||||||||||||
| 11/5/2017 – 12/2/2017 | None | None | None | No Change | ||||||||||||
| 12/3/2017 – 12/30/2017 | None | None | None | No Change | ||||||||||||
| Total share purchases under the current program | 982,916 | $ | 8.84 | 982,916 | $ | 2,273,939 | ||||||||||
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 10/1/2022 under the current repurchase program. | 2,153,132 | $ 13.38 | 2,153,132 | $ 4,153,252 |
Fourth quarter purchases: | ||||
10/2/2022 – 10/29/2022 | None | None | No Change | No Change |
10/30/2022 – 11/26/2022 | None | None | No Change | No Change |
11/27/2022 – 12/31/2022 | 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 each of February 2005, andFebruary 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 December 31, 2022, 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 planprogram has no termination date and there have been no share repurchases that were not part of a publicly announced program.
ITEM 6— SELECTED FINANCIAL DATA[RESERVED]
(In thousands, except per share data)
| At and For Years Ended | December 30, 2017 | December 31, 2016 | December 26, 2015 | December 27, 2014 | December 28, 2013 | |||||||||||||||
| Income Statement Data | ||||||||||||||||||||
| Net sales | $ | 177,333 | $ | 171,662 | $ | 159,463 | $ | 141,522 | $ | 136,146 | ||||||||||
| Net income | 14,061 | 11,493 | 11,606 | 11,817 | 9,805 | |||||||||||||||
| Weighted-average shares | 14,352 | 14,264 | 14,088 | 13,853 | 13,506 | |||||||||||||||
| Per Share Data | ||||||||||||||||||||
| Basic earnings per share | $ | 0.98 | $ | 0.81 | $ | 0.82 | $ | 0.85 | $ | 0.73 | ||||||||||
| Cash dividends | $ | 0.46 | $ | 0.44 | $ | 0.43 | $ | 0.38 | $ | 0.34 | ||||||||||
| Balance Sheet Data | ||||||||||||||||||||
| Working capital | 60,718 | 57,205 | 54,244 | 50,505 | 56,377 | |||||||||||||||
| Total assets | 156,105 | 150,761 | 143,737 | 127,881 | 141,974 | |||||||||||||||
| Short-term debt | 1,250 | 1,250 | 1,810 | 4,286 | 4,263 | |||||||||||||||
| Long-term debt | 21,871 | 24,189 | 21,526 | 16,860 | 23,946 | |||||||||||||||
| Total stockholders' equity | 111,670 | 101,713 | 96,480 | 89,779 | 87,955 | |||||||||||||||
Fiscal year 2017 reported increased sales in the Sporting Goods segment. Net income was positively impacted by the 2017 U.S. Tax Reforms that were signed into law on December 22, 2017.
Fiscal year 2016 reported increased sales in the Sporting Goods segment. Operating income was negatively impacted by bad debt expenses related to customer bankruptcy filings. Operating income was positively impacted by a gain on sale of our Wabash, IN land and facility.
Fiscal year 2015 was positively impacted by increased sales in the Sporting Goods segment. Gross margins were negatively impacted due to sales mix. Operating income was negatively impacted by increased operating costs related to acquisitions and marketing efforts in new categories acquired during the year and new products to be introduced in 2016.
Fiscal year 2014 was positively impacted by increased sales in the Sporting Goods segment. Net income was negatively impacted by the divestiture of the Information Security and Print Finishing segment of $9.6 million partially off-set by a tax benefit of $6.1 million.
Fiscal year 2013 was positively impacted by increased sales in the Sporting Goods segment, as well as improved margins resulting from higher sales volumes.
ITEM 7—MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONFINANCIALCONDITION AND RESULTS OF OPERATIONS
The following section should be read in conjunction with Item 1: Business; Item 1A: Risk Factors; Item 6: Selected Financial Data; and Item 8: Financial Statements and Supplementary Data.
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,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,pricing; product demand and market acceptance,acceptance; new product development,development; Escalade’s ability to achieve its business objectives, especially with respect to its Sporting Goods business on which it has chosen to focus,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,products; the continuation and development of key customer, supplier, licensing and other business relationships, therelationships; 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,habits; the financial health of our customers,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,results; changes in foreign currency exchange rates,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,financing; the availability, integration and effective operation of information systems and other technology, and the potential interruption of such systems or technology,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,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 segment through organic growth of existing categories, strategic acquisitions, and new product development. The Sporting Goods segment competes in a variety of categories including basketball goals, archery, 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 effectivecost-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 costreliable and low-cost supplier. Concentrated focus on the sporting goods industry will allow the Company to leverage its strength in these markets.
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 2015,October 2020, the Company acquired Onix Sports, Inc. to expand the Company’s offeringsassets of pickleball paddles, balls, sportswear,the billiard table, game room, and accessories, and Goalsetter Systems, Inc., (“Goalsetter”) to add another premium brandrecreational product lines of residential in-ground basketball goals. The acquisition of Goalsetter from Co-Line Manufacturing, which will continue to manufactureAmerican Heritage Billiards, including the Goalsetter basketball goals in its Iowa facilities, also strengthens and diversifies the Company’s sources of basketball goals.
related intellectual property. In 2016,December 2020, the Company acquired Triumphsubstantially all of the business and assets of Revel Match LLC, dba RAVE Sports, USA, Inc., strengtheninga 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 the indoor games category andvarious product categories, while providing exciting new opportunities forwithin the Company’s outdoor games category. In 2017, the Company acquired Lifeline Products, LLC, a fitness leader of over 40 years, providing products used for bodyweight, progressive variable resistance and functional training.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.
The Company is working to overcome the industry-wide downturn in the archery category, a reduction in contribution from our joint venture with Stiga Sports, AB, and bankruptcies that have plagued the retail industry. We believe these conditions have masked improvements in our other existing and acquired businesses and the expansion of our online distribution channels. The Company’s balance sheet is strong and we continue to reduce our long-term debt. Net income in 2017 was positively impacted by approximately $3.0 million due to the effects of the 2017 U.S. Tax Reforms, although the long-term effects of that legislation are uncertain.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. The following table sets forth the annual percentage change in revenues and net income over the past three years:
| 2017 | 2016 | 2015 | 2022 | 2021 | 2020 | |||||||||||||||||||
| Net revenue | ||||||||||||||||||||||||
| Sporting Goods | 3.3 | % | 7.7 | % | 12.7 | % | 0.1 | % | 14.6 | % | 51.6 | % | ||||||||||||
| Total | 3.3 | % | 7.7 | % | 12.7 | % | 0.1 | % | 14.6 | % | 51.6 | % | ||||||||||||
| Net income | ||||||||||||||||||||||||
| Sporting Goods | (1.7 | )% | (4.1 | )% | (14.8 | )% | (26.4 | %) | (7.3 | %) | 293.9 | % | ||||||||||||
| Total | 22.3 | % | (1.0 | )% | (1.8 | )% | (26.3 | %) | (5.9 | %) | 257.3 | % | ||||||||||||
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-K, the Company’s results of operations for the 2022 fiscal year 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:
| 2017 | 2016 | 2015 | 2022 | 2021 | 2020 | |||||||||||||||||||
| Net revenue | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||
| Cost of products sold | 74.8 | % | 74.2 | % | 72.8 | % | 76.5 | % | 75.4 | % | 72.7 | % | ||||||||||||
| Gross margin | 25.2 | % | 25.8 | % | 27.2 | % | 23.5 | % | 24.6 | % | 27.3 | % | ||||||||||||
| Selling, administrative and general expenses | 16.1 | % | 15.9 | % | 17.4 | % | 14.3 | % | 13.8 | % | 14.7 | % | ||||||||||||
| Amortization | 0.9 | % | 1.4 | % | 1.8 | % | 0.8 | % | 0.6 | % | 0.5 | % | ||||||||||||
| Operating income | 8.2 | % | 8.5 | % | 8.0 | % | 8.4 | % | 10.2 | % | 12.1 | % | ||||||||||||
Revenue and Gross Margin
Sales growth attributable largely to acquisitions and new products introduced into the market, resultedNet revenue increased 0.1% in an overall increase of 3.3% in Sporting Goods net revenues for 20172022 compared to 2016.2021. The Company recognized increased sales due to the Brunswick Billiards acquisition completed in January 2022 and increases in pickleball and indoor games categories due to category growth and market share gains. These increases were partially offset with lower sales in our outdoor categories including archery, basketball, games, water sports and playground.
The overall gross margin percentage decreased to 25.2%23.5% in 20172022 compared with 25.8%24.6% in 2016 due primarily to unfavorable product mix2021. Gross margins were unfavorably impacted by increased logistics expenses associated with ongoing inventory handling and continued decreased sales and margins in archery.storage costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses (SG&A) were $28.5$44.8 million in 20172022 compared to $27.4$43.4 million in 2016,2021, an increase of $1.1$1.4 million or 4.0%3.2%. The increase in SG&A is attributable to the Brunswick Billiards acquisition completed in 2022. SG&A as a percent of sales is 16.1%14.3% in 20172022 compared with 15.9%13.8% in 2016. In 2016, SG&A was favorably impacted by the recognition of a gain of approximately $1.9 million on the sale of our Wabash, IN land and building. One-time expenses of $0.4 million unfavorably impacted SG&A during 2016. The net gain of these one-time events recorded during 2016 was $1.5 million.2021.
Other Income
Other income, including equity in earnings of affiliates, decreased in 2017 to $1.7 million compared with $1.8 million in 2016, a decrease of 4.0%. Equity in earnings of affiliates was $1.6 million in 2017 compared with $1.7 million in 2016.
Provision for Income Taxes
The effective tax rate for 20172022 and 20162021 was 9.4%20.5% and 26.1%20.1%, respectively. On December 22, 2017, the 2017 U.S. Tax Reforms were signed into law, making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a territorial system and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017. We have calculated our best estimate of the impact of the 2017 U.S. Tax Reforms and as a result have recorded $3.0 million of income tax benefits during the year ended December 30, 2017. The provisional benefit related to the remeasurement of certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future was $1.8 million. The provisional expense related to the one-time transition tax on the mandatory deemed repatriation of foreign earnings was $0.6 million, based on cumulative foreign earnings of $22.8 million. The reversal of the deferred tax liability of unremitted earnings and the corresponding deferred tax asset for foreign tax credits was a net $1.8 million benefit. These amounts are our best estimates based on the current information and guidance available at this time relating to the 2017 U.S. Tax Reforms and will be finalized in 2018.
The 20162022 effective tax rate wasis 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 effectimpact of foreignthe state taxes and lower the statutory rate. The 2021 effective tax rates,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 change in deferred state taxstatutory rate.
Sporting Goods
Net revenues, operating income, and net income for the Sporting Goods segment for the three years ended December 30, 201731, 2022 were as follows:
| In Thousands | 2017 | 2016 | 2015 | 2022 | 2021 | 2020 | ||||||||||||||||||
| Net revenue | $ | 177,333 | $ | 171,662 | $ | 159,463 | $ | 313,757 | $ | 313,612 | $ | 273,649 | ||||||||||||
| Operating income | 15,600 | 15,731 | 15,450 | 25,925 | 31,534 | 32,685 | ||||||||||||||||||
| Net income | 8,626 | 8,774 | 9,151 | 16,117 | 21,892 | 23,625 | ||||||||||||||||||
Net revenue increased 3.3%0.1% in 20172022 compared to 2016 largely attributable to acquisitions completed. The Company continues to aggressively pursue opportunities to increase revenue through introduction of new products, expansion of product distribution, acquisitions, and increased investment in consumer marketing. Sales channels are predominately mass market retail customers, e-commerce, specialty retailers, and dealers.2021.
Gross margin and profitability declined in 2017 compared with 2016. The gross margin ratio in 2017 declined to 25.2%2022 was 23.5% compared to 25.8%24.6% in the prior year due to an unfavorable product mix2021. Gross margins were unfavorably impacted by increased logistics expenses associated with ongoing inventory handling and decreased sales and margins in archery.storage costs. Operating income, as a percentage of net revenue, decreased to 8.8%8.3% in 20172022 compared to 9.2%10.1% in 2016.2021.
Financial Condition and Liquidity
The current ratio, a basic measure of liquidity (current assets divided by current liabilities), for 2017 remained flat at 4.12022 was 4.8, compared to 2016.3.5 in 2021. Receivable levels increaseddecreased to $39.4$57.4 million in 20172022 compared with $35.9$66.0 million in 20162021 and net inventory increased $1.4$29.5 million to $35.2$121.9 million in 20172022 from $33.8$92.4 million in 2016. Total notes2021, due partially to the acquisition of Brunswick Billiards. Trade accounts payable and long-term debtaccrued liabilities decreased $9.5 million to $23.1$30.7 million down from $25.4$40.2 million in 2016. Total notes payable and long-term debt as a percentage of stockholders equity was 20.7% in 2017, down from 25.0% in 2016.2021.
The Company’s working capital requirements are primarily funded through cash flows from operations and revolving credit agreements with its bank. During 2017,2022, the Company’s maximum borrowings under its primary revolving credit lines and overdraft facility totaled $29.0$113.8 million compared to $39.6$69.2 million in 2016. Total notes payable and long-term debt decreased $2.3 million in 2017 as compared with 2016.2021. The overall effective interest rate in 20172022 was 3.1%3.8% compared to the effective rate of 2.5%2.9% in 2016. 2021. Total debt at the end of the Company’s 2022 fiscal year was $94.9 million.
On January 21, 2016,2022, the Company and its wholly owned subsidiary, Indian Industries, Inc. (“Indian”), entered into a Secondan Amended and Restated Credit Agreement (“(the “2022 Restated Credit Agreement”) with its issuing bank, JP MorganJPMorgan Chase Bank, N.A. (“Chase”), and the other lenders identified in the Restated Credit Agreement (collectively, the “Lender”“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, the Lender hasOld National Bank was added as a Lender. The Lenders have now made available to the CompanyEscalade and Indian a senior revolving credit facility in anwith increased maximum amountavailability of $65.0 million (the “Revolving Facility”), up from $50.0 million, plus an accordion feature that would allow borrowings up to $35.0$90.0 million under the Revolving Facility subject to certain terms and a term loan in an increased principal amount of $7.5 million.conditions. The maturity date of the revolving credit facility was extended to January 21, 20192027. 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.
As of December 31, 2022, the outstanding principal amount of the term loan facility was extended to January 21, 2021.$39.9 million and total amount drawn under the Revolving Facility was $55.0 million.
The Company’s cash remains stable compared with prior year due to the utilization of theCash flows from operations and revolving credit agreement facility to fund working capital needs. Operating cash flowsagreements were used to fund acquisitions, and to pay shareholder dividends.dividends, and to fund stock repurchases.
In 2018,2023, the Company estimates capital expenditures to be approximately $3.1$3.7 million.
The Company believes that cash generated from its projected 20182023 operations and the commitment of borrowings from its primary lender will provide it with sufficient cash flows for its operations.
It is possible that if economic conditions deteriorate, this could have adverse effects on the Company’s ability to operate profitably during fiscal year 2018.2023. To the extent that occurs, management will pursue cost reduction initiatives and consider realignment of its infrastructure in an effort to match the Company’s overhead and cost structure with the sales level dictated by current market conditions.
New Accounting Pronouncements
Refer to Note 1 to the consolidated financial statements under the sub-heading “New Accounting Pronouncements”.
Off Balance Sheet Financing Arrangements
The Company has no financing arrangements that are not recorded on the Company’s balance sheet.
Contractual Obligations
The following schedule summarizes the Company’s material contractual obligations as of December 30, 2017:31, 2022:
| Amounts in thousands | Total | 2018 | 2019 – 2020 | 2021 – 2022 | Thereafter | Total | 2023 | 2024 –2025 | 2026 –2027 | Thereafter | ||||||||||||||||||||||||||||||
| Debt | $ | 23,121 | $ | 1,250 | $ | 20,621 | $ | 1,250 | $ | — | $ | 94,881 | $ | 7,143 | $ | 14,286 | $ | 73,452 | $ | -- | ||||||||||||||||||||
| Future interest payments (1) | 1,164 | 704 | 440 | 20 | — | |||||||||||||||||||||||||||||||||||
Future interest payments(1) | 13,582 | 3,488 | 6,158 | 3,936 | -- | |||||||||||||||||||||||||||||||||||
| Operating leases | 886 | 498 | 388 | — | — | 12,053 | 1,454 | 2,769 | 2,560 | 5,270 | ||||||||||||||||||||||||||||||
| Minimum payments under purchase, royalty and license agreements | 735 | 480 | 255 | — | — | 4,567 | 898 | 1,145 | 1,219 | 1,305 | ||||||||||||||||||||||||||||||
| Total | $ | 25,906 | $ | 2,932 | $ | 21,704 | $ | 1,270 | $ | — | $ | 125,083 | $ | 12,983 | $ | 24,358 | $ | 81,167 | $ | 6,575 | ||||||||||||||||||||
Note:
(1) Assumes that the Company will not increase borrowings under its long-term credit agreements and that the effective interest rate experienced in 20172022 of 3.1%3.8% will continue for the life of the agreements.
