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United States

Securities and Exchange Commission
Washington, D.C. 20549

 

Form 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 26, 2020

Or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____________ to _____________


Commission File Number 0-6966

 

ESCALADE, INCORPORATED

(Exact name of registrant as specified in its charter)

 

Indiana

(State of incorporation)

13-2739290

(I.R.S. EIN)

 

817 Maxwell Ave, Evansville, Indiana

(Address of Principal Executive Office)

47711

(Zip Code)

 

812-467-1358

(Registrant's Telephone Number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each classTrading SymbolName of Exchange on which registered

 Common Stock, No Par Value

ESCA

The NASDAQ Stock Market LLC

 

Securities registered pursuant to section 12(g) of the Act: NONE

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities

Yes ☐ No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act

Yes ☐ No

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐

 

Accelerated filer

Non-accelerated filer ☐

 

Smaller reporting company

  

Emerging growth company

 

1

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  ☒

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12 b-2 of the Exchange Act).

Yes No ☒

 

Aggregate market value of common stock held by nonaffiliates of the registrant as of July 11, 2020 based on the closing sale price as reported on the NASDAQ Global Market: $143,976,960.

 

The number of shares of Registrant's common stock (no par value) outstanding as of February 15, 2021: 13,898,253.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Certain portions of the registrant's Proxy Statement relating to its annual meeting of stockholders scheduled to be held on April 30, 2021 are incorporated by reference into Part III of this Report, which Proxy Statement will be filed with the Securities and Exchange Commission within 120 days after the end of the Registrant’s fiscal year covered by this Form 10-K.

 

 

Escalade, Incorporated and Subsidiaries

 

Table of Contents

 

   

Page

Part I

   

Item 1.

Business

3

Item 1A.

Risk Factors 6

Item 1B.

Unresolved Staff Comments

14

Item 2.

Properties

14

Item 3.

Legal Proceedings

15

Item 4.

Mine Safety Disclosures

15

Part II

   

Item 5.

Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

15

Item 6.

Selected Financial Data

16

Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations

16

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

22

Item 8.

Financial Statements and Supplementary Data

23

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 23

Item 9A. 

Controls and Procedures

23

Item 9B.

Other Information

24

Part III

   

Item 10.

Directors, Executive Officers and Corporate Governance 25

Item 11.

Executive Compensation 25

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 25

Item 13.

Certain Relationships and Related Transactions and Director Independence 26

Item 14.

Principal Accounting Fees and Services 26

Part IV

   

Item 15.

Exhibits and Financial Statement Schedules 26

Item 16. 

Form 10-K Summary 27

 

2

 

 

Part I

ITEM 1—BUSINESS

 

General

 

Escalade, Incorporated (Escalade, the Company, we, us or our) operates in one business segment: Sporting Goods (Escalade Sports). Escalade and its predecessors have more than 80 years of manufacturing and selling experience in this industry.

 

Headquartered in Evansville, Indiana, Escalade Sports manufactures, imports, and distributes widely recognized sporting goods brands in basketball goals, archery, indoor and outdoor game recreation and fitness products through major sporting goods retailers, specialty dealers, key on-line retailers, traditional department stores and mass merchants. Escalade is a leader in table tennis tables, residential in-ground basketball goals and in archery bows. Some of the Company’s most recognized brands, owned or distributed, include:

 

Product Category

 

Brand Names

Archery

 

Bear® Archery, Trophy Ridge®, Whisker Biscuit®, Cajun Bowfishing™, Karnage™, Fletcher®, Rocket®, SIK®, BearX™

Table Tennis

 

STIGA®, Ping-Pong®

Basketball Goals

 

Goalrilla™, Goalsetter®, Goaliath®, Silverback®, Hoopstar®

Pickleball

 

Onix®, DURA®, Pickleball Now®

Play Systems

 

Woodplay®, Childlife®, Jack & June®

Fitness

 

The STEP®, Lifeline®, Kettleworx®, Natural Fitness®, PER4M®

Safety and Utility Weights

 

USWeight®

Game Tables (Hockey and Soccer)

 

Triumph™ Sports, Atomic®, American Legend®, HJ Scott®

Water Sports

 

RAVE Sports®

Billiard Tables and Accessories

 