Critical Accounting Estimates
The methods, estimates and judgments used in applying the Company’s accounting policies have a significant impact on the results reported in its financial statements. Some of these accounting policies require difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. 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 9030 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 Doubtful Accounts
The Company provides an allowance for doubtful accounts 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
The Company reviews goodwill for impairment annually and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable, in accordance with guidance in Financial Accounting Standards Board (FASB) Accounting Standard Codification (ASC) 350,Intangibles – Goodwill and Other. A qualitative assessment is first performed to determine if the fair value of the reporting unit is "more likely than not" less than the carrying value. If so, we proceed to step one of the two-step goodwill impairment test,a quantitative assessment, in which the fair value of the reporting unit is compared to its carrying value. If not, then performance of the second step of the goodwill impairment test is not necessary. If the carrying value of goodwill exceeds the implied estimated fair value, calculated in the second step, an impairment charge to current operations is recorded to reduce the carrying value to the implied estimated fair value.
If the second stepa quantitative assessment of the goodwill impairment testing is required, the Company establishes fair value by using an income approach or a combination of a market approach and an income approach. The market approach uses the guideline-companies method to estimate the fair value of a reporting unit based on reported sales of publicly-held entities engaged in the same or a similar business as the reporting unit. The income approach uses the discounted cash flow method to estimate the fair value of a reporting unit by calculating the present value of the expected future cash flows of the reporting unit. The discount rate is based on a weighted average cost of capital determined using publicly-available interest rate information on the valuation date and data regarding equity, size and country-specific risk premiums/decrements compiled and published by a commercial source. The Company uses assumptions about expected future operating performance in determining estimates of those cash flows, which may differ from actual cash flows.
The Company has one reporting unit that is identical to our operating segment, Sporting Goods. Of the total recorded goodwill of $21.5$42.3 million at December 30, 2017,31, 2022, 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 invested capital exceededreporting unit was less than the carrying value of the invested capital as of December 30, 2017.31, 2022.
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.
Non-Marketable Equity Method Investment
The Company has a minority equity position in a company strategically related to the Company’s business, but does not have control over this company. The accounting method employed is dependent on the level of ownership and degree of influence the Company can exert on operations. Where the equity interest is less than 20% and the degree of influence is not significant, the cost method of accounting is employed. Where the equity interest is greater than 20% but not more than 50%, the equity method of accounting is utilized. Under the equity method, the Company’s proportionate share of net income is recorded in equity in earnings of affiliates on the consolidated statements of operations. The proportionate share of net income was $1.6 million, $1.7 million and $3.0 million in 2017, 2016 and 2015, respectively. Total cash dividends received from this equity investment amounted to $2,168 thousand, $1,060 thousand, and $928 thousand in 2017, 2016 and 2015, respectively. The Company considers whether the fair values of its equity investment has declined below its carrying value whenever adverse events or changes in circumstances indicate that recorded values may not be recoverable. If the Company considers any such decline to be other than temporary (based on various factors, including historical financial results, product development activities and overall health of the investments’ industry), a write-down is recorded to estimated fair value.
Effect of Inflation
The Company cannot accurately determine the precise effects of inflation. The Company attempts to pass on increased costs and expenses through price increases when necessary. The Company is working on reducing expenses; improving manufacturing technologies; and redesigning products to keep these costs under control.
Capital Expenditures
As of December 30, 2017,31, 2022, the Company had no material commitments for capital expenditures. In 2018,2023, the Company estimates capital expenditures to be approximately $3.1$3.7 million.
ITEM 7A — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to financial market risks, including changes in currency exchange rates, interest rates and marketable equity security prices. The Company attempts to minimize these risks through regular operating and financing activities and, when considered appropriate, through the use of derivative financial instruments. During fiscal 2017, there were no derivatives in use. The Company does not purchase, hold or sell derivative financial instruments for trading or speculative purposes.
Interest Rates
The Company’sexposure to market-rate risk for changes in interest rates relates primarily to its revolving variable rate bank debt which is based onLIBOR interest rates.A hypothetical 1% or 100 basis point change in interest rates would not have a significant effect on our consolidated financial position or results of operation.
Foreign Currency[Not Required]
The Company conducts business in various countries around the world and is therefore subject to risks associated with fluctuating foreign exchange rates. The Sporting Goods foreign currency transactions are denominated primarily in Mexican Peso and Chinese Yuan. The Company has a 50% interest in a joint venture, Stiga, which is denominated in Swedish Krona.
The geographic areas outside the United States in which the Company operated are generally not considered by management to be highly inflationary. Nonetheless, the Company’s foreign operations are sensitive to fluctuations in currency exchange rates arising from, among other things, certain inter-company transactions that are denominated in currencies other than the respective functional currency. Operating results as well as assets and liabilities are also subject to the effect of foreign currency translation when the operating results, assets and liabilities of our foreign subsidiaries are translated into U.S. dollars in our consolidated financial statements.
The Company and its subsidiaries conduct substantially all their business in their respective functional currencies to avoid the effects of cross-border transactions. To protect against reductions in value and the volatility of future cash flows caused by changes in currency exchange rates, the Company carefully considers the use of transaction and balance sheet hedging programs such as matching assets and liabilities in the same currency. Such programs reduce, but do not entirely eliminate the impact of currency exchange rate changes. The Company has evaluated the use of currency exchange hedging financial instruments but has determined that it would not use such instruments under the current circumstances. Changes in currency exchange rates may be volatile and could affect the Company’s performance.
ITEM 8 — FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by Item 8 are set forth in Part IV, Item 15.
ITEM 9 — CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A —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. Also, the Company has investments in certain unconsolidated entities. As the Company does not control or manage these entities, its disclosure controls and procedures with respect to such entities are necessarily substantially more limited than those it maintains with respect to its consolidated subsidiaries.
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.
Management’sManagement’s Report on Internal Control over Financial Reporting
Escalade’s management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Escalade’s internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting of the Company includes those policies and procedures that:
(1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions of the Company;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the Company’s financial statements.
All internal control systems, no matter how well designed, have inherent limitations, including the possibility of human error or circumvention through collusion or improper overriding of controls. Therefore, even those internal control systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of internal control may vary over time.
The management of Escalade assessed the effectiveness of the Company’s internal control over financial reporting as of December 30, 2017.31, 2022. In making its assessment of internal control over financial reporting, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) inInternal Control – Integrated Framework (published in 2013) and implemented a process to monitor and assess both the design and operating effectiveness of the Company’s internal controls. Based on this assessment, management believes that, as of December 30, 2017,31, 2022, the Company’s internal control over financial reporting was effective.
This annual report on Form 10-K includes an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report regarding internal control over financial reporting is subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission. In addition, this report by management regarding internal control over financial reporting is specifically not incorporated by reference into any other filing by the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.
/s/ Walter P. Glazer, Jr., Chief Executive Officer/s/ Stephen R. Wawrin, Chief Financial Officer
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 Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the fourth quarter of 2017.2022. In connection with such evaluation, there have been no changes to the Company’s internal control over financial reporting that occurred since the beginning of the Company’s fourth quarter of 20172022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
None.
Part IIIITEM 9C — DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS.
Part III
ITEM 10 — DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information required under this item with respect to Directors and Executive Officers is contained in the registrant's Proxy Statement relating to its annual meeting of stockholders scheduled to be held on May 16, 201810, 2023 under the captions “Certain Beneficial Owners,” “Election of Directors,” “Executive Officers of the Registrant,” “Board of Directors, Its Committees, Meetings and Functions,” and “Beneficial Ownership Reporting Compliance”“Delinquent Section 16(a) Reports,” if applicable, and is incorporated herein by reference.
ITEM 11— EXECUTIVE COMPENSATION
Information required under this item is contained in the registrant's Proxy Statement relating to its annual meeting of stockholders scheduled to be held on May 16, 201810, 2023 under the captions “Compensation Discussion and Analysis,” “Compensation Committee Interlocks and Insider Participation,” “Report of the Compensation Committee” and “Executive Compensation” and is incorporated herein by reference, except that the information required by Item 407(e)(5) of Regulation S-K which appears under the caption “Report of the Compensation Committee” is specifically not incorporated by reference into this Form 10-K or into any other filing by the registrant under the Securities Act of 1933 or the Securities Exchange Act of 1934.
ITEM 12—SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Except for the information required by Item 201(d) of Regulation S-K, which is included below, information required by this item is contained in the registrant’s proxy statement relating to its annual meeting of stockholders scheduled to be held on May 16, 201810, 2023 under the captions “Certain Beneficial Owners” and “Election of Directors” and is incorporated herein by reference.
Equity Compensation Plan Information
| Plan Category | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (2) | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans | |||||||||
| Equity compensation plans approved by security holders (1) | 44,250 | $ | 11.75 | 1,494,201 | ||||||||
| Equity compensation plans not approved by security holders | — | — | — | |||||||||
| Total | 44,250 | 1,494,201 | ||||||||||
Plan Category | Number of Upon Exercise of Outstanding Options, Warrants and Rights (2) | Weighted-Average Exercise Price Warrants | Number of Issuance Under Equity Compensation Plans | |||||||||
Equity compensation plans approved by security holders (1) | -- | -- | 996,461 | |||||||||
Equity compensation plans not approved by security holders | -- | -- | -- | |||||||||
Total | -- | 996,461 | ||||||||||
(1) These plans include the Escalade, Incorporated 2007 Incentive Plan, including an additional 1,500,000The maximum number of shares addedthat can be awarded under a 2012 amendment to the Escalade 2007 Incentive Plan, and the Escalade, Incorporated 2017 Incentive Plan. All plans werePlan is 1,661,598. The plan was approved by stockholders at Escalade’s Annual Meetings of Stockholders in 2007, 2012, and 2017, respectively.2017.
(2) Does not include 103,076252,029 shares subject to outstanding, unvested restricted stock unit awards.
ITEM 13—CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information required by Item 407(a) of Regulation S-K is contained in the registrant’s proxy statement relating to its annual meeting of stockholders to be held on May 16, 201810, 2023 under the captions “Election of Directors” and “Board of Directors, Its Committees, Meetings and Functions” and is incorporated herein by reference. The information required by Item 404 of Regulation S-K is contained in the registrant’s proxy statement relating to its annual meeting of stockholders scheduled to be held on May 16, 201810, 2023 under the caption “Certain Relationships and Related Person Transactions” and is incorporated herein by reference.
ITEM 14 — PRINCIPAL ACCOUNTING FEES AND SERVICES
The Company’s independent registered accounting firm is FORVIS, LLP, formerly BKD, LLP; Evansville, IN; PCAOB ID: 686. The information required by this item is contained in the registrant’s proxy statement relating to its annual meeting of stockholders scheduled to be held on May 16, 201810, 2023 under the caption “Principal Accounting Firm Fees” and is incorporated herein by reference.
ITEM 15—EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(A) | Documents filed as a part of this report: |
(1) | Financial Statements |
Reports of Independent Registered Public Accounting Firm
Consolidated financial statements of Escalade, Incorporated and subsidiaries:
Consolidated balance sheets—December 31, 2022 and December 25, 2021
Consolidated statements of operations—fiscal years ended December 31, 2022, December 25, 2021, and December 26, 2020
Consolidated statements of stockholders’ equity—fiscal years ended December 31, 2022, December 25, 2021, and December 26, 2020
Consolidated statements of cash flows—fiscal years ended December 31, 2022, December 25, 2021, and December 26, 2020
Notes to consolidated financial statements
All other schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the consolidated financial statements or notes thereto.
(3) | Exhibits |
3.1 |
3.2 |
10.1 |
10.2 | ||
10.3 |
(4) | Executive Compensation Plans and Arrangements |
10.5 |
10.6 |
10.7 |
10.8 |
10.9 |
10.10 |
21 |
23.1 |
31.1 | Chief Executive Officer Rule 13a-14(a)/15d-14(a) Certification (j) |
32.1 |
32.2 |
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 (formatted as Inline XBRL and contained in Exhibit 101) |
(a) | Incorporated by reference from the Company's 2007 First Quarter Report on Form 10-Q |
(b) |
Incorporated by reference from the Company’s |
(c) | Incorporated by reference from the Company’s |
(d) |
Incorporated by reference from the Company’s Form 8-K filed on |
(e) | Incorporated by reference from the Company’s 2017 Proxy Statement | |
(f) | Incorporated by reference from the Company’s Form 8-K filed on October 27, 2022 | |
(g) | Incorporated by reference from the Company’s Form 8-K filed on December 23, 2021 | |
(h) | Incorporated by reference from the Company’s Form 8-K filed on January 3, 2022 | |
(i) | Incorporated by reference from the Company’s Form 8-K filed on January 24, 2022 | |
| (j) | Incorporated by reference from the Company’s Form 10-K filed on February 24, 2023 |
None.
Escalade, Incorporated and Subsidiaries
Index to Financial Statements
The following consolidated financial statements of the Registrant and its subsidiaries and Independent Accountants’ Reports are submitted herewith:
ReportsReport of Independent Registered Public Accounting FirmsFirm
Audit Committee, Board of Directors and Stockholders
Escalade, Incorporated
Evansville, Indiana
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Escalade, Incorporated as of December 30, 2017,31, 2022, and December 31, 2016,25, 2021, and the related consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for each of the years in the three-year period ended December 30, 2017.31, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Escalade, Incorporated as of December 30, 2017,31, 2022, and December 31, 2016,25, 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended December 30, 2017,31, 2022, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), Escalade, Incorporated’s internal control over financial reporting as of December 30, 2017,31, 2022, based on criteria established in Internal Control––Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 27, 2018,24, 2023, expressed an unqualified opinion on the effectiveness of Escalade, Incorporated’s internal control over financial reporting.thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of Escalade, Incorporated’s management. Our responsibility is to express an opinion on Escalade, Incorporated’s consolidated financial statements based on our audits.
We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States)PCAOB and are required to be independent with respect to Escalade, Incorporated in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the Public Company Accounting Oversight Board (United States).
PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Customer Allowances
As more fully described in Note 16 within the consolidated financial statements, revenue is recognized net of various sales adjustments, which includes estimated customer allowances for advertising subsidies, volume rebates and catalog allowances. Escalade, Incorporated reviews such allowances on an ongoing basis and accruals are adjusted based on the information within the customer agreements. These estimated sales adjustments are included as part of Net Sales on the consolidated statement of operations. At December 31, 2022, the total accrued for these customer allowances was $4,504,000 and was presented as part of accrued liabilities on the consolidated balance sheet.
The principal consideration for our determination that performing procedures relating to these accruals is a critical audit matter was the significant judgment by management to estimate the accruals due to the complexity of the process involved in developing the accruals. The volume of the customer contracts containing allowance agreements is significant, some customers are granted multiple types of allowances and contract terms can change frequently. Management obtains the amount of sales subject to the allowances and the various allowances taken by customers over time from its accounting system. All of this in turn led to a high degree of auditor judgment and subjectivity in performing procedures and evaluating management’s process for developing the accruals.
We identified the estimated sales allowances as a critical audit matter. The primary procedures we performed to address this critical audit matter included:
● | Testing the design and operating effectiveness of controls, including those related to technology, over the estimated sales allowances, including data completeness and accuracy and the potential for management bias in the estimation process; | |
● | Testing the completeness and accuracy of the underlying data used to estimate the accrual by agreeing the sales data used in the calculation to reports that were reconciled to the financial statements, reconciling the various allowance percentages to signed customer contracts, tracing the allowance amounts used by the various customers during the year to supporting documentation and comparing the estimated allowances at the end of each reporting period to actual results that occurred during subsequent reporting periods; | |
● | Testing the clerical accuracy of the individual customer allowances computed by management and agreeing the total of all estimated allowances to the respective accounts on the financial statements. |
As described in Note 13 to the consolidated financial statements, Escalade, Incorporated consummated the acquisition of the assets constituting the Brunswick Billiards business of Life Fitness, LLC during the year ended December 31, 2022, resulting in the expansion of Escalade, Incorporated’s operating product lines and additional goodwill of $9,631,000 and additional intangible assets of $12,900,000 being recognized on Escalade Incorporated’s consolidated balance sheet. As part of this acquisition, management assessed that the acquisition qualified as a business combination and all identifiable assets and liabilities acquired were recorded at fair value as part of the purchase price allocation as of the acquisition date. The identification and valuation of such acquired assets and assumed liabilities requires management to exercise significant judgment and consider the use of outside vendors to estimate the fair value allocations.
We identified the consummated acquisition and the valuation of acquired assets and assumed liabilities a critical audit matter. Auditing the acquired balance sheet and acquisition related considerations involved a high degree of subjectivity in evaluating management’s operational assumptions of the newly acquired division, fair value estimates, purchase price allocations and assessing the appropriateness of outside vendor valuation models.
The primary procedures we performed to address this critical audit matter included:
● | Obtaining and reviewing the executed Asset Purchase Agreement documents to gain an understanding of the underlying terms of the consummated acquisition; |
● | Testing the design and operating effectiveness of controls over the acquisition accounting, including cut-off procedures performed, asset/liability identification considerations made, and the completeness and accuracy of the balance sheet acquired and related fair value purchase price allocations made to identified assets and liabilities assumed; |
● | Obtaining and reviewing all significant outside vendor valuation estimates and challenging management’s review of the appropriateness of the valuations assessed/allocated to assets acquired and liabilities assumed; including but not limited to, testing all critical inputs, assumptions applied and valuation models utilized by the outside vendors; |
● | Utilizing internal valuation specialists to assist with testing the related fair value purchase price allocations made to identified assets acquired and liabilities assumed; |
● | Testing the goodwill calculation resulting from the acquisition consummated, being the difference between the total net consideration paid and the fair value of the net assets acquired; and |
● | Reviewing and evaluating the adequacy of the disclosures made in the notes of Escalade Incorporated’s SEC filings. |
/s/ FORVIS, LLP
(Formerly, BKD, LLP)
We have served as Escalade, Incorporated’s auditor since 1977.
Evansville, Indiana
February 24, 2023
Report of Independent Registered Public Accounting Firm
Audit Committee, Board of Directors and Stockholders
Escalade, Incorporated
Evansville, Indiana
Opinion on the Internal Control Over Financial Reporting
We have audited Escalade, Incorporated’s internal control over financial reporting as of December 30, 2017,31, 2022, based on criteria established inInternal Control––Integrated FrameworkFramework: (2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, Escalade, Incorporated maintained, in all material respects, effective internal control over financial reporting as of December 30, 2017,31, 2022, based on criteria established inInternal Control–– Integrated Framework: (2013) issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements of Escalade, Incorporated as of December 31, 2022 and for each of the three years in the period ended December 31, 2022 and our report dated February 27, 2018,24, 2023, expressed an unqualified opinion thereon.on those financial statements.
Basis for Opinion
Escalade, Incorporated’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanyingManagement’sManagement’s Report on Internal Control Overover Financial Reporting. Our responsibility is to express an opinion on Escalade, Incorporated’s internal control over financial reporting based on our audit.
We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States)PCAOB and are required to be independent with respect to Escalade, Incorporated in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the Public Company Accounting Oversight Board (United States).PCAOB.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definitions and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of reliable financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the companyEscalade, Incorporated are being made only in accordance with authorizations of management and directors of the company;Escalade, Incorporated; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
/s/ FORVIS, LLP
(Formerly, BKD, LLP)
Evansville, Indiana
February 24, 2023
Escalade, Incorporated and Subsidiaries
Consolidated Balance Sheets
| All Amounts in Thousands Except Share Information | December 30, 2017 | December 31, 2016 | December 31, 2022 | December 25, 2021 | ||||||||||||
| ASSETS | ||||||||||||||||
| Current Assets: | ||||||||||||||||
| Cash and cash equivalents | $ | 1,572 | $ | 1,013 | $ | 3,967 | $ | 4,374 | ||||||||
| Receivables, less allowances of $623 and $910 | 39,350 | 35,894 | ||||||||||||||
Receivables, less allowances of $492 and $457; respectively | 57,419 | 65,991 | ||||||||||||||
| Inventories | 35,160 | 33,802 | 121,870 | 92,382 | ||||||||||||
| Prepaid expenses | 3,414 | 2,798 | 4,942 | 7,569 | ||||||||||||
| Deferred income tax benefit | — | 1,283 | ||||||||||||||
| Prepaid income tax | 764 | 833 | - | 739 | ||||||||||||
| TOTAL CURRENT ASSETS | 80,260 | 75,623 | 188,198 | 171,055 | ||||||||||||
| Property, plant and equipment, net | 14,286 | 13,714 | 24,751 | 24,936 | ||||||||||||
Assets held for sale | 2,823 | - | ||||||||||||||
Operating lease right-of-use assets | 9,100 | 2,210 | ||||||||||||||
| Intangible assets | 19,691 | 20,857 | 31,120 | 20,778 | ||||||||||||
| Goodwill | 21,548 | 21,456 | 42,326 | 32,695 | ||||||||||||
| Investments | 20,278 | 19,030 | ||||||||||||||
| Other assets | 42 | 81 | 400 | 124 | ||||||||||||
| TOTAL ASSETS | $ | 156,105 | $ | 150,761 | $ | 298,718 | $ | 251,798 | ||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
| Current liabilities: | ||||||||||||||||
| Current portion of long-term debt | $ | 1,250 | $ | 1,250 | $ | 7,143 | $ | 7,143 | ||||||||
| Trade accounts payable | 4,295 | 4,376 | 9,414 | 15,847 | ||||||||||||
| Accrued liabilities | 13,997 | 12,792 | 21,320 | 24,385 | ||||||||||||
Income tax payable | 71 | - | ||||||||||||||
Current operating lease liabilities | 993 | 818 | ||||||||||||||
| TOTAL CURRENT LIABILITIES | 19,542 | 18,418 | 38,941 | 48,193 | ||||||||||||
| Long-term debt | 21,871 | 24,189 | 87,738 | 50,396 | ||||||||||||
| Deferred income tax liability | 2,469 | 6,441 | 4,516 | 4,759 | ||||||||||||
Operating lease liabilities | 8,641 | 1,387 | ||||||||||||||
| Other liabilities | 553 | — | 407 | 448 | ||||||||||||
| TOTAL LIABILITIES | 44,435 | 49,048 | 140,243 | 105,183 | ||||||||||||
| Commitments and contingencies | — | — | ||||||||||||||
| 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: 2017 —14,371,586 shares, 2016 —14,304,959 shares | 14,372 | 14,305 | ||||||||||||||
Issued and outstanding: 2022 —13,594,407 shares, 2021 —13,493,332 shares | 13,594 | 13,493 | ||||||||||||||
| Retained earnings | 99,908 | 91,688 | 144,881 | 133,122 | ||||||||||||
| Accumulated other comprehensive loss | (2,610 | ) | (4,280 | ) | ||||||||||||
| TOTAL STOCKHOLDERS’ EQUITY | 111,670 | 101,713 | 158,475 | 146,615 | ||||||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 156,105 | $ | 150,761 | $ | 298,718 | $ | 251,798 | ||||||||
See notes to consolidated financial statements.
Escalade, Incorporated and Subsidiaries
Consolidated Statements of Operations
| Years Ended | ||||||||||||
All Amounts in Thousands Except Per Share Data | December 30, 2017 | December 31, 2016 | December 26, 2015 | |||||||||
| Net Sales | $ | 177,333 | $ | 171,662 | $ | 159,463 | ||||||
| Costs and Expenses | ||||||||||||
| Cost of products sold | 132,606 | 127,395 | 115,989 | |||||||||
| Selling, administrative and general expenses | 28,548 | 27,357 | 27,775 | |||||||||
| Amortization | 1,579 | 2,327 | 2,881 | |||||||||
| Operating Income | 14,600 | 14,583 | 12,818 | |||||||||
| Other Income (Expense) | ||||||||||||
| Interest expense | (804 | ) | (834 | ) | (470 | ) | ||||||
| Equity in earnings of affiliates | 1,634 | 1,672 | 2,993 | |||||||||
| Gain on bargain purchase | 256 | — | — | |||||||||
| Other income (expense) | (169 | ) | 121 | 333 | ||||||||
| Income Before Income Taxes | 15,517 | 15,542 | 15,674 | |||||||||
| Provision for Income Taxes | 1,456 | 4,049 | 4,068 | |||||||||
| Net Income | $ | 14,061 | $ | 11,493 | $ | 11,606 | ||||||
| Earnings Per Share Data: | ||||||||||||
| Basic earnings per share | $ | 0.98 | $ | 0.81 | $ | 0.82 | ||||||
| Diluted earnings per share | $ | 0.98 | $ | 0.80 | $ | 0.82 | ||||||
See notes to consolidated financial statements.
| Years Ended | ||||||||||||
All Amounts in Thousands Except Per Share Data | December 31, 2022 | December 25, 2021 | December 26, 2020 | |||||||||
Net Sales | $ | 313,757 | $ | 313,612 | $ | 273,649 | ||||||
| Costs and Expenses | ||||||||||||
Cost of products sold | 240,118 | 236,482 | 198,822 | |||||||||
Selling, administrative and general expenses | 44,765 | 43,367 | 40,315 | |||||||||
Amortization | 2,559 | 1,867 | 1,480 | |||||||||
Operating Income | 26,315 | 31,896 | 33,032 | |||||||||
| Other Income (Expense) | ||||||||||||
Interest expense | (3,780 | ) | (1,510 | ) | (250 | ) | ||||||
Other income (expense) | 79 | 163 | 140 | |||||||||
Income Before Income Taxes | 22,614 | 30,549 | 32,922 | |||||||||
Provision for Income Taxes | 4,625 | 6,144 | 6,988 | |||||||||
Net Income | $ | 17,989 | $ | 24,405 | $ | 25,934 | ||||||
| Earnings Per Share Data: | ||||||||||||
Basic earnings per share | $ | 1.33 | $ | 1.78 | $ | 1.84 | ||||||
Diluted earnings per share | $ | 1.31 | $ | 1.76 | $ | 1.82 | ||||||
Escalade, Incorporated and Subsidiaries
Consolidated Statements of Comprehensive Income
| Years Ended | ||||||||||||
All Amounts in Thousands | December 30, 2017 | December 31, 2016 | December 26, 2015 | |||||||||
| Net Income | $ | 14,061 | $ | 11,493 | $ | 11,606 | ||||||
| Foreign currency translation adjustment before reclassifications | 1,670 | (1,102 | ) | (1,214 | ) | |||||||
| Comprehensive Income | $ | 15,731 | $ | 10,391 | $ | 10,392 | ||||||
See notes to consolidated financial statements.
Consolidated Statements of Stockholders’ Equity
| Accumulated | ||||||||||||||||||||
| Other | ||||||||||||||||||||
| Common Stock | Retained | Comprehensive | ||||||||||||||||||
| All Amounts in Thousands | Shares | Amount | Earnings | Income (Loss) | Total | |||||||||||||||
| Balances at December 27, 2014 | 13,998 | $ | 13,998 | $ | 77,745 | $ | (1,964 | ) | $ | 89,779 | ||||||||||
| Other comprehensive loss | (1,214 | ) | (1,214 | ) | ||||||||||||||||
| Net income | 11,606 | 11,606 | ||||||||||||||||||
| Expense of stock options and restricted stock units | 719 | 719 | ||||||||||||||||||
| Exercise of stock options | 156 | 156 | 781 | 937 | ||||||||||||||||
| Settlement of restricted stock units | 19 | 19 | (19 | ) | — | |||||||||||||||
| Tax benefit from settlement of stock compensation | 701 | 701 | ||||||||||||||||||
| Tax withholding for equity awards | (79 | ) | (79 | ) | ||||||||||||||||
| Dividends declared | (6,072 | ) | (6,072 | ) | ||||||||||||||||
| Stock issued to directors as compensation | 7 | 7 | 96 | 103 | ||||||||||||||||
| Balances at December 26, 2015 | 14,180 | $ | 14,180 | $ | 85,478 | $ | (3,178 | ) | $ | 96,480 | ||||||||||
| Other comprehensive loss | (1,102 | ) | (1,102 | ) | ||||||||||||||||
| Net income | 11,493 | 11,493 | ||||||||||||||||||
| Expense of stock options and restricted stock units | 398 | 398 | ||||||||||||||||||
| Exercise of stock options | 96 | 96 | 451 | 547 | ||||||||||||||||
| Settlement of restricted stock units | 16 | 16 | (16 | ) | — | |||||||||||||||
| Tax benefit from settlement of stock compensation | 35 | 35 | ||||||||||||||||||
| Dividends declared | (6,282 | ) | (6,282 | ) | ||||||||||||||||
| Stock issued to directors as compensation | 13 | 13 | 131 | 144 | ||||||||||||||||
| Balances at December 31, 2016 | 14,305 | $ | 14,305 | $ | 91,688 | $ | (4,280 | ) | $ | 101,713 | ||||||||||
| Other comprehensive income | 1,670 | 1,670 | ||||||||||||||||||
| Net income | 14,061 | 14,061 | ||||||||||||||||||
| Expense of stock options and restricted stock units | 522 | 522 | ||||||||||||||||||
| Exercise of stock options | 28 | 28 | 131 | 159 | ||||||||||||||||
| Settlement of restricted stock units | 26 | 26 | (26 | ) | — | |||||||||||||||
| Dividends declared | (6,607 | ) | (6,607 | ) | ||||||||||||||||
| Stock issued to directors as compensation | 13 | 13 | 139 | 152 | ||||||||||||||||
| Balances at December 30, 2017 | 14,372 | $ | 14,372 | $ | 99,908 | $ | (2,610 | ) | $ | 111,670 | ||||||||||
See notes to consolidated financial statements.
Escalade, Incorporated and Subsidiaries
Consolidated Statements of Cash FlowsStockholders’ Equity
| Years Ended | ||||||||||||
| All Amounts in Thousands | December 30, 2017 | December 31, 2016 | December 26, 2015 | |||||||||
| Operating Activities: | ||||||||||||
| Net Income | $ | 14,061 | $ | 11,493 | $ | 11,606 | ||||||
| Reconciling adjustments: | ||||||||||||
| Depreciation and amortization | 3,910 | 5,244 | 5,218 | |||||||||
| Provision for doubtful accounts | 775 | 1,758 | 159 | |||||||||
| Stock option and restricted stock unit expense | 522 | 398 | 719 | |||||||||
| Equity in net income of joint venture investments | (1,634 | ) | (1,672 | ) | (2,993 | ) | ||||||
| Deferred income taxes | (2,947 | ) | (375 | ) | 1,696 | |||||||
| Gain on bargain purchase | (256 | ) | — | — | ||||||||
| Loss (gain) on disposals of assets | (5 | ) | (2,158 | ) | 1 | |||||||
| Dividends received from equity method investments | 2,168 | 1,060 | 928 | |||||||||
| Changes in | ||||||||||||
| Accounts receivable | (3,366 | ) | 2,709 | (6,053 | ) | |||||||
| Inventories | (468 | ) | (6,548 | ) | (1,121 | ) | ||||||
| Prepaids and other assets | (507 | ) | 950 | 2,887 | ||||||||
| Accounts payable and accrued expenses | 1,110 | (690 | ) | 2,416 | ||||||||
| Net cash provided by operating activities | 13,363 | 12,169 | 15,463 | |||||||||
| Investing Activities: | ||||||||||||
| Purchase of property and equipment | (2,745 | ) | (2,653 | ) | (5,067 | ) | ||||||
| Acquisitions | (1,450 | ) | (9,659 | ) | (10,678 | ) | ||||||
| Net sale of short-term time deposits | — | — | 1,450 | |||||||||
| Net purchase of marketable securities | — | (57 | ) | — | ||||||||
| Proceeds from insurance for involuntary conversion | — | — | — | |||||||||
| Proceeds from sale of property and equipment | 5 | 2,568 | — | |||||||||
| Net cash used in investing activities | (4,190 | ) | (9,801 | ) | (14,295 | ) | ||||||
| Financing Activities: | ||||||||||||
| Dividends paid | (6,607 | ) | (6,282 | ) | (6,072 | ) | ||||||
| Proceeds from issuance of long-term debt | 56,713 | 65,887 | 62,127 | |||||||||
| Net decrease in notes payable | — | — | (2,699 | ) | ||||||||
| Proceeds from exercise of stock options | 159 | 547 | 937 | |||||||||
| Payments on long-term debt | (59,031 | ) | (63,585 | ) | (57,436 | ) | ||||||
| Deferred financing fees | — | (83 | ) | — | ||||||||
| Tax benefit from settlement of stock compensation | — | 35 | 701 | |||||||||
| Tax withholding for equity awards | — | — | (79 | ) | ||||||||
| Director stock compensation | 152 | 144 | 103 | |||||||||
| Net cash used in financing activities | (8,614 | ) | (3,337 | ) | (2,418 | ) | ||||||
| Increase (Decrease) in Cash and Cash Equivalents | 559 | (969 | ) | (1,250 | ) | |||||||
| Cash and Cash Equivalents, beginning of year | 1,013 | 1,982 | 3,232 | |||||||||
| Cash and Cash Equivalents, end of year | $ | 1,572 | $ | 1,013 | $ | 1,982 | ||||||
| Supplemental Cash Flows Information | ||||||||||||
| Interest paid | $ | 792 | $ | 866 | $ | 465 | ||||||
| Income taxes paid | $ | 3,816 | $ | 3,333 | $ | 108 | ||||||
| Dividends payable | — | — | $ | 4 | ||||||||
| Information regarding the Company’s acquisitions in 2017, 2016 and 2015 are as follows: | ||||||||||||
| Fair value of assets acquired | $ | 2,018 | $ | 10,597 | $ | 13,269 | ||||||
| Cash paid for assets | 1,450 | 9,464 | 10,678 | |||||||||
| Note payable for deferred purchase price obligation | — | — | 200 | |||||||||
| Liabilities assumed | $ | 568 | $ | 1,133 | $ | 2,391 | ||||||
Common Stock | Retained | |||||||||||||||
All Amounts in Thousands | Shares | Amount | Earnings | Total | ||||||||||||
Balances at December 28, 2019 | 14,215 | $ | 14,215 | $ | 111,955 | $ | 126,170 | |||||||||
Net income | 25,934 | 25,934 | ||||||||||||||
Expense of stock options and restricted stock units | 1,016 | 1,016 | ||||||||||||||
Exercise of stock options | 10 | 10 | 134 | 144 | ||||||||||||
Settlement of restricted stock units | 55 | 55 | (55 | ) | - | |||||||||||
Issuance of restricted stock awards | 35 | 35 | (35 | ) | - | |||||||||||
Dividends declared | (7,466 | ) | (7,466 | ) | ||||||||||||
Stock issued to directors as compensation | 10 | 10 | 87 | 97 | ||||||||||||
Purchase of stock | (406 | ) | (406 | ) | (6,333 | ) | (6,739 | ) | ||||||||
Balances at December 26, 2020 | 13,919 | $ | 13,919 | $ | 125,237 | $ | 139,156 | |||||||||
Net income | 24,405 | 24,405 | ||||||||||||||
Expense of stock options and restricted stock units | 902 | 902 | ||||||||||||||
Exercise of stock options | 10 | 10 | 134 | 144 | ||||||||||||
Settlement of restricted stock units | 50 | 50 | (50 | ) | - | |||||||||||
Dividends declared | (7,693 | ) | (7,693 | ) | ||||||||||||
Stock issued to directors as compensation | 6 | 6 | 129 | 135 | ||||||||||||
Purchase of stock | (492 | ) | (492 | ) | (9,942 | ) | (10,434 | ) | ||||||||
Balances at December 25, 2021 | 13,493 | $ | 13,493 | $ | 133,122 | $ | 146,615 | |||||||||
Net income | 17,989 | 17,989 | ||||||||||||||
Expense of stock options and restricted stock units | 1,974 | 1,974 | ||||||||||||||
Settlement of restricted stock units | 97 | 97 | (97 | ) | - | |||||||||||
Dividends declared | (8,154 | ) | (8,154 | ) | ||||||||||||
Stock issued to directors as compensation | 4 | 4 | 47 | 51 | ||||||||||||
Balances at December 31, 2022 | 13,594 | $ | 13,594 | $ | 144,881 | $ | 158,475 | |||||||||
See notes to consolidated financial statements.