American Heritage Billiards®, Cue&Case®, Lucasi®, Mizerak®, PureX®, Rage®, Players®

Darting

 

Unicorn®, Winmau®, Arachnid®, Accudart®, Nodor®

Outdoor Games

 

Victory Tailgate®, Triumph™ Sports, Zume Games®, Viva Sol®

 

During 2020, 2019 and 2018, the Company had one customer, Amazon.com, Inc., that accounted for approximately 23%, 21% and 19%, respectively of the Company’s revenues. During 2020, 2019 and 2018 the Company had another customer, Dick’s Sporting Goods, which accounted for approximately 13%, 13% and 13%, respectively, of the Company’s revenues.

 

As of December 26, 2020, the Company had approximately 26%, 14% and 11% of its total accounts receivable with Amazon.com, Inc., Academy Sports and Outdoors, Inc. and Dick’s Sporting Goods, respectively. As of December 28, 2019, the Company had approximately 27% and 18% of its total accounts receivable with Amazon.com, Inc. and Dick’s Sporting Goods, respectively.

 

Escalade Sports manufactures in the USA and Mexico and imports product from Asia, where the Company utilizes a number of contract manufacturers.

 

Certain products produced by Escalade Sports are subject to regulation by the Consumer Product Safety Commission. The Company believes it is in material compliance with all applicable regulations.

 

3

 

Business Development

 

The Company is the successor to The Williams Manufacturing Company, founded in 1922, an Ohio-based  manufacturer and retailer of women’s and children’s footwear, and to the Indian Archery and Toy Corp., founded in 1927, an Evansville, Indiana-based manufacturer of archery equipment, badminton sets, and darts. In the 1960’s, Indian Archery entered the table tennis manufacturing business and changed its name to Indian Industries, Inc. Williams Manufacturing and Indian Industries operated independently of each other until a series of transactions in the early 1970’s. In 1972, Williams Manufacturing acquired Martin-Yale Industries, Inc., an Illinois-based manufacturer of office and graphic arts products, and crafts and toys. In 1973, Williams Manufacturing acquired both Indian Industries and Harvard Table Tennis, Inc., a Massachusetts-based manufacturer of table tennis accessories. The resulting enterprise, renamed as Escalade, Incorporated, became a diversified manufacturer of sporting goods, recreational products, office products, graphic arts products, hobby and craft items, toys, and footwear. 

 

In the following decades, Escalade continued to diversify its product lines through acquisitions and organic growth, including increasing its manufacturing capabilities for table tennis tables, pool tables, basketball backboard, goals, and poles, and related accessories. In order to focus on areas of potential growth, Escalade also has divested certain product lines and businesses over the years. Most notably, Escalade exited the footwear and toy businesses in the 1970’s and ultimately completed its exit from the office products and graphic arts businesses in 2014. Such divestitures have resulted in Escalade now focusing 100% on its Sporting Goods business segment. Escalade’s Sporting Goods segment competes in a variety of product categories including basketball goals, archery, indoor and outdoor games, recreational, fitness, and related products. 

 

Core components of Escalade’s business development and growth strategy have been, and continue to be, making strategic acquisitions, developing strong brand names, and investing in product innovation.  Escalade’s strategic acquisitions include, among others, its acquisitions of: the table tennis and pool table assets of the Ideal Toy Company in 1977 and of Harvard Sports, Inc. in 1980; the home exercise equipment business of Marcy Fitness Products, Inc. in 1989; the high quality basketball system assets of Zue Corporation, including the Goalrilla™ brand in 1999; the table tennis assets of Lifetime Products, Inc. in 2000; the darting assets of Accudart in 2001; the filled vinyl weight assets and manufacturing business of U.S. Weights, Inc. in 2001; the assets of North American Archery Group, including the Bear® Archery brand in 2003; the residential playground systems businesses of ChildLife, Inc. in 2005 and of Woodplay in 2006; and the archery assets of Carolina Archery Products in 2006, of Trophy Ridge, LLC in 2007, and of Cajun Archery in 2012. Escalade entered the pickleball product category through acquisitions of Pickleball Now and Onix Sports in 2014 and 2015, expanded its billiard accessory business with the acquisition of Cue&Case Sales, Inc. in 2014, and strengthened its manufacturing capabilities of basketball goals by acquiring Goalsetter Systems, Inc. in 2015. More recently, in 2016, Escalade acquired the assets of Triumph Sports USA, a leader in the indoor and outdoor games categories, in 2017 acquired the assets of Lifeline Fitness, Inc., a leader in the fitness industry, in 2018 acquired Victory Tailgate, a manufacturer of premium licensed and custom tailgating games, in 2020 acquired the billiard table, game room and recreational product lines of American Heritage Billiards, and in 2020 acquired the assets of RAVE Sports, providing entry into the water recreational products category.