Escalade, Incorporated and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended | ||||||||||||
All Amounts in Thousands | December 31, 2022 | December 25, 2021 | December 26, 2020 | |||||||||
| Operating Activities: | ||||||||||||
Net Income | $ | 17,989 | $ | 24,405 | $ | 25,934 | ||||||
| Reconciling adjustments: | ||||||||||||
Depreciation and amortization | 6,063 | 4,835 | 4,016 | |||||||||
Provision for doubtful accounts | 108 | (408 | ) | 473 | ||||||||
Stock option and restricted stock unit expense | 1,974 | 902 | 1,016 | |||||||||
Deferred income taxes | (244 | ) | 567 | 656 | ||||||||
Loss (gain) on disposals of assets | (22 | ) | (19 | ) | (2 | ) | ||||||
| Changes in | ||||||||||||
Accounts receivable | 9,738 | (301 | ) | (29,905 | ) | |||||||
Inventories | (15,847 | ) | (19,894 | ) | (26,422 | ) | ||||||
Prepaids and other assets | 3,433 | (4,163 | ) | (42 | ) | |||||||
Accounts payable and accrued expenses | (14,668 | ) | (4,985 | ) | 26,909 | |||||||
Net cash provided by operating activities | 8,524 | 939 | 2,633 | |||||||||
| Investing Activities: | ||||||||||||
Purchase of property and equipment | (2,111 | ) | (9,696 | ) | (5,455 | ) | ||||||
Acquisitions | (35,757 | ) | - | (15,446 | ) | |||||||
Payment on note payable related to an acquisition | - | - | (135 | ) | ||||||||
Proceeds from sale of property and equipment | 40 | 43 | 4 | |||||||||
Net cash used in investing activities | (37,828 | ) | (9,653 | ) | (21,032 | ) | ||||||
| Financing Activities: | ||||||||||||
Dividends paid | (8,154 | ) | (7,693 | ) | (7,466 | ) | ||||||
Proceeds from issuance of long-term debt | 197,369 | 232,065 | 84,044 | |||||||||
Payments on long-term debt | (160,027 | ) | (204,601 | ) | (53,971 | ) | ||||||
Proceeds from exercise of stock options | - | 144 | 144 | |||||||||
Deferred financing fees | (342 | ) | (33 | ) | (87 | ) | ||||||
Purchase of stock | - | (10,434 | ) | (6,739 | ) | |||||||
Director stock compensation | 51 | 135 | 97 | |||||||||
Net cash provided by financing activities | 28,897 | 9,583 | 16,022 | |||||||||
Increase (decrease) in Cash and Cash Equivalents | (407 | ) | 869 | (2,377 | ) | |||||||
Cash and Cash Equivalents, beginning of year | 4,374 | 3,505 | 5,882 | |||||||||
Cash and Cash Equivalents, end of year | $ | 3,967 | $ | 4,374 | $ | 3,505 | ||||||
| Supplemental Cash Flows Information | ||||||||||||
Interest paid | $ | 3,867 | $ | 1,433 | $ | 205 | ||||||
Income taxes paid | $ | 4,144 | $ | 6,284 | $ | 6,205 | ||||||
| Information regarding the Company’s acquisitions in 2022 and 2020 are as follows: | ||||||||||||
Fair value of assets acquired | $ | 41,496 | $ | - | $ | 16,277 | ||||||
Cash paid for assets | (35,757 | ) | - | (15,446 | ) | |||||||
Liabilities assumed | $ | 5,739 | $ | - | $ | 831 | ||||||
See notes to consolidated financial statements.
Note 1 — Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
Escalade, Incorporated and its wholly-owned subsidiaries (Escalade, the Company, we, us or our) are engaged in the manufacture and sale of sporting goods products. The Company is headquartered in Evansville, Indiana and currently has manufacturing facilities in the United States of America and Mexico. The Company sells products to customers primarily in North America with minimal sales throughout the remainder of the world.
Principles of Consolidation
The consolidated financial statements include the accounts of Escalade, Incorporated and its wholly-owned subsidiaries. All material inter-company accounts and transactions have been eliminated.
Basis of Presentation
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The books and records of subsidiaries located in foreign countries are maintained according to generally accepted accounting principles in those countries. Upon consolidation, the Company evaluates the differences in accounting principles and determines whether adjustments are necessary to convert the foreign financial statements to the accounting principles upon which the consolidated financial statements are based. As a result of this evaluation no material adjustments were identified.
During the year ended December 30, 2017, we revised the presentation of shipping fees within the statements of operations. These amounts were previously presented on a net basis as an offset to freight revenue within net sales. We have determined that these shipping fees should have been presented on a gross basis as a component of cost of goods sold.
We assessed the materiality of this revision on prior periods' financial statements in accordance with the Securities and Exchange Commission Staff Accounting Bulletin No. 99,Materiality, codified in Accounting Standards Codification (ASC) 250,Presentation of Financial Statements. We concluded that the revision was not material to any prior annual or interim period and therefore, amendments of previously filed reports are not required. In accordance with ASC 250, we have corrected the classification for all prior periods presented by revising the consolidated financial statements appearing herein. Periods not presented herein will be revised, as applicable, in future filings. The revisions had no impact on operating income, net income or earnings per share data.
The impact of this revision on our consolidated statements of operations was as follows:
| Year Ended December 31, 2016 | As Previously Reported | Revision | As Revised | |||||||||
| In Thousands | ||||||||||||
| Net Sales | $ | 167,650 | $ | 4,012 | $ | 171,662 | ||||||
| Costs of product sold | 123,383 | 4,012 | 127,395 | |||||||||
| Year Ended December 26, 2015 | As Previously Reported | Revision | As Revised | |||||||||
| In Thousands | ||||||||||||
| Net Sales | $ | 155,542 | $ | 3,921 | $ | 159,463 | ||||||
| Costs of product sold | 112,068 | 3,921 | 115,989 | |||||||||
Fiscal Year End
TheThrough and including December 31, 2022, the Company’s fiscal year iswas a 52 or 53 week period ending on the last Saturday in December. Fiscal year 20172022 was 53 weeks long, ending December 31, 2022. Fiscal year 2021 was 52 weeks long, ending December 25, 2021. Fiscal year 2020 was 52 weeks long, ending on December 30, 2017. Fiscal26, 2020.
On August 10, 2022, Escalade’s Board of Directors approved a change in its fiscal year 2016 was 53 weeks long, endingend from the last Saturday in December of each year to December 31 2016. Fiscalof each year. Escalade’s fiscal quarters will end on March 31, June 30, and September 30. The fiscal year 2015 was 52 weeks long, endingchange 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. Following the filing of this Form 10-K for the year ended December 26, 2015.31, 2022, the new fiscal year will take effect from January 1, 2023 to December 31, 2023.
Cash and Cash Equivalents
Highly liquid financial instruments with insignificant interest rate risk and with original maturities of three months or less are classified as cash and cash equivalents. Cash and cash equivalent balances may at times be in excess of federally insured limits. The Company maintains its cash and cash equivalent balances at high-credit quality financial institutions. Book overdrafts that result from outstanding checks in excess of our bank balance are reclassified to accrued liabilities. As of December 31, 2022, the Company reclassed $6.9 million of book overdrafts to accrued liabilities. As of December 25, 2021, the Company reclassed $4.7 million of book overdrafts to accrued liabilities.
Accounts Receivable
Revenue from the sale of the Company’s products is recognized as productswhen obligations under the terms of a contract with our customer are shippedsatisfied; generally this occurs with the transfer of control of our goods at a point in time based on shipping terms and legal title has passed to customers and accountstransfer of title. Accounts receivable are stated at the amount billed to customers. Interest and late charges billed to customers are not material and, because collection is uncertain, are not recognized until collected and are therefore not included in accounts receivable. The Company provides an allowance for doubtful accounts which is described in Note 2 – Certain Significant Estimates.
Inventories
Inventory cost is computed on a currently adjusted standard cost basis (which approximates actual cost on a current average or first-in, first-out basis). Work in process and finished goods inventory are determined to be saleable based on a demand forecast within a specific time horizon, generally one year or less. Inventory in excess of saleable amounts is reserved, and the remaining inventory is valued at the lower of cost or net realizable value for 2017 and lower of cost or market for 2016.value. This inventory valuation reserve totaled $504$1,568 thousand and $415$748 thousand at fiscal year-end 20172022 and 2016,2021, respectively.
Inventories, net of the valuation reserve, at fiscal year-ends were as follows:
| In Thousands | 2017 | 2016 | 2022 | 2021 | ||||||||||||
| Raw materials | $ | 3,462 | $ | 4,781 | $ | 7,789 | $ | 9,142 | ||||||||
| Work in process | 2,927 | 3,671 | 3,478 | 3,529 | ||||||||||||
| Finished goods | 28,771 | 25,350 | 110,603 | 79,711 | ||||||||||||
| $ | 35,160 | $ | 33,802 | $ | 121,870 | $ | 92,382 | |||||||||
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation and amortization are computed for financial reporting purposes principally using the straight-line method over the following estimated useful lives: buildings, 20-30 years; leasehold improvements, term of the lease; machinery and equipment, 5-15 years; and tooling, dies and molds, 2-5 years. Property, plant and equipment consist of the following:
| In Thousands | 2017 | 2016 | 2022 | 2021 | ||||||||||||
| Land | $ | 1,943 | $ | 1,943 | $ | 1,306 | $ | 2,255 | ||||||||
| Buildings and leasehold improvements | 16,392 | 15,733 | 27,406 | 24,175 | ||||||||||||
| Machinery and equipment | 24,453 | 22,379 | 27,497 | 31,853 | ||||||||||||
| Total cost | 42,788 | 40,055 | 56,209 | 58,283 | ||||||||||||
| Accumulated depreciation and amortization | (28,502 | ) | (26,341 | ) | (31,458 | ) | (33,347 | ) | ||||||||
| $ | 14,286 | $ | 13,714 | $ | 24,751 | $ | 24,936 | |||||||||
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. No asset impairment was recognized during the years ended 2017, 2016,2022, 2021, or 2015.2020.
DuringWe classify assets as held for sale when our management approves and commits to a formal plan of sale that is probable of being completed within one (1) year. Assets designated as held for sale are recorded at the year ended December 31, 2016, the Company sold its Wabash, Indiana land and building for a purchase pricelower of approximately $2.1 million. The sale resulted in a gain of approximately $1.9 million, recognized within operating income for the year ended December 31, 2016.
Investments
Investments are composed of the following:
| In Thousands | 2017 | 2016 | ||||||
| Non-marketable equity investments (equity method) | $ | 20,278 | $ | 19,030 | ||||
Non-Marketable Equity Investment:The Company has an equity position in a company that strategically relates to the Company’s business, but the Company does not have control over that entity. The accounting method employed is dependent on the level of ownership and degree of influence the Company can exert on operations. Where the equity interest is less than 20% and the degree of influence is not significant, the cost method of accounting is employed. Where the equity interest is greater than 20% but not more than 50%, the equity method of accounting is utilized. Under the equity method, the Company’s proportionate share of net income (loss) is recorded in equity in earnings of affiliates on the consolidated statement of operations. The proportionate share of net income was $1.6 million, $1.7 million and $3.0 million in 2017, 2016 and 2015, respectively. Total cash dividends received from this equity investment amounted to $2,168 thousand, $1,060 thousand, and $928 thousand in 2017, 2016 and 2015, respectively. The Company considers whether the fair value of it equity investment has declined below itstheir current carrying value whenever adverse events or changestheir fair market value, less costs to sell, beginning in circumstances indicate that recorded values may not be recoverable. If the Company considered any such declineperiod in which the assets meet the criteria to be other than temporary (based on various factors, including historical financial results, product development activities and overall health of the investments’ industry), a write-down is recorded to estimated fair value.classified as held for sale.
Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price over fair value of net tangible and identifiable intangible assets of acquired businesses. Intangible assets consist of patents, consulting agreements, non-compete agreements, customer lists, developed technology, license agreements, and trademarks. Goodwill and trademarks areis deemed to have an indefinite liveslife and areis not amortized, but areis subject to impairment testing annually in accordance with guidance included in FASB ASC 350, Intangibles – Goodwill and Other. Other intangible assets are amortized using the straight-line method over the following lives: license agreements, 17 years; developed technology, 5 years; trademarks, 20 years to indefinite life; consulting agreements, the life of the agreement; customer lists, 53 to 1415 years; non-compete agreements, the lesser of the term or 5 years; and patents, the lesser of the remaining life or 5 to 15 years.
The Company reviews goodwill for impairment annually and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable, in accordance with guidance in FASB ASC 350,Intangibles – Goodwill and Other. A qualitative assessment is first performed to determine if the fair value of the reporting unit is "more likely than not" less than the carrying value. If so, we proceed to step one of the two-step goodwill impairment test,a quantitative assessment, in which the fair value of the reporting unit is compared to its carrying value. If not, then performance of the second step of the goodwill impairment test is not necessary. If the carrying value of goodwill exceeds the implied estimated fair value, calculated in the second step, an impairment charge to current operations is recorded to reduce the carrying value to the implied estimated fair value. 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, 2022 and December 25, 2021.
Employee Incentive Plan
During 2017, the Company approved a newan incentive plan explained in Note 10.9. The Company accounts for this plan under the recognition and measurement principles of FASB ASC 718,Equity Based Payments.
Foreign Currency Translation
The functional currency for the foreign operations of Escalade is the U.S. dollar. Gains or losses resulting from foreign currency transactions are included in selling, general and administrative expense in the Consolidated Statements of Operations and were insignificant in fiscal years 2017, 2016,2022, 2021, and 2015.2020.
Cost of Products Sold
Cost of products sold is comprised of those costs directly associated with or allocated to the products sold and include materials, labor and factory overhead.
Other Income (Loss)
The components of Other Income (Loss) are as follows:
| In Thousands | 2017 | 2016 | 2015 | |||||||||
| Rent income from real estate | $ | — | $ | 158 | $ | 212 | ||||||
| Other income (loss) | (169 | ) | (37 | ) | 121 | |||||||
| $ | (169 | ) | $ | 121 | $ | 333 | ||||||
Provision for Income Taxes
Income tax in the consolidated statement of operations includes deferred income tax provisions or benefits for all significant temporary differences in recognizing income and expenses for financial reporting and income tax purposes. A valuation allowance is established ifIn assessing the realizability of deferred tax assets, management considers whether it is more likely than not that asome portion or all of the deferred tax asset will not be realized.
The Company accounts for uncertainty in tax positions by recognizing in its financial statements the impact of a tax position only if that position is more likely than not of being sustained.
Research and Development
Research and development costs are charged to expense as incurred. Research and development costs incurred during 2017, 20162022, 2021 and 20152020 were approximately $1.6$2.7 million, $1.5$2.0 million, and $1.5 million, respectively.
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.
New Accounting Pronouncements and Changes in Accounting Principles
In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU) 2016-09,Improvements to Employee Share-Based Payment Accounting, which amends existing guidance related to accounting for employee share-based payments affecting the income tax consequences of awards, classification of awards as equity or liabilities, and classification on the statement of cash flows. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016.
The new standard requires excess tax benefits and tax deficienciesNew Accounting Standards to be recorded as income tax expense or benefit in the income statement and also requires a policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. The Company has elected to account for forfeitures when they actually occur. The new guidance also requires cash paid by an employer when directly withholding shares for tax withholding purposes to be classified in the Consolidated Statement of Cash Flows as a financing activity, which is the classification currently used by the Company. Lastly, the guidance requires that excess tax benefits should be classified along with other income tax cash flows as an operating activity on the statement of cash flows. The Company elected to apply this provision using the prospective transition method. Adoption of this guidance did not impact the presentation of cash flows in the current period.
Adopted
In November 2015, the FASB issued ASU 2015-17,Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. ASU 2015-17 eliminates the current requirement for organizations to present deferred tax liabilities and assets as current and noncurrent in a classified balance sheet. Instead, organizations will be required to classify all deferred tax assets and liabilities as noncurrent. The ASU is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company adopted this standard on January 1, 2017 and has elected to apply the requirements prospectively. Comparative financial statements of prior periods have not been retrospectively adjusted. Adoption of this standard did not impact results of operations or cash flows in the current or previous reporting periods.