 

For more information regarding Escalade’s business development and strategies for growth, please see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Overview.”

 

Marketing and Product Development

 

The Company makes a substantial investment in product development and brand marketing to differentiate its product line from its competition. We conduct market research and development efforts to design products which satisfy existing and emerging consumer needs. The Company markets directly to the consumer or end-user as well as through its retail partners in the form of advertising and other promotional allowances.

 

4

 

Competition

 

Escalade is subject to competition with various manufacturers in each product line. The Company is not aware of any other single company that is engaged in the same product lines as Escalade or that produces the same range of products as Escalade. Nonetheless, competition exists for many Escalade products. Some competitors are larger and have substantially greater resources than the Company. Escalade believes that its long-term success depends on its ability to strengthen its relationship with existing customers, attract new customers, to be a reliable source of products to timely supply customers with their needs, and to develop new products that satisfy the quality and price requirements of sporting goods customers.

 

Licenses, Trademarks and Brand Names

 

The Company has an agreement and contract with STIGA Sports AB for the exclusive right and license to distribute and produce table tennis equipment under the brand name STIGA® for North America. The Company also owns several registered trademarks and brand names including but not limited to Goalrilla™, Goalsetter®, Bear® Archery, Ping-Pong®, The Step®, Lifeline® and Woodplay®.

 

Backlog and Seasonality

 

Sales are based primarily on standard purchase orders and in most cases, orders are shipped within the same month received. Unshipped orders at the end of the fiscal year (backlog) were not material and therefore are not an indicator of future results. Due to diversity in product categories, revenues have not been seasonal and are not expected to be so in the future.

 

Employees

 

The number of employees at December 26, 2020 and December 28, 2019 were as follows:

 

   

2020

   

2019

 

Sporting Goods

               

USA

    523       365  

Mexico

    160       84  

Asia

    21       19  

Total

    704       468  

 

Of Escalade’s 704 employees at December 26, 2020, 700 were full time employees and 4 were part time employees.

 

The I.U.E./C.W.A. (United Electrical Communication Workers of America, AFL-CIO) represents hourly rated employees at the Escalade Sports’ Evansville, Indiana distribution center. There were approximately 28 covered employees at December 26, 2020. A five year labor contract was negotiated and renewed in May 2016 and expires on May 1, 2021.

 

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 accelerated its timing for placing 2021 orders with its suppliers and continues to identify and to develop other potential sources of products and raw materials.

 

5

 

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.

 

ITEM 1A—RISK FACTORS

 

OPERATIONAL RISKS TO THE COMPANY AND OUR BUSINESS 

 

Markets are highly competitive which could limit the Company’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.

 

6

 

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’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’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, including the 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’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 is currently transitioning to a new Interim Chief Executive Officer and will soon commence the process of seeking a new Chief Executive Officer, which may result in some disruption to the Company.

 

On February 22, 2021, the Company announced that former Chief Executive Officer Scott J. Sincerbeaux had resigned from all positions with the Company. While the Chairman of the Board of Directors, Walter P. Glazer, Jr., has agreed to serve as the Company’s Interim Chief Executive Officer until a replacement is hired, the transition may result in some disruptions to the Company’s ordinary course of operations.  Additionally, the process of seeking a new Chief Executive Officer requires substantial effort and time of the Company’s Board of Directors and other executives, which may divert attention from other matters.

 

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 2020 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 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.

 

7

 

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. 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 any of the significant suppliers terminated or significantly curtailed its relationship with the Company or 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 currently is experiencing 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 ongoing 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.

 

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, branding, 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.

 

8

 

The expiration or termination of our material trademarks, brand names and licensing agreements could have a material adverse effect on the Company’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.

 

Breaches of data or technology security could damage the Company’s reputation, cause the Company to incur additional expense, expose the Company to litigation, and adversely affect the Company’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.

 

Unauthorized disclosure of sensitive or confidential customer information could harm the Company’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.

 

Cybersecurity breaches or other data security incidents could result in unauthorized access, theft, modification, or destruction of Company assets, including bank accounts, intellectual property, and confidential information, which may adversely affect the Company’s business.

 

The Company has experienced an increase in cybersecurity threats and attempts to breach the Company’s security networks. The techniques used to conduct cyber attacks, including phishing, hacking, and malicious software, are increasingly sophisticated and the sources and targets 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 period of time. From time to time, the Company has been, and likely will continue to be, the target of cyber and other security threats. To the Company’s knowledge, the Company has not experienced a significant cybersecurity breach that had a material impact on the Company’s business or operating results, although there can be no assurance that the Company’s efforts to maintain the security of the Company’s information technology networks and related systems will be effective or that attempted security breaches will not be damaging in the future. The Company maintains cyber liability insurances, however, such insurance may not be sufficient to cover the financial, legal, business or reputational losses that could result from a breach of the Company’s systems.

 

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:

 

 

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;

 

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.

 

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.

 

9

 

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 $0.14 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 has manufacturing operations in Mexico and sources many of its products and raw materials from China 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, the ongoing 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 effect on the continuity of the Company’s operations and on the Company’s income and profitability.

 

The Company’s business is subject to risks associated with sourcing and manufacturing outside of the United States, and risks arising from tariffs and/or international trade wars.

 

The Company imports many of its raw materials and finished goods from 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, such as public health crises, labor disputes, political unrest, and security requirements of the U.S. and other countries that could delay importation of products or require us to locate alternative sources. 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 bilateral 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 costs may increase, which in turn may result in lower profitability if we are unable to offset such increases through higher 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. However, 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 materially adversely affect the Company’s business, financial condition, operating results and 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.

 

10

 

COVID-19 PANDEMIC RISKS

 

The COVID-19 pandemic currently is affecting the Company’s business. Additional factors could  exacerbate 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 26, 2020, economic and health conditions in the United States and across most of the globe changed rapidly during 2020. In the short-term, demand for the Company’s products has increased, notably in our fitness products and also in basketball, playground, and indoor/outdoor games. Some of the increase in demand is likely due to consumers being required or encouraged by governmental authorities to stay at home, schools being closed, and employers requiring employees to work remotely and/or implementing furloughs and layoffs. Such increased demand may not continue and/or demand  may decrease from historical levels depending on the duration and severity of the COVID-19 pandemic, the length of time it takes for normal economic and operating conditions to resume, additional governmental actions that may be taken and/or extensions of time for restrictions that have been imposed to date, and numerous other uncertainties. During 2020, such restrictions at times caused the Company to shut down its Mexico production facilities, to limit its Gainesville, Florida facility to conduct only shipping and receiving operations but no manufacturing operations, to require all office staff to work remotely, and to change staffing of the Company’s distribution center in Evansville, Indiana. While the Company has largely resumed normal operations in such facilities subject to increased health protocols having been implemented, most of the Company’s office staff continue to work remotely. The ongoing  pandemic may result in future business and manufacturing disruption, inventory shortages, delivery delays, and reduced sales and operations, any of which could materially affect our business, financial condition, and results of operations.

 

The ability of the Company’s employees to work may be significantly impacted by the coronavirus.

 

The Company’s employees are being affected  by the COVID-19 pandemic. Virtually all of our office and  management personnel continue to work remotely. Travel restrictions imposed by the U.S. government and of foreign countries, particularly China and Mexico have limited, or in some cases prohibited, normal business travel relating to the Company’s internal operations and to our ongoing business relationships with our customers and suppliers. The health of the Company’s workforce is of primary concern and the Company may need to continue indefinitely existing precautionary measures, and possibly enact additional measures, to help minimize the risk of our employees being exposed to the coronavirus. Further, our management team continues to focus on mitigating the adverse effects of the COVID-19 pandemic, which has required and will continue to require a large investment of time and resources across the entire Company, thereby potentially diverting their attention from other priorities that existed prior to the outbreak of the pandemic. If these conditions worsen, or last for an extended period of time, the Company’s ability to manage its business may be impaired, and operational risks, cybersecurity risks and other risks facing the Company even prior to the pandemic may be elevated.