In May 2014, the FASB issued ASU 2014-09,Revenue from Contracts with Customers (Topic 606),which amends existing accounting standards related to revenue recognition. In August 2015, the FASB issued ASU 2015-14,Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,which delays the effective date of ASU 2014-09 by one year. In MarchJune 2016, the FASB issued ASU 2016-082016-13, 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 clarifiesrequires the implementation guidance on principal versus agent considerations. The guidance includes indicatorsuse of forward-looking information to assistcalculate 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 entityallowance for credit losses rather than as a reduction in determining whether it controls a specified good or service before it is transferred to the customers. In December 2016, FASB issued ASU 2016-20, which affect narrow aspectsamortized cost basis of the guidance issuedsecurities. These changes will result in ASU 2014-09. The new revenueearlier recognition standard will be effective for public entities for annual reporting periods beginning after December 15, 2017, including interim reporting periods therein. The new standard permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the modified retrospective method). We have completed our analysis of the impact this guidance will have on our consolidated financial statements and related disclosures, and other than an increase in the level of disclosures, we do not expect the impact to be material.
In February 2016, the FASB issued ASU 2016-02,Leases (Topic 842). The amendments in this update will increase the transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Under ASU 2016-02, a lessee will recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-to-use asset representing its right to use the underlying asset for the lease term. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from current GAAP. ASU 2016-02 retains a distinction between finance leases (i.e. capital leases under current GAAP) and operating leases. The classification criteria for distinguishing between finance leases and operating leases will be substantially similar to the classification criteria for distinguishing between capital leases and operating leases under current GAAP. This amendment is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is evaluating the effect on its financial statements. We do not expect the standard to have a material impact on our consolidated financial statements.
In August 2016, FASB issued ASU 2016-15,Statement of Cash Flows (Topic 230). The amendments in this update address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This amendment is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted for any interim or annual period. The Company is currently evaluating the effect, if any, that the updated standard will have on its consolidated statement of cash flows. We do not expect the standard to have a material impact on our consolidated financial statements.
In January, 2017, FASB issued ASU 2017-01,Business Combinations (Topic 805): Clarifying the Definition of a Business.These amendments clarify the definition of a business.credit losses. The amendments are intended to help companies and other organizations evaluate whether transactions should be accounted for as acquisitions (or disposals) or assets or businesses. The amendments are effective for annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. Early adoption is permitted under certain circumstances. The amendments should be applied prospectively as of the beginning of the period of adoption. The Company is currently evaluating the effect, if any, that the updated standard will have on its consolidated financial statements.
In January, 2017, FASB issued ASU 2017-04,Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.These amendments eliminate Step 2 from the goodwill impairment test. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The amendments are effective for annual impairment tests in fiscal years beginning after December 15, 2019. Early adoption2020, and interim periods within those fiscal years. In November 2019, the FASB issued ASU 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates. This amendment delays the effective dates of specific ASUs, including ASU 2016-13 by one year. Amendments in ASU 2016-13 are effective in fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. The Company will adopt this ASU within the annual reporting period ending December 31, 2023. The Company is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The provisionscurrently assessing the impact of the amendment should be adopted on a prospective basis. We doadopting this standard, but based upon its preliminary assessment, does not expect the standardadoption of this guidance to have a material impact on ourits consolidated financial statements.
In May, 2017, FASB issued ASU 2017-09,Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting.These amendments were issued to provide clarity and reduce both (1) diversity in practice and (2) cost and complexity when applying guidance to a change to the terms or conditions of a share-based payment award. The amendments in this ASU provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The amendments are effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted. We do not expect the standard to have a material impact, if any, on our consolidated financial statements.
Note 2 — Certain Significant Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities; the disclosure of contingent assets and liabilities at the date of the consolidated financial statements; and the reported amounts of revenues and expenses during the reporting period. These estimates and judgments are evaluated on an ongoing basis and are based on experience; current and expected future conditions; third party evaluations; and various other assumptions believed reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities as well as identifying and assessing the accounting treatment with respect to commitments and liabilities. Actual results may differ from the estimates and assumptions used in the financial statements and related notes.
Listed below are certain significant estimates and assumptions related to the preparation of the consolidated financial statements:
Goodwill and Intangible Assets
The Company reviews goodwill for impairment annually and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable, in accordance with guidance in FASB ASC 350, Intangibles – Goodwill and Other.Other. A qualitative assessment is first performed to determine if the fair value of the reporting unit is "more likely than not" less than the carrying value. If so, we proceed to step one of the two-step goodwill impairment test,a quantitative assessment, in which the fair value of the reporting unit is compared to its carrying value. If not, then performance of the second step of the goodwill impairment test is not necessary. If the carrying value of goodwill exceeds the implied estimated fair value, calculated in the second step, an impairment charge to current operations is recorded to reduce the carrying value to the implied estimated fair value.
Other intangible assets are amortized using the straight-line method over the following lives: license agreements, 17 years; developed technology, 5 years; trademarks, 20 years to indefinite life; consulting agreements, the life of the agreement; customer lists, 53 to 1415 years; non-compete agreements, the lesser of the term or 5 years; and patents, the lesser of the remaining life or 5 to 15 years.
Indefinite-lived intangible assets are reviewed for impairment annually, or whenever events or changes in circumstances indicate the carrying amount of an intangible asset may not be recoverable.
There are inherent assumptions and judgments required in the analysis of goodwill and intangible impairment.
Product Warranty
The Company provides limited warranties on certain of its products, for varying periods. Generally, the warranty periods range from 9030 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. Changes in product warranty were as follows:
| In Thousands | 2017 | 2016 | 2015 | 2022 | 2021 | 2020 | ||||||||||||||||||
| Beginning balance | $ | 876 | $ | 847 | $ | 695 | $ | 1,119 | $ | 962 | $ | 688 | ||||||||||||
| Additions | 1,036 | 1,501 | 1,459 | 2,472 | 2,487 | 1,648 | ||||||||||||||||||
| Deductions | (1,221 | ) | (1,472 | ) | (1,307 | ) | (2,578 | ) | (2,330 | ) | (1,374 | ) | ||||||||||||
| Ending balance | $ | 691 | $ | 876 | $ | 847 | $ | 1,013 | $ | 1,119 | $ | 962 | ||||||||||||
Inventory Valuation Reserves
The Company evaluates inventory for obsolescence and excess quantities based on demand forecasts based on 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. Changes in inventory valuation reserves were as follows:
In Thousands | 2022 | 2021 | 2020 | |||||||||
Beginning balance | $ | 748 | $ | 697 | $ | 786 | ||||||
Additions | 1,083 | 446 | 831 | |||||||||
Deductions | (263 | ) | (395 | ) | (920 | ) | ||||||
Ending balance | $ | 1,568 | $ | 748 | $ | 697 | ||||||
| In Thousands | 2017 | 2016 | 2015 | |||||||||
| Beginning balance | $ | 415 | $ | 471 | $ | 537 | ||||||
| Additions | 288 | 327 | 470 | |||||||||
| Deductions | (199 | ) | (383 | ) | (536 | ) | ||||||
| Ending balance | $ | 504 | $ | 415 | $ | 471 | ||||||
Allowance for Doubtful Accounts
The Company provides an allowance for doubtful accounts 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. Changes in allowance for doubtful accounts were as follows:
| In Thousands | 2017 | 2016 | 2015 | 2022 | 2021 | 2020 | ||||||||||||||||||
| Beginning balance | $ | 910 | $ | 1,086 | $ | 900 | $ | 457 | $ | 896 | $ | 483 | ||||||||||||
| Additions | 775 | 1,758 | 159 | |||||||||||||||||||||
Additions (Reductions) | 108 | (408 | ) | 473 | ||||||||||||||||||||
| Deductions | (1,062 | ) | (1,934 | ) | 27 | (73 | ) | (31 | ) | (60 | ) | |||||||||||||
| Ending balance | $ | 623 | $ | 910 | $ | 1,086 | $ | 492 | $ | 457 | $ | 896 | ||||||||||||
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. Changes in customer allowances for advertising subsidies, volume rebates and catalog allowances were as follows:
| In Thousands | 2017 | 2016 | 2015 | 2022 | 2021 | 2020 | ||||||||||||||||||
| Beginning balance | $ | 2,777 | $ | 2,151 | $ | 2,155 | $ | 2,340 | $ | 2,296 | $ | 1,292 | ||||||||||||
| Additions | 6,608 | 5,778 | 5,312 | 11,627 | 12,930 | 11,940 | ||||||||||||||||||
| Deductions | (6,028 | ) | (5,152 | ) | (5,316 | ) | (12,326 | ) | (12,886 | ) | (10,936 | ) | ||||||||||||
| Ending balance | $ | 3,357 | $ | 2,777 | $ | 2,151 | $ | 1,641 | $ | 2,340 | $ | 2,296 | ||||||||||||
Note 3 — Accrued Liabilities
Accrued liabilities consist of the following:
| In Thousands | 2017 | 2016 | 2022 | 2021 | ||||||||||||
| Employee compensation | $ | 2,813 | $ | 2,590 | $ | 3,647 | $ | 5,573 | ||||||||
| Customer related allowances and accruals | 6,324 | 5,749 | ||||||||||||||
Customer co-op and volume allowances | 1,641 | 2,340 | ||||||||||||||
Customer return accruals and other allowances | 4,225 | 6,435 | ||||||||||||||
| Other accrued items | 4,860 | 4,453 | 11,807 | 10,037 | ||||||||||||
| $ | 13,997 | $ | 12,792 | $ | 21,320 | $ | 24,385 | |||||||||
Note 4 — 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 December 31, 2022, the Company has not entered into any lease arrangements classified as a finance lease.
We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, current operating lease liabilities and operating lease liabilities on our consolidated balance sheet. The Company has elected an accounting policy to not recognize short-term leases warehouse and office space under non-cancelable operating(one year or less) on the balance sheet. The Company also elected the package of practical expedients which applies to leases that expire at various dates through 2020. Termscommenced 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, including renewals, taxes, utilities,the lease classification for any existing leases and maintenance, vary by lease. Total rental expense included in the results of operations relating to all leases was $1.0 million in 2017, $0.9 million in 2016, and $0.9 million in 2015.initial direct costs for any existing leases.
AtROU 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:
All Amounts in Thousands | Twelve Months Ended December 31, 2022 | Twelve Months Ended December 25, 2021 | ||||||
| Lease Expense | ||||||||
Operating Lease Cost | $ | 1,481 | $ | 1,489 | ||||
Short-term Lease Cost | 2,587 | 3,019 | ||||||
Variable Lease Cost | 502 | 378 | ||||||
Total Operating Lease Cost | $ | 4,570 | $ | 4,886 | ||||
Operating Lease – Operating Cash Flows | $ | 860 | $ | 1,347 | ||||
New ROU Assets – Operating Leases (non-cash) | $ | 8,084 | $ | 2,347 | ||||
Other information about lease amounts recognized in our consolidated financial statements is summarized as follows:
Period Ended December 31, 2022 | Period Ended December 25, 2021 | |||||||
Weighted Average Remaining Lease Term – Operating Leases (in years) | 8.98 | 3.97 | ||||||
Weighted Average Discount Rate – Operating Leases | 5.06 | % | 5.00 | % | ||||
Future minimum lease payments under non-cancellable leases as of December 30, 2017, minimum rental payments for warehouse and office space under non-cancelable leases with terms of more than one year31, 2022 were as follows:
| In Thousands | Amount | |||
| 2018 | $ | 498 | ||
| 2019 | 304 | |||
| 2020 | 84 | |||
| 2021 | — | |||
| Thereafter | — | |||
| $ | 886 | |||
All Amounts in Thousands | ||||
Year 1 | $ | 1,454 | ||
Year 2 | 1,402 | |||
Year 3 | 1,367 | |||
Year 4 | 1,323 | |||
Year 5 | 1,237 | |||
Thereafter | 5,270 | |||
Total future minimum lease payments | 12,053 | |||
Less imputed interest | (2,419 | ) | ||
Total | $ | 9,634 | ||
| Reported as of December 31, 2022 | ||||
Current operating lease liabilities | 993 | |||
Long-term operating lease liabilities | 8,641 | |||
Total | $ | 9,634 |
Note 5 — Acquired Intangible Assets and Goodwill
The carrying basis and accumulated amortization of recognized intangible assets are summarized in the following table:
| 2017 | 2016 | 2022 | 2021 | |||||||||||||||||||||||||||||
| In Thousands | Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | ||||||||||||||||||||||||
| Patents | $ | 24,515 | $ | 23,322 | $ | 24,515 | $ | 23,068 | 24,715 | 24,270 | 24,715 | 24,068 | ||||||||||||||||||||
| Non-compete agreements | 2,749 | 2,545 | 2,749 | 2,377 | 2,749 | 2,749 | 2,749 | 2,749 | ||||||||||||||||||||||||
| Customer list | 13,913 | 3,403 | 13,703 | 2,247 | 22,017 | 9,783 | 18,017 | 8,100 | ||||||||||||||||||||||||
| Trademarks | 7,905 | 121 | 7,703 | 121 | 18,636 | 802 | 9,736 | 266 | ||||||||||||||||||||||||
Developed technology | 475 | 396 | 475 | 301 | ||||||||||||||||||||||||||||
License agreements | 700 | 172 | 700 | 130 | ||||||||||||||||||||||||||||
| $ | 49,082 | $ | 29,391 | $ | 48,670 | $ | 27,813 | 69,292 | 38,172 | 56,392 | 35,614 | |||||||||||||||||||||
Amortization expense was $1.6$2.6 million, $2.3$1.9 million and $2.9$1.5 million for 2017, 20162022, 2021 and 2015,2020, respectively.
Estimated future amortization expense is summarized in the following table:
| In Thousands | 2018 | 2019 | 2020 | 2021 | 2022 | Thereafter | ||||||||||||||||||
| Sporting Goods | $ | 1,379 | $ | 1,279 | $ | 1,234 | $ | 1,188 | $ | 1,182 | $ | 5,645 | ||||||||||||
All Amounts in Thousands | ||||
2023 | $ | 2,480 | ||
2024 | 2,356 | |||
2025 | 2,307 | |||
2026 | 2,259 | |||
2027 | 2,173 | |||
Thereafter | 11,761 | |||
Subtotal | 23,336 | |||
Indefinite-lived intangible asset balance | 7,784 | |||
Total | $ | 31,120 |
All goodwill is allocated to the operating segment of the business. The changes in the carrying amount of goodwill were:
| In Thousands | Sporting Goods | Sporting Goods | ||||||
| Balance at December 26, 2015 | $ | 20,047 | ||||||
Balance at December 26, 2020 | $ | 32,695 | ||||||
| Acquisition | 1,409 | - | ||||||
| Balance at December 31, 2016 | $ | 21,456 | ||||||
Balance at December 25, 2021 | $ | 32,695 | ||||||
| Acquisition | 92 | 9,631 | ||||||
| Balance at December 30, 2017 | $ | 21,548 | ||||||
Balance at December 31, 2022 | $ | 42,326 | ||||||
The Company reviews goodwill for impairment annually and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable, in accordance with guidance in FASB ASC 350,Intangibles – Goodwill and Other. A qualitative assessment is first performed to determine if the fair value of the reporting unit is "more“more likely than not"not” less than the carrying value. If so, we proceed to step one of the two-step goodwill impairment test,a quantitative assessment, in which the fair value of the reporting unit is compared to its carrying value. If not, then performance of the second step of the goodwill impairment test is not necessary. If the carrying value of goodwill exceeds the implied estimated fair value, calculated in the second step, an impairment charge to current operations is recorded to reduce the carrying value to the implied estimated fair value.
The Company has a 50% interest in a joint venture, Stiga Sports AB (Stiga). The joint venture is accounted for under the equity method of accounting. Stiga, located in Sweden, is a global sporting goods company producing table tennis equipment, snow sleds and game products. Financial information for Stiga reflected in the table below has been translated from local currency to U.S. dollars using exchange rates in effect at the respective year-end for balance sheet amounts and using average exchange rates for income statement amounts. Certain differences exist between U.S. GAAP and local GAAP in Sweden, and the impact of these differences is not reflected in the summarized information reflected in the table below. The most significant difference relates to the accounting for goodwill for Stiga which is amortized over eight years in Sweden but is not amortized for U.S. GAAP reporting purposes. The effect on Stiga’s net assets resulting from the amortization of goodwill for the years ended 2017 and 2016 are addbacks of $10.9 million and $9.8 million, respectively. These net differences are comprised of cumulative goodwill adjustments of $15.2 million offset by the related cumulative tax effect of $4.3 million as of December 30, 2017 and cumulative goodwill adjustments of $13.7 million offset by the related cumulative tax effect of $3.9 million as of December 31, 2016. The income statement impact of these goodwill and tax adjustments and other individually insignificant U.S. GAAP adjustments for the years ended December 30, 2017, December 31, 2016, and December 26, 2015 are to increase total Stiga net income by approximately zero, zero, and $0.1 million, respectively. The Company’s 50% portion of net income for Stiga for the years ended December 30, 2017, December 31, 2016, and December 26, 2015 are $1.6 million, $1.7 million, and $3.0 million, respectively. Additionally, for each of the years ended December 30, 2017, December 31, 2016 and December 26, 2015, the Company paid royalties to Stiga in the amount of $0.4 million.