 

The 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 is affecting the Company’s customers, suppliers, vendors, and other business partners, but the Company is not able to assess the full extent of the current impact nor predict the ultimate consequences that will result therefrom. Although Amazon, the Company’s largest customer, has 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 which consumers make purchasing decisions. Dick’s Sporting Goods, the Company’s second largest customer, and many of the Company’s other mass merchant customers have experienced increased online orders and reduced foot traffic into their physical stores. In general, many retailers are experiencing severe financial difficulties and bankruptcies. If those trends continue for the long-term, the Company’s strategies in distributing and marketing its products will need to change accordingly. The Company’s planning and efforts in recent years to position itself to ship many goods purchased on Amazon or other online sources direct to consumers and for the Company to make direct to consumer online sales may mitigate some, but not all, of the adverse effects resulting from changes in the businesses of the Company’s resellers. 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 has created significant public health concerns and economic disruption and may continue to do so indefinitely. While the Company experienced substantial increases in sales and order activity in its 2020 fiscal year, due in part to increased consumer demand for home recreational products during the pandemic, 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 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 long-term impact of the pandemic on the Company’s business is unknown and ultimately could result in material adverse effects on the Company’s business, financial performance and results of operations.

 

LEGAL, TAX, ACCOUNTING AND REGULATORY RISKS

 

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.

 

11

 

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 changes in presidential administration and Congress may do with respect to future policies and regulations 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) 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.

 

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 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.

 

Certain political developments in recent years have provided increased economic uncertainty. The United Kingdom formally exited the European Union on January 31, 2020 (“Brexit”), and entered into a new trade agreement with the European Union on December 24, 2020. The United Kingdom may set its own trade policies with countries such as the United States, Australia and New Zealand that currently do not have free trade agreements with the European Union. Although the Company may not be directly impacted by Brexit, these and future trade deals could subject the rest of the world to tariffs and duties set by the World Trade Organization, potentially resulting in higher import costs on the Company’s products and raw materials. In addition, political conflicts in the U.S. could result in economic and trade policy actions that would impact economic conditions in various countries, the cost of importing into the U.S. and the competitive landscape of our customers, suppliers and competitors.

 

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.

 

12

 

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 notwithstanding the coronavirus pandemic, product shipments from China 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.

 

13

 

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.

 

ITEM 2—PROPERTIES

 

At December 26, 2020, 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

174,700

 

Owned

Manufacturing and distribution

Gainesville, Florida, USA

154,200

 

Owned

Manufacturing and distribution

Olney, Illinois, USA

108,500

 

Leased

Manufacturing and distribution

Orlando, Florida, USA

50,018

 

Leased

Marketing; manufacturing and distribution

Orlando, Florida, USA

10,587

 

Leased

Manufacturing and distribution

Eagan, MN, USA

41,600

 

Leased

Distribution; sales and marketing; engineering; administration

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.

 

14

 

ITEM 3—LEGAL PROCEEDINGS

 

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.

 

Part II

 

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. As of February 15, 2021, there were approximately 109 stockholders of record of our common stock, although there is a significantly larger number of beneficial owners of our common stock.

 

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 10/3/2020 under the current repurchase program.

    1,397,490     $ 9.28       1,397,490     $ 10,000,330  

Fourth quarter purchases:

                               

10/4/2020 – 10/31/2020

 

 

None    

 

None    

 

No Change    

 

No Change  

11/1/2020 – 11/28/2020

    209,831     $ 20.67       1,607,321     $ 5,664,110  

11/29/2020 – 12/26/2020

    54,193     $ 19.87       1,661,514     $ 14,586,649  

Total share purchases under the current program

    1,661,514     $ 11.06       1,661,514     $ 14,586,649  

 

The Company has one stock repurchase program which was established in February 2003 by the Board of Directors and which initially authorized management to expend up to $3,000,000 to repurchase shares on the open market as well as in private negotiated transactions. In February 2005, February 2006, August 2007 and February 2008 the Board of Directors increased the remaining balance on this plan to its original level of $3,000,000. In September 2019, the Board of Directors increased the stock repurchase program from $3,000,000 to $5,000,000. In December 2020, the Board of Directors increased the stock repurchase program to $15,000,000. From its inception date through December 26, 2020, the Company has repurchased 1,661,514 shares of its common stock under this repurchase program for an aggregate price of $18,379,289. The repurchase program has no termination date and there have been no share repurchases that were not part of a publicly announced program.

 

15

 

ITEM 6—SELECTED FINANCIAL DATA [Not Required]

 

ITEM 7—MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following section should be read in conjunction with Item 1: Business; Item 1A: Risk Factors; 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: specific and overall impacts of the COVID-19 global pandemic on Escalade’s financial condition and results of operations; Escalade’s plans and expectations surrounding the transition to its new Chief Executive Officer and all potential related effects and consequences; the impact of competitive products and pricing; product demand and market acceptance; new product development; Escalade’s ability to achieve its business objectives, especially with respect to its Sporting Goods business on which it has chosen to focus; Escalade’s ability to successfully achieve the anticipated results of strategic transactions, including the integration of the operations of acquired assets and businesses and of divestitures or discontinuances of certain operations, assets, brands, and products; the continuation and development of key customer, supplier, licensing and other business relationships; Escalade’s ability to develop and implement our own direct to consumer e-commerce distribution channel; Escalade’s ability to successfully negotiate the shifting retail environment and changes in consumer buying habits; the financial health of our customers; disruptions or delays in our business operations, including without limitation disruptions or delays in our supply chain, arising from political unrest, war, labor strikes, natural disasters, public health crises such as the coronavirus pandemic, and other events and circumstances beyond our control; Escalade’s ability to control costs; Escalade’s ability to successfully implement actions to lessen the potential impacts of tariffs and other trade restrictions applicable to our products and raw materials, including impacts on the costs of producing our goods, importing products and materials into our markets for sale, and on the pricing of our products; general economic conditions; fluctuation in operating results; changes in foreign currency exchange rates; changes in the securities markets; Escalade’s ability to obtain financing and to maintain compliance with the terms of such financing; the availability, integration and effective operation of information systems and other technology, and the potential interruption of such systems or technology; risks related to data security of privacy breaches; 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 recreation and fitness products. Strong brands and on-going investment in product development provide a solid foundation for building customer loyalty and continued growth.

 

Within the sporting goods industry, the Company has successfully built a robust market presence in several niche markets. This strategy is heavily dependent on expanding our customer base, barriers to entry, strong brands, excellent customer service and a commitment to innovation. A key strategic advantage is the Company’s established relationships with major customers that allow the Company to bring new products to market in a cost-effective manner while maintaining a diversified portfolio of products to meet the demands of consumers. In addition to strategic customer relations, the Company has substantial manufacturing and import experience that enable it to be a reliable and low-cost supplier.

 

16

 

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 2018, the Company acquired Victory Tailgate, LLC, a brand known for its premium licensed and custom tailgating games. In October 2020, the Company acquired the assets of the billiard table, game room, and recreational product lines of American Heritage Billiards, including the related intellectual property. In December 2020, the Company acquired substantially all of the business and assets of Revel Match LLC, dba RAVE Sports, a brand known for its innovative and high-quality water recreation products. These and other acquisitions strengthen the Company’s leadership in various product categories, while providing exciting new opportunities within the growing water sports market. The Company also sometimes divests or discontinues certain operations, assets, and products that do not perform to the Company's expectations or no longer fit with the Company's strategic objectives.

 

Management believes that key indicators in measuring the success of these strategies are revenue growth, earnings growth, new product introductions, and the expansion of channels of distribution. The following table sets forth the annual percentage change in revenues and net income over the past three years:

 

   

2020

   

2019

   

2018

 
                         

Net revenue

                       

Sporting Goods

    51.6 %     2.7 %     (0.9 %)

Total

    51.6 %     2.7 %     (0.9 %)
                         

Net income

                       

Sporting Goods

    293.9 %     (39.2 %)     14.4 %

Total

    257.3 %     (64.5 %)     45.4 %

 

COVID-19 Pandemic

 