In accordance with Rule 4-08(g) of Regulation S-X, summarized financial information for Stiga Sports AB balance sheets as of December 31, 2017 and 2016, and statements of operations for the years ended December 31, 2017, 2016 and 2015 is as follows:
| In Thousands | 2017 | 2016 | ||||||
| Current assets | $ | 30,623 | $ | 28,322 | ||||
| Non-current assets | 10,854 | 9,379 | ||||||
| Total assets | 41,477 | 37,701 | ||||||
| Current liabilities | 6,897 | 4,847 | ||||||
| Non-current liabilities | 5,462 | 5,133 | ||||||
| Total liabilities | 12,359 | 9,980 | ||||||
| Net assets | $ | 29,118 | $ | 27,721 | ||||
| 2017 | 2016 | 2015 | ||||||||||
| Net sales | $ | 46,296 | $ | 42,887 | $ | 45,688 | ||||||
| Gross profit | 21,427 | 19,642 | 22,122 | |||||||||
| Net income | 3,268 | 3,344 | 5,843 | |||||||||
Note 6 — Borrowings
On January 21, 2016,2019, the Company entered into a Secondan Amended and Restated Credit Agreement (“2019 Restated Credit Agreement”) among the Company and its wholly owned subsidiary, Indian Industries, Inc. (“Indian”), each of their domestic subsidiaries, and JPMorgan Chase Bank, N.A., as Administrative Agent and as Lender (the “Lender”). Under the terms of the 2019 Restated Credit Agreement, the Lender made available to the Company a senior revolving credit facility with maximum availability of $50.0 million having a maturity date of January 31, 2022. The 2019 Restated Credit Agreement also allowed Escalade to request the issuance of letters of credit of up to $5.0 million.
On December 14, 2020, the Company entered into the Third Amendment dated as of December 14, 2020 (the “Third Amendment”) to the 2019 Restated Credit Agreement. Under the terms of the Third Amendment, the maximum availability under the senior revolving credit facility increased to $75.0 million and the maturity date was extended to December 14, 2023. Other significant changes reflected in the Third Amendment included: increases in borrowing base availability if the Company’s funded debt to EBITDA ratio is less than 1.75 to 1:00; increasing to $30.0 million the total consideration that the Company may use for acquisitions without obtaining the Lender’s consent, as long as no event of default exists; resetting the maximum authorized stock repurchases to $15.0 million for the period commencing upon entry into the Third Amendment; increasing the interest rate on borrowings by twenty five basis points; increasing the unused facility fee by five basis points; and adding specific provisions and procedures for replacement of LIBOR if and when LIBOR would no longer be the benchmark for determining interest rates.
On July 7, 2021, the Company entered into the Fourth Amendment dated as of July 7, 2021 (the “Fourth Amendment”) to the 2019 Restated Credit Agreement. Under the terms of the Fourth Amendment, the Lender extended a $50.0 million term loan to the Company and reduced the maximum availability under the senior revolving credit facility from $75.0 million to $50.0 million. The proceeds of the term loan were used to pay down the Company’s then-outstanding indebtedness under the revolving credit facility, with the balance of the term loan proceeds being available for general working capital purposes. The maturity date of the term loan was July 7, 2026 and the maturity date of the revolving credit facility likewise was extended to July 7, 2026.
On January 21, 2022, the Company entered into an Amended and Restated Credit Agreement (“2022 Restated Credit Agreement”) with its issuing bank, JP Morgan Chase Bank, N.A. (“Chase”), and the other lenders identified in the 2022 Restated Credit Agreement (collectively, the “Lender”“Lenders”). Under the terms of the 2022 Restated Credit Agreement, the Lender hasOld National Bank was added as a Lender. The Lenders made available to the Company a senior revolving credit facility in anwith increased maximum amountavailability of $65.0 million (the “Revolving Facility”), up from $50.0 million, plus an accordion feature that would allow borrowings up to $35.0$90.0 million under the Revolving Facility subject to certain terms and a term loan in an increased principal amount of $7.5 million.conditions. The maturity date of the revolving credit facility was extended to January 21, 20192027. 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 ofdate for the term loan facility was extended to January 21, 2021.2027.
The existing term loan principalIn addition to the increased borrowing amount was increased to $7.5 million and remains outstanding. Theextended maturity date, has been extended to January 21, 2021. As amended, the Company is required to repay the outstanding principal balance of the term loan, including all accrued and unpaid interest thereon, on January 21, 2021. The Company is required to make repayments of the principal balance of the term loan in equal installments of $313 thousand per calendar quarter, with interest accrued thereon. Principal amounts repaid in respect of the term loan may not be re-borrowed. The credit facility and term debt are secured by substantially all assets of the Company.
The2022 Restated Credit Agreement allows Escaladeprovided 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 request the issuancefixed charge coverage ratio.
On July 18, 2022, the Company entered into the First Amendment (the “First Amendment”) to the 2022 Restated Credit Agreement.
Under the terms of lettersthe First Amendment, the Lenders 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 (the “Second Amendment”) to the 2022 Restated Credit Agreement
Under the terms of the Second Amendment, the Lenders 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 $5,000,000. $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.
Each loan other than a Eurodollar Borrowing shallwill bear interest atbased on the Alternate Base Rate plus the Applicable Base Rate. Loans comprising each Eurodollar Borrowing shall bear interest at the Adjusted LIBO Rateapplicable SOFR rate for the interest period in effect plus the Applicable Rate. Applicable Rate meansFrom October 26, 2022 up to and including the fiscal quarter ending June 30, 2023, the applicable rate per annum is set forth below in Category 1. After the fiscal quarter ending June 30, 2023, the Applicable Rate shall be determined as of the end of each quarter based upon Escalade’s Funded Debt to Adjusted Ratio as of the most recent determination date:
| Funded Debt to Adjusted EBITDA Ratio | Revolving Eurodollar Borrowing | Term Eurodollar Borrowing | ABR Revolving Borrowing | ABR Term Borrowing | Letter of Credit Fee | Commitment Fee | ||||||||||||||||||
| Category 1 | 2.50 | % | 2.75 | % | 0.50 | % | 0.75 | % | 2.50 | % | 0.45 | % | ||||||||||||
| Greater than or equal to 2.50 to 1.0 | ||||||||||||||||||||||||
| Category 2 | 2.25 | % | 2.50 | % | 0.25 | % | 0.50 | % | 2.25 | % | 0.40 | % | ||||||||||||
| Greater than or equal to 2.25 to 1.0 but less than 2.50 to 1.0 | ||||||||||||||||||||||||
| Category 3 | 2.00 | % | 2.25 | % | 0.00 | % | 0.25 | % | 2.00 | % | 0.35 | % | ||||||||||||
| Greater than or equal to 2.00 to 1.0 but less than 2.50 to 1.0 | ||||||||||||||||||||||||
| Category 4 | 1.75 | % | 2.00 | % | (0.25 | %) | 0.00 | % | 1.75 | % | 0.30 | % | ||||||||||||
| Greater than or equal to 1.75 to 1.0 but less than 2.00 to 1.0 | ||||||||||||||||||||||||
| Category 5 | 1.50 | % | 1.75 | % | (0.50 | %) | (0.25 | %) | 1.50 | % | 0.30 | % | ||||||||||||
| Less than 1.75 to 1.0 | ||||||||||||||||||||||||
Funded Debt to EBITDA Ratio | Revolving Commitment ABR Spread | Revolving Commitment Term Benchmark Spread | Letter of Credit Fee | Commitment Fee Rate | ||||||||||||
Category 1 Greater than or equal to 3.00 to 1.0 | 0.75 | % | 2.50 | % | 2.50 | % | 0.35 | % | ||||||||
Category 2 Greater than or equal to 2.50 to 1.0 but less than 3.00 to 1.0 | 0.25 | % | 2.00 | % | 2.00 | % | 0.30 | % | ||||||||
Category 3 Greater than or equal to 1.50 to 1.0 but less than 2.50 to 1.0 | -0- | 1.75 | % | 1.75 | % | 0.25 | % | |||||||||
Category 4 Less than 1.50 to 1.0 | (0.25% | ) | 1.50 | % | 1.50 | % | 0.20 | % | ||||||||
The Applicable Rate shall beis determined as of the end of each quarter based upon the Company’s annual or quarterly consolidated financial statements and shall beis effective during the period commencing the date of delivery to the agent.
Indebtedness 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 and Indian’s domestic subsidiaries and substantially all of the assets of the Company. In addition, eachCompany (excluding real estate). Each direct and indirect domestic subsidiary of Escalade has unconditionally guaranteed all of the indebtedness of Escalade arising under the Restated Credit AgreementCompany and Indian has secured its guaranty of indebtedness incurred under the revolving facility with a first priority security interest and lien on all of itssuch subsidiary’s assets. The Pledgeobligations, guarantees, liens and Security Agreement dated April 30, 2009 by and between Escalade and Chase, and each Pledge and Security Agreement dated April 30, 2009 by and between each such Escalade subsidiary and Chase continue in full force and effect, as amendedother interests granted by the Master Amendment to PledgeCompany, Indian, and Security Agreements dated May 31, 2010 entered into by Chase, Escalade and each such subsidiary. The Unlimited Continuing Guaranty dated April 30, 2009 applicable to each of Escalade’stheir domestic subsidiaries continues in full force and effect without change.effect.
During the first quarter 2013, the Company entered into a seller-financed agreement for the purchase of its formerly leased real estate in Mexico. The agreement required sixteen quarterly installments of $156 thousand with a maturity date of November 30, 2016. The outstanding principal balance as of December 31, 2016 was zero.
Long-Term Debt
Short-Term Debt
Short-term debt at fiscal year-ends was as follows:
| In Thousands | 2017 | 2016 | ||||||
| Short-term debt reclassified from long-term debt | $ | 1,250 | $ | 1,250 | ||||
| $ | 1,250 | $ | 1,250 | |||||
The weighted average interest rate on short-term debt outstanding at December 30, 2017 and December 31, 2016 was 3.19% and 2.56%, respectively.
Long-Term Debt
Long-term debt at fiscal year-ends was as follows:
| In Thousands | 2017 | 2016 | ||||||
| Senior secured revolving credit facility of $35.0 million with a maturity of January 21, 2019. The interest rate at December 30, 2017 was 3.227%. | $ | 18,121 | $ | 19,189 | ||||
| Term loan of $7.5 million with a maturity date of January 21, 2021. The interest rate at December 30, 2017, was 3.188%. | 5,000 | 6,250 | ||||||
| 23,121 | 25,439 | |||||||
| Portion classified as short-term debt | (1,250 | ) | (1,250 | ) | ||||
| $ | 21,871 | $ | 24,189 | |||||
In Thousands | 2022 | 2021 | ||||||
Senior secured revolving credit facility of $90.0 million with a maturity of January 21, 2027. The interest rate at December 31, 2022 was 6.92% and 3.00% at December 25, 2021. | $ | 55,000 | $ | 10,515 | ||||
Term loan of $50.0 million with a maturity date of January 21, 2027. The interest rate at December 31, 2022 and December 25, 2021, was 2.97%. | 39,881 | 47,024 | ||||||
| 94,881 | 57,539 | |||||||
Current portion of long-term debt | (7,143 | ) | (7,143 | ) | ||||
| $ | 87,738 | $ | 50,396 | |||||
MaturitiesThe Company makes monthly principal payments under the Term loan of long-term debt outstanding at December 30, 2017 are as follows: $1.3 million in 2018, $19.4 million in 2019, $1.2 million in 2020 and $1.2 million in 2021.$595 thousand.
While the revolving credit facility has a due date within one year of the issuance of these financial statements, the Company utilizes the financing for long-term operating purposes and does not have liquid funds available to repay the balance at its maturity date. Management intends to renew the revolving credit facility on comparable terms at or near the maturity date and believes it is probable such renewal will be successful.Note 7 — Earnings Per Share
The shares used in the computation of the Company’s basic and diluted earnings per common share are as follows:
| In Thousands | 2017 | 2016 | 2015 | |||||||||
| Weighted average common shares outstanding | 14,352 | 14,264 | 14,088 | |||||||||
| Dilutive effect of stock options and restricted stock units | 39 | 53 | 150 | |||||||||
| Weighted average common shares outstanding, assuming dilution | 14,391 | 14,317 | 14,238 | |||||||||
| Number of anti-dilutive stock options and unvested restricted stock units | 58 | 49 | 4 | |||||||||
In Thousands | 2022 | 2021 | 2020 | |||||||||
Weighted average common shares outstanding | 13,572 | 13,747 | 14,096 | |||||||||
Dilutive effect of stock options and restricted stock units | 117 | 119 | 129 | |||||||||
Weighted average common shares outstanding, assuming dilution | 13,689 | 13,866 | 14,225 | |||||||||
Number of anti-dilutive stock options and unvested restricted stock units | - | - | 58 | |||||||||
Weighted average common shares outstanding, assuming dilution, includes the incremental shares that would be issued upon the assumed exercise of stock options outstanding.
Note 8 — Employee Benefit Plans
The Company has an employee profit-sharing salary reduction plan, pursuant to the provisions of Section 401(k) of the Internal Revenue Code, for all employees. The Company'sCompany’s contribution is a matching percentage of the employee contribution as determined by the Board of Directors annually. The Company'sCompany’s expense for the plan was $695$1,179 thousand, $626$1,041 thousand and $600$841 thousand for 2017, 20162022, 2021 and 2015,2020, respectively.
Note 9 — Stock Compensation Plans
In May 2017, Shareholders approved the Escalade, Incorporated 2017 Incentive Plan (2017 Incentive Plan), which is an incentive plan for key employees, directors and consultants with various equity-based incentives as described in the plan document. The 2017 Incentive Plan is a replacement for the 2007 Incentive Plan, which expired at the end of April 2017. All options issued and outstanding under the expired plans will remain in effect until exercised, expired or forfeited.
The 2017 Incentive Plan is administered by the Board of Directors or a committee thereof, which is authorized to determine, among other things, the key employees, directors or consultants who will receive awards under the plan, the amount and type of award, exercise prices or performance criteria, if applicable, and vesting schedules. Under the original terms of the plan and subject to various restrictions contained in the plan document, the total number of shares of common stock which may be issued pursuant to awards under the Plan may not exceed 1,661,598.
Restricted Stock UnitsAwards
InDuring 2022, and pursuant to the 2017 Incentive Plan, in lieu of cash payments of director fees, the Company awarded 14,250to certain directors 3,886 shares of common stock. In 2022, the Company awarded 20,000 restricted stock units to directors and 40,782196,254 restricted stock units to employees. The restricted stock units awarded to directors time vest over two years (one-half(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 2017All of the 2022 restricted stock units awarded to employees time vest over fourthree years (one-third(one-third one year from grant, one-third two years from grant date, and one-third three years from grant date and one-third four years from grant date)grant) provided that the employee is still employed by the Company and that the performance criteria related to the market price of the Company’s stock is satisfied. The criteria is for any 30 consecutive trading days on the NASDAQ Stock Market (or such other principal securities exchange on which the Company’s shares of common stock are then traded) during the period beginning on the grant date and ending on the fourth anniversary thereof, the cumulative average Volume Weighted Average Price per share is at least 15% higher than the closing price per share on the grant date plus any incremental dividends paid above the current quarterly dividend rate of $0.115 per share by thevesting date. The Company during such four year period.has elected to account for forfeitures when they actually occur.
A summary of restricted stock unitawards activity is as follows:
| Number of Shares | Weighted Average Grant Date Fair Value | Number of Shares | Weighted Average Grant Date Fair Value | |||||||||||||
| Non-vested stock units as of December 26, 2015 | 75,900 | $ | 12.52 | |||||||||||||
Non-vested stock units as of December 26, 2020 | 244,076 | $ | 8.98 | |||||||||||||
| Granted | 47,250 | 11.13 | 50,615 | 20.74 | ||||||||||||
| Vested | (16,003 | ) | 12.28 | (84,887 | ) | 8.98 | ||||||||||
| Forfeited | (24,800 | ) | 12.05 | (55,684 | ) | 7.99 | ||||||||||
| Non-vested stock units as of December 31, 2016 | 82,347 | $ | 11.91 | |||||||||||||
Non-vested stock units as of December 25, 2021 | 154,120 | $ | 13.19 | |||||||||||||
| Granted | 55,032 | 12.26 | 216,254 | 14.15 | ||||||||||||
| Vested | (25,819 | ) | 12.81 | (97,189 | ) | 12.16 | ||||||||||
| Forfeited | (8,484 | ) | 11.40 | (21,156 | ) | 14.10 | ||||||||||
| Non-vested stock units as of December 30, 2017 | 103,076 | $ | 11.92 | |||||||||||||
Non-vested stock units as of December 31, 2022 | 252,029 | $ | 14.33 | |||||||||||||
When vesting is dependent on certain market criteria, the fair value of restricted stock units is determined by the use of Monte Carlo techniques. The market price of the Company’s stock on the grant date is used to value restricted stock units where vesting is not contingent on market criteria. In 2017, 2016,2022, 2021, and 20152020 the Company recognized $504$1,974 thousand, $342,$902 thousand, and $542$1,011 thousand respectively in compensation expense related to restricted stock units and as of December 30, 201731, 2022 and December 31, 2016,25, 2021, there was $471$1,415 thousand and $397$629 thousand respectively, of unrecognized compensation expense related to restricted stock units.
Stock Options
Total compensation expense recorded in the statements of operations for 2017, 20162022, 2021 and 20152020 relating to stock options was $18 thousand, $56 thousandzero, zero and $177$5 thousand, respectively. As of December 30, 2017, there were $26 thousand of total unrecognized compensation costs related to stock options. These costs are expected to be recognized over a weighted average period of 3.2 years.
During 2016,the Company awarded 20,000 stock options to an employee. The stock options awarded will vest over five years (one-third three years from the grant date, one-third four years from the grant date and one-third five years from the grant date). The stock options have an exercise price 15% higher than the closing price of a share of Escalade common stock on the grant date and are subject to forfeiture if on the vesting date the employee is no longer employed.No stock options were awarded during 20172022, 2021 or 2015.2020.
The following table summarizes option activity for each of the three years ended 2017:2022:
| Incentive Stock Options | Director Stock Options | |||||||||||||||
| Granted | Outstanding | Granted | Outstanding | |||||||||||||
| 2017 | — | 29,250 | — | 15,000 | ||||||||||||
| 2016 | 20,000 | 57,375 | — | 15,000 | ||||||||||||
| 2015 | — | 172,625 | — | 15,000 | ||||||||||||
The fair value of each option grant award is estimated on the grant date using the Black-Scholes-Merton option valuation model using the following assumptions:
| 2017 | 2016 | 2015 | ||||||||||
| Risk-free interest rates | — | 1.06 | % | — | ||||||||
| Dividend yields | — | 2.73 | % | — | ||||||||
| Volatility factors of expected market price of common stock | — | 35.60 | % | — | ||||||||
| Weighted average expected life of the options | — | 1-5 years | — | |||||||||
Incentive Stock Options | Director Stock Options | |||||||||||||||
Granted | Outstanding | Granted | Outstanding | |||||||||||||
| 2022 | - | - | - | - | ||||||||||||
| 2021 | - | - | - | - | ||||||||||||
| 2020 | - | 10,000 | - | - | ||||||||||||
The following table summarizes stock option transactions for the three years ended 2017:2022:
| 2017 | 2016 | 2015 | 2022 | 2021 | 2020 | |||||||||||||||||||||||||||||||||||||||||||
| Shares | Option Price | Shares | Option Price | Shares | Option Price | Shares | Option Price | Shares | Option Price | Shares | Option Price | |||||||||||||||||||||||||||||||||||||
| Outstanding at beginning of year | 72,375 | $5.28 to $14.39 | 187,625 | $5.28 to $11.86 | 344,375 | $2.56 to $11.86 | - | - | 10,000 | $ | 14.39 | 20,000 | $ | 14.39 | ||||||||||||||||||||||||||||||||||
| Issued during year | — | — | 20,000 | $ | 14.39 | — | — | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||||
| Canceled or expired | — | (39,250 | ) | (500 | ) | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||
| Exercised during year | (28,125 | ) | $5.28 to $5.85 | (96,000 | ) | $5.28 to $6.07 | (156,250 | ) | $2.56 to $11.86 | - | - | (10,000 | ) | $ | 14.39 | (10,000 | ) | $ | 14.39 | |||||||||||||||||||||||||||||
| Outstanding at end of year | 44,250 | $5.85 to $14.39 | 72,375 | $5.28 to $14.39 | 187,625 | $5.28 to $11.86 | - | - | - | - | 10,000 | $ | 14.39 | |||||||||||||||||||||||||||||||||||
| Exercisable at end of year | 24,250 | 41,125 | 133,250 | - | - | 10,000 | ||||||||||||||||||||||||||||||||||||||||||
| Weighted-average fair value of options granted during the year | — | $ | 2.52 | — | - | - | - | |||||||||||||||||||||||||||||||||||||||||
The total intrinsic value of options exercised was $0.2 million, $0.7 millionzero, zero and $1.6 million for 2017, 2016$73 thousand 2022, 2021 and 2015,2020, respectively.
The following table summarizes information aboutThere were no stock options outstanding at December 30, 2017:31, 2022.
| Options Outstanding | Options Exercisable | |||||||||||||||||||||
| Range of Exercise Prices | Number of Shares | Weighted-Average Remaining Contractual Life | Weighted-Average Exercise Price | Number of Shares | Weighted-Average Exercise Price | |||||||||||||||||
| $ | 5.85 | 9,250 | 0.2 years | $ | 5.85 | 9,250 | $ | 5.85 | ||||||||||||||
| $ | 11.86 | 15,000 | 1.2 years | $ | 11.86 | 15,000 | $ | 11.86 | ||||||||||||||
| $ | 14.39 | 20,000 | 4.2 years | $ | 14.39 | — | — | |||||||||||||||
| 44,250 | 24,250 | |||||||||||||||||||||
During the year ended December 30, 2017, the following activity occurred under the Company’s stock option plan:
| Number of Options | Weighted Average Grant Date Fair Value | |||||||
| Nonvested balance, beginning of year | 31,250 | $ | 2.41 | |||||
| Granted | — | — | ||||||
| Vested | (11,250 | ) | $ | 2.21 | ||||
| Forfeited | — | — | ||||||
| Nonvested balance, end of year | 20,000 | $ | 2.52 | |||||
Note 10 — Provision for Taxes
The components of other comprehensive loss were as follows:
| In Thousands | 2017 | 2016 | 2015 | |||||||||
| Change in foreign currency translation adjustment before reclassifications | $ | 1,670 | $ | (1,102 | ) | $ | (1,214 | ) | ||||
The components of accumulated other comprehensive loss, net of tax, were as follows:
| In Thousands | 2017 | 2016 | 2015 | |||||||||
| Foreign currency translation adjustment | $ | (2,610 | ) | $ | (4,280 | ) | $ | (3,178 | ) | |||
Income before taxes and the provision for taxes consisted of the following:
| In Thousands | 2017 | 2016 | 2015 | 2022 | 2021 | 2020 | ||||||||||||||||||
| Income before taxes: | $ | 15,517 | $ | 15,542 | $ | 15,674 | $ | 22,614 | $ | 30,549 | $ | 32,922 | ||||||||||||
| Provision for taxes: | ||||||||||||||||||||||||
| Provision (benefit) for taxes: | ||||||||||||||||||||||||
| Current | ||||||||||||||||||||||||
| Federal | $ | 4,191 | $ | 4,060 | $ | 1,670 | $ | 4,149 | $ | 4,819 | $ | 5,479 | ||||||||||||
| State | 212 | 363 | 237 | 720 | 758 | 854 | ||||||||||||||||||
| 4,403 | 4,423 | 1,907 | 4,869 | 5,577 | 6,333 | |||||||||||||||||||
| Deferred | ||||||||||||||||||||||||
| Federal | (2,441 | ) | 1,453 | 1,909 | (502 | ) | 408 | 665 | ||||||||||||||||
| State | (506 | ) | (1,827 | ) | 252 | 258 | 159 | (10 | ) | |||||||||||||||
| (2,947 | ) | (374 | ) | 2,161 | (244 | ) | 567 | 655 | ||||||||||||||||
| $ | 1,456 | $ | 4,049 | $ | 4,068 | $ | 4,625 | $ | 6,144 | $ | 6,988 | |||||||||||||
The provision for income taxes was computed based on financial statement income. A reconciliation of the provision for income taxes to the amount computed using the statutory rate follows:
| In Thousands | 2017 | 2016 | 2015 | 2022 | 2021 | 2020 | ||||||||||||||||||
| Income tax at statutory rate | $ | 5,431 | $ | 5,439 | $ | 5,486 | $ | 4,749 | $ | 6,415 | $ | 6,914 | ||||||||||||
| Increase (decrease) in income tax resulting from | ||||||||||||||||||||||||
| State tax expense, net of federal effect | (191 | ) | 194 | 318 | 773 | 724 | 668 | |||||||||||||||||
| Federal true-ups | 193 | 8 | (38 | ) | (49 | ) | (38 | ) | (103 | ) | ||||||||||||||
| Federal tax credits | (242 | ) | (189 | ) | (802 | ) | (413 | ) | (251 | ) | (114 | ) | ||||||||||||
| Effect of foreign tax rates | (399 | ) | (443 | ) | (474 | ) | ||||||||||||||||||
| Valuation allowances (state and foreign) | (148 | ) | 19 | — | ||||||||||||||||||||
| Captive insurance earnings | (128 | ) | 311 | (361 | ) | (478 | ) | (456 | ) | (443 | ) | |||||||||||||
| Incentive stock options | (22 | ) | 20 | 57 | (18 | ) | (214 | ) | (4 | ) | ||||||||||||||
| Deferred state rate adjustments | — | (1,194 | ) | — | ||||||||||||||||||||
| Tax Cuts & Jobs Act of 2017 | (2,986 | ) | — | — | ||||||||||||||||||||
| Other | (52 | ) | (116 | ) | (118 | ) | 61 | (36 | ) | 70 | ||||||||||||||
| Recorded provision for income taxes | $ | 1,456 | $ | 4,049 | $ | 4,068 | $ | 4,625 | $ | 6,144 | $ | 6,988 | ||||||||||||
The provision for income taxes was computed based on financial statement income. In accordance with FASB ASC 740, the Company does not have anyhas an uncertain tax positionsposition as of and for the years ended December 30, 201731, 2022 and December 31, 2016.
25, 2021. Interest costs and penalties related to income taxes are classified as interest expense and selling, general and administrative costs, respectively in the Company’s financial statements. The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, and multiple state and foreign jurisdictions. The Company is subject to future examinations by federal, state and other tax authorities for all years after 2013.2018.
On December 22, 2017, the Tax Cuts and Jobs ActThe Company has state, net of 2017 (the “2017 U.S. Tax Reforms”) was signed into law, making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporatefederal benefit, research tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transitioncredit carryforwards of U.S. international taxation from a worldwide tax system to a territorial system and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings$351 thousand as of December 31, 2017.2022. The Companystate research tax credit carryforwards begin to expire in 2024. A valuation allowance has calculated its best estimatebeen established in the amount of the impact$351 thousand as of the 2017 U.S. Tax Reforms and as a result has recorded $3.0 million of income tax benefits during the year ended December 30, 2017. The provisional benefit31, 2022 related to the remeasurementstate tax credit carryforwards, leaving an ending deferred, net of certain deferredfederal benefit, in the amount of zero. The increase in the valuation allowance relates to the decrease in the projected tax assets and liabilitiesliability which would be offset by the credit carryforward. The valuation allowance is based on the rates at which they are expected to reverse in thehistorical results and estimated future was $1.8 million. The provisional expense related to the one-time transition tax on the mandatory deemed repatriation of foreign earnings was $0.6 million, based on cumulative foreign earnings of $22.8 million. The reversalresults of the deferredCompany, as it is the judgment of management not all of these tax liability of unremitted earnings and the corresponding deferred tax asset for foreign tax credits was a net $1.8 million benefit.
On December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118") was issuedcarryforward attributes will be realized before they begin to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the 2017 U.S. Tax Reforms.expire. In accordance with SAB 118,addition, the Company has recognized the provisional tax impacts related to deemed repatriated earnings and the benefit for the revaluation of deferred tax assets and liabilities in its consolidated financial statements for the year ended December 30, 2017. Additional work is necessary to determine the amount of accumulated foreign earnings and the corresponding foreign tax credit. The final impact may differ from these provisional amounts, possibly materially, due to, among other things, issuancecredit carryforwards of additional regulatory guidance, changes in interpretations and assumptions$323 thousand, as of December 31, 2022.
At December 31, 2022, the Company has made,had domestic federal income taxes payable of $158 thousand, domestic state income taxes receivable of $87 thousand, and actionstransition tax payable of $387 thousand recorded. At December 25, 2021, the Company may take as a resulthad domestic federal income taxes receivable of the 2017 U.S. Tax Reforms. Any subsequent adjustment to these amounts will be recorded to current$631 thousand, domestic state income taxes receivable of $108 thousand, and transition tax expense in the quarterpayable of 2018 when the analysis is complete.$387 thousand recorded.
The components of the net deferred tax liabilities are as follows:
| In Thousands | 2017 | 2016 | 2022 | 2021 | ||||||||||||
| Assets | ||||||||||||||||
| Employee benefits | $ | 24 | $ | 39 | ||||||||||||
| Valuation reserves | 869 | 1,782 | $ | 1,167 | $ | 1,248 | ||||||||||
| Property and equipment | (175 | ) | (129 | ) | ||||||||||||
| Stock based compensation | 178 | 224 | 389 | 329 | ||||||||||||
| Federal and state credits | 382 | 287 | 674 | 339 | ||||||||||||
| Net operating loss carry forward | 1 | — | ||||||||||||||
Lease obligation | 2,252 | 515 | ||||||||||||||
Other | 4 | 34 | ||||||||||||||
Capitalized research costs | 605 | - | ||||||||||||||
| Total assets | 1,279 | 2,203 | 5,091 | 2,465 | ||||||||||||
| Liabilities | ||||||||||||||||
| Unrealized equity investment income | — | (2,025 | ) | |||||||||||||
Property and equipment | (1,502 | ) | (1,474 | ) | ||||||||||||
| Goodwill and intangible assets | (3,465 | ) | (4,697 | ) | (5,347 | ) | (4,973 | ) | ||||||||
Lease – right of use asset | (2,127 | ) | (517 | ) | ||||||||||||
| Prepaid insurance | (123 | ) | (228 | ) | (280 | ) | (237 | ) | ||||||||
| Total liabilities | (3,588 | ) | (6,950 | ) | (9,256 | ) | (7,201 | ) | ||||||||
| Valuation Allowance | ||||||||||||||||
| Beginning balance | (411 | ) | (435 | ) | (23 | ) | (27 | ) | ||||||||
| Decrease during period | 251 | 24 | ||||||||||||||
(Increase) Decrease during period | (328 | ) | 4 | |||||||||||||
| Ending balance | (160 | ) | (411 | ) | (351 | ) | (23 | ) | ||||||||
| $ | (2,469 | ) | $ | (5,158 | ) | $ | (4,516 | ) | $ | (4,759 | ) | |||||
DeferredThe following table reconciles the total amounts of unrecognized tax assets (liabilities) are included in the consolidated balance sheets as follows:benefits:
| In Thousands | 2017 | 2016 | ||||||
| Deferred income tax asset - current | $ | — | $ | 1,283 | ||||
| Deferred income tax asset (liability) – long-term | (2,469 | ) | (6,441 | ) | ||||
| $ | (2,469 | ) | $ | (5,158 | ) | |||
In Thousands | 2022 | 2021 | 2020 | |||||||||
Balance at beginning of year | $ | 61 | $ | 61 | $ | - | ||||||
Increases related to prior year tax positions | - | - | - | |||||||||
Decreases related to prior year tax positions | - | - | - | |||||||||
Increases related to current year tax positions | - | - | 61 | |||||||||
Settlements | - | - | - | |||||||||
Closure of tax years | (41 | ) | - | - | ||||||||
Balance at end of year | $ | 20 | $ | 61 | $ | 61 | ||||||
The total amount of unrecognized tax benefits, net of federal income tax benefits, of $16 thousand at December 31, 2022, and $48 thousand at December 25, 2021, that if recognized, would affect the effective tax rate on income from continuing operations.
The Company had no accrued interest and penalties related to taxes, recognized as a liability, as of December 31, 2022.
The Company has utilizedassessed its risk associated with all state net operating losses duringtax return positions and believes its tax reserve estimate reflects its best estimate of the year ended December 30, 2017.deductions and positions it will be able to sustain, or it may be willing to concede as part of a settlement. At this time, the Company does not anticipate any change in its tax reserves in the next twelve months. The Company will continue to monitor the progress and conclusion of all audits and will adjust its estimated liability as necessary.
Note 11 — Operating Segment and Geographic Information
The following table presents certain operatingsegment information.
| In Thousands | 2017 | 2016 | 2015 | 2022 | 2021 | 2020 | ||||||||||||||||||
| Sporting Goods | ||||||||||||||||||||||||
| Net revenue | $ | 177,333 | $ | 171,662 | $ | 159,463 | $ | 313,757 | $ | 313,612 | $ | 273,649 | ||||||||||||
| Operating income | 15,600 | 15,731 | 15,450 | 25,925 | 31,534 | 32,685 | ||||||||||||||||||
| Interest expense (income) | 975 | 802 | (50 | ) | ||||||||||||||||||||
Interest expense | 3,780 | 1,510 | 250 | |||||||||||||||||||||
| Provision for taxes | 6,134 | 6,173 | 6,356 | 6,106 | 8,295 | 8,951 | ||||||||||||||||||
| Net income | 8,626 | 8,774 | 9,151 | 16,117 | 21,892 | 23,625 | ||||||||||||||||||
| Identifiable assets | 130,388 | 125,780 | 116,013 | 286,417 | 241,547 | 211,253 | ||||||||||||||||||
| Depreciation & amortization | 3,910 | 5,244 | 5,218 | 6,063 | 4,835 | 4,016 | ||||||||||||||||||
| Capital expenditures | 2,745 | 2,653 | 5,067 | 2,111 | 9,696 | 5,455 | ||||||||||||||||||
| All Other | ||||||||||||||||||||||||
| Net revenue | — | — | — | - | - | - | ||||||||||||||||||
| Operating loss | (1,000 | ) | (1,148 | ) | (2,632 | ) | ||||||||||||||||||
Operating income | 390 | 362 | 347 | |||||||||||||||||||||
| Interest expense (income) | (171 | ) | 32 | 520 | - | - | - | |||||||||||||||||
| Benefit for taxes | (4,678 | ) | (2,124 | ) | (2,288 | ) | ||||||||||||||||||
Provision (benefit) for taxes | (1,481 | ) | (2,151 | ) | (1,963 | ) | ||||||||||||||||||
| Net income | 5,435 | 2,719 | 2,455 | 1,872 | 2,513 | 2,309 | ||||||||||||||||||
| Identifiable assets | 25,717 | 24,981 | 27,724 | 12,301 | 10,251 | 9,452 | ||||||||||||||||||
| Non-marketable equity investments (equity method) | 20,278 | 19,030 | 19,644 | |||||||||||||||||||||
| Depreciation & amortization | — | — | — | - | - | - | ||||||||||||||||||
| Capital expenditures | — | — | — | - | - | - | ||||||||||||||||||
| Total | ||||||||||||||||||||||||
| Net revenue | 177,333 | 171,662 | 159,463 | 313,757 | 313,612 | 273,649 | ||||||||||||||||||
| Operating income | 14,600 | 14,583 | 12,818 | 26,315 | 31,896 | 33,032 | ||||||||||||||||||
| Interest expense | 804 | 834 | 470 | 3,780 | 1,510 | 250 | ||||||||||||||||||
| Provision for taxes | 1,456 | 4,049 | 4,068 | 4,625 | 6,144 | 6,988 | ||||||||||||||||||
| Net income | 14,061 | 11,493 | 11,606 | 17,989 | 24,405 | 25,934 | ||||||||||||||||||
| Identifiable assets | 156,105 | 150,761 | 143,737 | 298,718 | 251,798 | 220,705 | ||||||||||||||||||
| Non-marketable equity investments (equity method) | 20,278 | 19,030 | 19,644 | |||||||||||||||||||||
| Depreciation & amortization | 3,910 | 5,244 | 5,218 | 6,063 | 4,835 | 4,016 | ||||||||||||||||||
| Capital expenditures | 2,745 | 2,653 | 5,067 | 2,111 | 9,696 | 5,455 | ||||||||||||||||||
Each operating segment is individually managed and has separate financial results that are reviewed by the Company’s management. There were no changes to the composition of segments in 2017.2022. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies.