The emergence of the coronavirus (COVID-19) around the world, and particularly in the United States and China, presents significant risks to the Company, not all of which the Company is able to fully evaluate or even to foresee at the current time. Economic and health conditions in the United States and across most of the globe have changed rapidly since the end of the Company’s first quarter of 2020. In the short-term, demand for the Company’s products has increased, notably in our fitness products, basketball, playground, and indoor/outdoor games. Some of the increase in demand is likely due to consumers being required or encouraged by governmental authorities to stay at home, schools being closed, and employers requiring employees to work remotely and/or implementing furloughs and layoffs. Such increased demand may not continue and/or demand may decrease from historical levels depending on the duration and severity of the COVID-19 pandemic, the length of time it takes for normal economic and operating conditions to resume, additional governmental actions that may be taken and/or extensions of time for restrictions that have been imposed to date, and numerous other uncertainties.

 

In addition, increased customer demand for certain products presents challenges for the Company to anticipate and adjust inventory levels to meet such demand. So far, the Company has been able to obtain products from its suppliers on a timely basis.  To alleviate the risks of incurring product outages, the Company has accelerated orders of certain products with a resulting increase in inventories. While the Company believes it is currently in strong financial condition, a substantial decrease in customer demand and/or slower payments by the Company’s mass merchants, specialty dealers and other customers could adversely affect the Company’s liquidity. 

 

17

 

The COVID-19 pandemic continued to affect the Company’s operations through the fourth quarter of 2020 and may continue to do so indefinitely thereafter. All of these factors may have far reaching impacts on the Company’s business, operations, and financial results and conditions, directly and indirectly, including without limitation impacts on the health of the Company’s management and employees, many of whom are still working remotely, manufacturing, distribution, marketing and sales operations, customer and consumer behaviors, and on the overall economy. The scope and nature of these impacts, most of which are beyond the Company’s control, continue to evolve and the outcomes are uncertain.

 

Due to the above circumstances and as described generally in this Form 10-K, the Company’s results of operations for the fiscal year ended December 26, 2020 are not necessarily indicative of the results to be expected for fiscal year 2021. Management cannot predict the full impact of the COVID-19 pandemic on the Company’s sales channels, supply chain, manufacturing and distribution nor to economic conditions generally, including the effects on consumer spending. 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 even after the pandemic might end.

 

Results of Operations

 

The following schedule sets forth certain consolidated statement of operations data as a percentage of net revenue:

 

   

2020

   

2019

   

2018

 

Net revenue

    100.0 %     100.0 %     100.0 %

Cost of products sold

    72.7 %     76.5 %     74.4 %

Gross margin

    27.3 %     23.5 %     25.6 %

Selling, administrative and general expenses

    14.7 %     17.6 %     16.9 %

Amortization

    0.5 %     0.8 %     0.8 %

Operating income

    12.1 %     5.1 %     7.9 %

 

Revenue and Gross Margin

 

Net revenue increased 51.6% in 2020 compared to 2019. The Company recognized increased sales across nearly all product categories due to increased product placement and continued high demand, most notably in our outdoor and fitness categories.

 

The overall gross margin percentage increased to 27.3% in 2020 compared with 23.5% in 2019. Margins were favorably impacted by factory utilization, change in sales mix and supply chain improvements made throughout the year. 

 

18

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses (SG&A) were $40.3 million in 2020 compared to $31.6 million in 2019, an increase of $8.7 million or 27.5%. The increase in SG&A is in line with the growth of the business. SG&A as a percent of sales is 14.7% in 2020 compared with 17.6% in 2019.

 

Provision for Income Taxes

 

The effective tax rate for 2020 and 2019 was 21.2% and 18.8%, respectively. The 2020 effective tax rate is slightly higher than the federal statutory rate primarily due to the impact of state taxes, with federal income tax credits helping to offset the impact of the state taxes and lower the statutory rate. The 2019 effective tax rate is lower than the statutory rate primarily due to the federal benefit of state income taxes and federal income tax credits.

 

Sporting Goods

 

Net revenues, operating income, and net income for the Sporting Goods segment for the three years ended December 26, 2020 were as follows:

 

In Thousands

 

2020

   

2019

   

2018

 
                         

Net revenue

  $ 273,649     $ 180,541     $ 175,780  

Operating income

    32,685       8,611       13,999  

Net income

    23,625       5,997       9,869  

 

Net revenue increased 51.6% in 2020 compared to 2019.