The Sporting Goods segment consists of home entertainment products such as table tennis tables and accessories; basketball goals; pickleball; pool tables and accessories; outdoor playsets; water sports; soccer and hockey tables; archery equipment and accessories; and fitness, arcade and darting products. Customers include retailers, dealers and wholesalers located throughout North America, Europe and the rest of the world.
All Other consist of general and administrative expenses not specifically related to the operating business segments and includes investment income from equity investments.segments.
Interest expense is allocated to operating segments based on working capital usage and the provision for taxes is allocated based on a combined federal and state statutory rate of 39.4%27.5% adjusted for actual taxes on foreign income. Permanent tax adjustments and timing differences are included in the all other segment.
Identifiable assets are principally those assets used in each segment. The assets in the all other segment are principally cash and cash equivalents; deferred tax assets; and investments.prepaid assets.
The Company had net assets of $14.8 million and $15.8 million located in Mexico as of December 31, 2022 and December 25, 2021, respectively.
During 2017, 20162022, 2021 and 20152020, the Company had one customer Dick’s Sporting Goods, whichthat accounted for approximately 17%23%, 18% 21% and 18%23%, respectively, of the Company’s total consolidated revenues. During 20172022, 2021 and 2016,2020 the Company had another customer Amazon.com, Inc., thatwhich accounted for approximately 18%12%, 11% and 13%, respectively, of the Company’s consolidated revenues. No other customer accounted for 10% or more of consolidated total revenues.
As of December 30, 2017,31, 2022, the Company had approximately 22% and 25%28% of its total accounts receivable with Dick’s Sporting Goods and Amazon.com, Inc., respectively.one customer. As of December 31, 2016,25, 2021, the Company had approximately 22%24%, 17% and 20%10% of its total accounts receivable with Dick’s Sporting Goodsthat same customer and Amazon.com, Inc.,two other customers, respectively.
As of December 30, 2017,31, 2022, approximately 3731 employees of the Company's labor force were covered by a collective bargaining agreement that expires May 1, 2021.on January 31, 2025.
Raw materials for Escalade’s various product lines consist of wood, tempered glass, particle board, standard grades of steel and steel tubing, aluminum, engineering plastics, fiberglass and packaging materials. Escalade relies upon domestic, Mexico, Brazil, and Asian suppliers for these materials and upon various Asian manufacturers for many of its products.
Net sales are attributed to country based on location of customer and are for continuing operations.customer. Net sales by geographic region/country were as follows:
| In Thousands | 2017 | 2016 | 2015 | 2022 | 2021 | 2020 | ||||||||||||||||||
| North America | $ | 175,065 | $ | 168,998 | $ | 156,744 | $ | 307,318 | $ | 309,211 | $ | 270,173 | ||||||||||||
| Europe | 974 | 1,302 | 1,265 | 3,036 | 2,153 | 1,555 | ||||||||||||||||||
| Other | 1,294 | 1,362 | 1,454 | 3,403 | 2,248 | 1,921 | ||||||||||||||||||
| $ | 177,333 | $ | 171,662 | $ | 159,463 | $ | 313,757 | $ | 313,612 | $ | 273,649 | |||||||||||||
Note 12 — Summary of Quarterly Results
In thousands, except per share data (unaudited) | March 19 | July 9 | October 1 | December 31 | ||||||||||||
| 2022 | ||||||||||||||||
Net Sales | $ | 72,380 | $ | 94,337 | $ | 74,904 | $ | 72,136 | ||||||||
Operating Income | 9,023 | 8,189 | 4,220 | 4,883 | ||||||||||||
Net income | 6,654 | 5,673 | 2,958 | 2,704 | ||||||||||||
Basic Earnings Per Share Data: | $ | 0.49 | $ | 0.42 | $ | 0.22 | $ | 0.20 | ||||||||
Diluted Earnings Per Share Data: | $ | 0.49 | $ | 0.42 | $ | 0.22 | $ | 0.20 | ||||||||
Identified assets by geographic region/country were as follows:
| In Thousands | 2017 | 2016 | 2015 | |||||||||
| North America | $ | 156,105 | $ | 150,761 | $ | 143,737 | ||||||
| Europe | — | — | — | |||||||||
| $ | 156,105 | $ | 150,761 | $ | 143,737 | |||||||
In thousands, except per share data (unaudited) | March 20 | July 10 | October 2 | December 25 | ||||||||||||
2021 | ||||||||||||||||
Net Sales | $ | 59,191 | $ | 99,679 | $ | 81,298 | $ | 73,444 | ||||||||
Operating Income | 7,129 | 10,686 | 7,672 | 6,409 | ||||||||||||
Net income | 5,442 | 8,126 | 5,966 | 4,871 | ||||||||||||
Basic Earnings Per Share Data: | $ | 0.39 | $ | 0.59 | $ | 0.44 | $ | 0.36 | ||||||||
Diluted Earnings Per Share Data: | $ | 0.39 | $ | 0.58 | $ | 0.43 | $ | 0.36 | ||||||||
| In thousands, except per share data (unaudited) | March 25 | July 15 | October 7 | December 30 | ||||||||||||
| 2017 | ||||||||||||||||
| Net Sales | $ | 31,866 | $ | 53,921 | $ | 42,861 | $ | 48,685 | ||||||||
| Operating Income | 1,996 | 3,332 | 4,128 | 5,144 | ||||||||||||
| Net income | 1,388 | 2,096 | 3,118 | 7,459 | ||||||||||||
| Basic Earnings Per Share Data: | $ | 0.10 | $ | 0.15 | $ | 0.22 | $ | 0.52 | ||||||||
| Diluted Earnings Per Share Data: | $ | 0.10 | $ | 0.15 | $ | 0.22 | $ | 0.52 | ||||||||
| In thousands, except per share data (unaudited) | March 19 | July 9 | October 1 | December 31 | ||||||||||||
| 2016 | ||||||||||||||||
| Net Sales | $ | 35,520 | $ | 49,822 | $ | 39,657 | $ | 46,663 | ||||||||
| Operating Income | 2,478 | 3,005 | 5,329 | 3,771 | ||||||||||||
| Net income | 1,697 | 2,090 | 4,243 | 3,463 | ||||||||||||
| Basic Earnings Per Share Data: | $ | 0.12 | $ | 0.15 | $ | 0.30 | $ | 0.24 | ||||||||
| Diluted Earnings Per Share Data: | $ | 0.12 | $ | 0.15 | $ | 0.30 | $ | 0.24 | ||||||||
Net income for the quarter ended December 30, 2017, was favorably impacted by approximately $3.0 million of income tax benefit resulting from the 2017 U.S. Tax Reforms more fully described in Note 12.13 — Acquisitions
All of the Company’s acquisitions have been accounted for using the purchase method of accounting.
20172022
During 2017,On January 21, 2022, the Company acquired certaincompleted its acquisition of the assets constituting the Brunswick Billiards business of Life Fitness, LLC. The purchase price of the acquisition was $35.8 million. Acquisition-related costs of $134 thousand were incurred during the year ended December 31, 2022. The acquisition was funded by cash and liabilities through two acquisitions.
Total consideration paid for the acquisitions was $1.5 million.Company’s revolving credit facility. The consideration paid byCompany allocated the company for these acquisitions was allocatedpurchase price to the assets acquired, net of the liabilities assumed, based uponon their estimated fair valuesvalue as of the date of the acquisition.
ASC 805 requires that when The excess of the purchase price over the fair value of the net assets acquired, exceeds the purchase price, resulting in a bargain purchase, the acquirer must reassess the reasonablenessnet of the values assigned to allfair value of the net assets acquired, liabilities assumed, and consideration transferred.was recorded as goodwill. The Company has performed such assessment and has concluded that the values assigned appear to be reasonable.recorded goodwill is deductible for tax purposes. The following table summarizes the allocation of the purchase price, forincluding values assigned to assets, liabilities and the acquisition that resultedamount of goodwill and intangible assets are represented in a bargain purchase:the table below:
| In thousands | ||||
| Accounts receivable, net | $ | 852 | ||
| Inventories, net | 737 | |||
| Other assets | 64 | |||
| Intangible assets | 413 | |||
| Total fair value of assets acquired | 2,066 | |||
| Total liabilities assumed | (563 | ) | ||
| Net assets acquired | 1,503 | |||
| Total consideration paid | (1,101 | ) | ||
| Gain before deferred income tax liability | 402 | |||
| Income tax liability – deferred | (146 | ) | ||
| Gain on bargain purchase | $ | 256 | ||
In thousands | ||||
Assets acquired and liabilities assumed: | ||||
Accounts receivable, net | $ | 1,275 | ||
Inventories, net | 13,641 | |||
Fixed assets, including building and land | 4,049 | |||
Goodwill | 9,631 | |||
Intangible assets | 12,900 | |||
Accounts payable | (3,193 | ) | ||
Other liabilities | (2,546 | ) | ||
| $ | 35,757 |
20162020
On January 21, 2016,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 TriumphRevel Match LLC, dba RAVE Sports, USA, Inc.’s business, a brand known for its innovative lines of indoor and outdoor games. Of the $10.0 million purchase pricehigh-quality water recreation products. Total consideration paid for the acquisition, $9.5 millionacquisitions was paid in cash and the remaining $0.5 million was contingent upon the attainment of certain targets. The more significant assets acquired and liabilities assumed were comprised of receivables ($1.4 million), inventory ($1.4 million), prepaid and other assets ($0.1 million), accounts payable ($0.6 million), goodwill ($1.4 million) and other intangible assets ($6.3 million).
2015
During 2015, the Company acquired certain assets and liabilities of Onix Sports, Inc. and acquired all of the issued and outstanding shares of capital stock of Goalsetter Systems, Inc. for total consideration of cash and notes of approximately $10.3 million, subject to adjustments for working capital. The total working capital adjustments resulted in $0.6 million of additional consideration to the sellers.
$15.4 million. The consideration paid by the Companycompany for these acquisitions was allocated to the assets acquired, net of the liabilities assumed, based upon their estimated fair values as of the date of the acquisition. The excess of the purchase price over the estimated fair value of the assets acquired, net of the estimated fair value of the liabilities assumed, was recorded as goodwill. The recorded goodwill is deductible for tax purposes. The allocation of the purchase price, including values assigned to assets, liabilities and the amount of goodwill and intangible assets are represented in the table below.
| In thousands | ||||||||
| Assets acquired and liabilities assumed: | ||||||||
| Accounts receivable | $ | 795 | ||||||
| Inventories | 966 | |||||||
Accounts receivable, net | $ | 399 | ||||||
Inventories, net | 3,797 | |||||||
| Other assets | 50 | 936 | ||||||
| Goodwill | 5,172 | 5,946 | ||||||
| Intangible assets | 6,286 | 5,277 | ||||||
| Accounts payable | (271 | ) | (576 | ) | ||||
| Other liabilities | (74 | ) | (333 | ) | ||||
| Deferred income tax liability | (2,046 | ) | ||||||
| $ | 10,878 | $ | 15,446 | |||||
These acquisitions were notNote 14 — Commitments and would not have been material to the Company’s net sales, results of operations or total assets during the years ended December 30, 2017, December 31, 2016 and December 26, 2015, respectively. Accordingly, our consolidated results from operations do not differ materially from historical performance as a result of these acquisitions, and therefore, pro-forma results are not presented.Contingencies
The Company is involved in litigation arising in the normal course of its 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.
The Company has entered into various agreements whereby it is required to make royalty and license payments. At December 30, 2017,31, 2022, the Company had future estimated minimum non-cancelable royalty and license payments as follows:
| In Thousands | Amount | |||
| 2018 | $ | 480 | ||
| 2019 | 120 | |||
| 2020 | 135 | |||
| 2021 | — | |||
| 2022 | — | |||
| Thereafter | — | |||
| $ | 735 | |||
In Thousands | Amount | |||
2023 | $ | 898 | ||
2024 | 566 | |||
2025 | 579 | |||
2026 | 599 | |||
2027 | 620 | |||
Thereafter | 1,305 | |||
| $ | 4,567 | |||
58 |
Note 15 — 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 and Time Deposits
Fair values of cash and cash equivalents approximate cost due to the short period of time to maturity.
Notes Payable and Long-term Debt
The Company believes the carrying value of short-termlong-term debt, including the current portion of long-term debt, and long-term debt, adequately reflects the fair value of these instruments.
The following table presents estimated fair values of the Company’s financial instruments in accordance with FASB ASC 825 at December 30, 201731, 2022 and December 31, 2016.25, 2021.
| Fair Value Measurements Using | Fair Value Measurements Using | |||||||||||||||||||||||||||||||
| 2017 In Thousands | Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||||||||||
2022 In Thousands | Fair Value | 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 | $ | 1,572 | $ | 1,572 | $ | — | $ | — | $ | 3,967 | $ | 3,967 | $ | - | $ | - | ||||||||||||||||
| Financial liabilities | ||||||||||||||||||||||||||||||||
| Current portion of Long-term debt | $ | 1,250 | $ | — | $ | 1,250 | $ | — | ||||||||||||||||||||||||
Current portion of long-term debt | $ | 7,143 | $ | - | $ | 7,143 | $ | - | ||||||||||||||||||||||||
| Long-term debt | $ | 21,871 | $ | — | $ | 21,871 | $ | — | $ | 87,738 | $ | - | $ | 87,738 | $ | - | ||||||||||||||||
| Fair Value Measurements Using | Fair Value Measurements Using | |||||||||||||||||||||||||||||||
| 2016 In Thousands | Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||||||||||
2021 In Thousands | Fair Value | 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 | $ | 1,013 | $ | 1,013 | $ | — | $ | — | $ | 4,374 | $ | 4,374 | $ | - | $ | - | ||||||||||||||||
| Financial liabilities | ||||||||||||||||||||||||||||||||
| Current portion of Long-term debt | $ | 1,250 | $ | — | $ | 1,250 | $ | — | ||||||||||||||||||||||||
Current portion of long-term debt | $ | 7,143 | $ | - | $ | 7,143 | $ | - | ||||||||||||||||||||||||
| Long-term debt | $ | 24,189 | $ | — | $ | 24,189 | $ | — | $ | 50,396 | $ | - | $ | 50,396 | $ | - | ||||||||||||||||
Note 16 — 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:
Years Ended | ||||||||||||
All Amounts in Thousands | December 31, 2022 | December 25, 2021 | December 26, 2020 | |||||||||
| Gross Sales by Channel: | ||||||||||||
Mass Merchants | $ | 104,097 | $ | 115,949 | $ | 104,147 | ||||||
Specialty Dealers | 98,954 | 96,166 | 80,419 | |||||||||
E-commerce | 119,401 | 119,550 | 109,297 | |||||||||
International | 16,183 | 11,337 | 8,226 | |||||||||
Other | 4,490 | 3,240 | 2,312 | |||||||||
Total Gross Sales | 343,125 | 346,242 | 304,401 | |||||||||
| Less: Gross-to-Net Sales Adjustments | ||||||||||||
Returns | 5,256 | 8,304 | 7,837 | |||||||||
Warranties | 2,472 | 2,488 | 1,648 | |||||||||
Customer Allowances | 21,640 | 21,838 | 21,267 | |||||||||
Total Gross-to-Net Sales Adjustments | 29,368 | 32,630 | 30,752 | |||||||||
Total Net Sales | $ | 313,757 | $ | 313,612 | $ | 273,649 | ||||||
Note 17 — Subsequent Events
On February 21, 2023, the Company’s Board of Directors approved a plan to close the Company’s manufacturing facilities in Rosarito, Mexico and to dispose of those facilities. The strategic decision to cease the Company’s manufacturing operations in Mexico is part of the Company’s ongoing efforts to improve profitability and to drive operational efficiencies.
Signatures
Pursuant to the requirements of Section 13 or 15(d) 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 By: /s/ Stephen R. Wawrin | |||
| February 27, 2023 | |||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Vice President and Chief Financial Officer (Principal Financial and Accounting | |||