 

The gross margin ratio in 2020 was 27.3% compared to 23.5% in 2019. The increase was primarily due to factory utilization, changes in sales mix and supply chain improvements made throughout the year. Operating income, as a percentage of net revenue, increased to 11.9% in 2020 compared to 4.8% in 2019.

 

Financial Condition and Liquidity

 

The current ratio, a basic measure of liquidity (current assets divided by current liabilities), for 2020 was 3.1, compared to 4.8 in 2019. Receivable levels increased to $65.3 million in 2020 compared with $35.5 million in 2019 and net inventory increased $30.2 million to $72.5 million in 2020 from $42.3 million in 2019.

 

The Company’s working capital requirements are primarily funded through cash flows from operations and revolving credit agreements with its bank. During 2020, the Company’s maximum borrowings under its primary revolving credit lines and overdraft facility totaled $33.6 million compared to $10.5 million in 2019. The overall effective interest rate in 2020 was 2.4% compared to the effective rate of 8.7% in 2019. Total long-term debt at the end of the Company’s 2020 fiscal year was $30.1 million.

 

On January 21, 2019, the Company entered into an Amended and Restated Credit Agreement (“2019 Restated Credit Agreement”) with its issuing bank, JPMorgan Chase Bank, N.A. (“Chase”), and the other lenders identified in the 2019 Restated Credit Agreement (collectively, the “Lender”). Under the terms of the 2019 Restated Credit Agreement, the Lender has made available to the Company a senior revolving credit facility with increased maximum availability of $50.0 million. The maturity date was extended to January 31, 2022. In addition to the increased borrowing amount and extended maturity date, other significant changes reflected in the 2019 Restated Credit Agreement include: more favorable interest rate provisions; increases in borrowing base availability; releases of existing mortgages on the Company’s real property; and increasing to $25.0 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.

 

19

 

On December 14, 2020, the Company and its wholly owned subsidiary, Indian Industries, Inc. (“Indian”) entered into the Third Amendment dated as of December 14, 2020 (the “Third Amendment”) to the 2019 Restated Credit Agreement dated as of January 21, 2019 among the Company, Indian, each of their domestic subsidiaries, and Chase, as Administrative Agent and as Lender. Under the terms of the Third Amendment, the maximum availability under the senior revolving credit facility increased to $75.0 million, up from $50.0 million. The maturity date of the revolving credit facility was extended to December 14, 2023. In addition to the increased borrowing amount and extended maturity date, other significant changes reflected in the Third Amendment include: 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 more specific provisions and procedures for replacement of LIBOR if and when LIBOR would no longer be the benchmark for determining interest rates.

 

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

 

In 2021, the Company estimates capital expenditures to be approximately $7.0 million.

 

The Company believes that cash generated from its projected 2021 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 2021. 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 26, 2020:

 

Amounts in thousands

 

Total

   

2021

    2022– 2023     2024– 2025    

Thereafter

 
                                         

Debt

  $ 30,073     $ -     $ 30,073     $ -     $ -  

Future interest payments

    1,796       718       1,078       -       -  

Operating leases

    1,768       971       717       80       -  

Minimum payments under purchase, royalty and license agreements

    6,494       942       1,889       1,139       2,524  

Total

  $ 40,131     $ 2,631     $ 33,757     $ 1,219     $ 2,524  

 

20

 

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 30 days to one year. However, some products carry extended warranties of three-year, five-year, seven-year, ten-year, fifteen-year, and lifetime warranties. The Company records an accrued liability and reduction in sales for estimated future warranty claims based upon historical experience and management’s estimate of the level of future claims. Changes in the estimated amounts recognized in prior years are recorded as an adjustment to the accrued liability and sales in the current year. To the extent there are product defects in current products that are unknown to management and do not fall within historical defect rates, the product warranty reserve could be understated and the Company could be required to accrue additional product warranty costs thus negatively affecting gross margin.

 

Inventory Valuation Reserves

The Company evaluates inventory for obsolescence and excess quantities based on demand forecasts over specified time frames, usually one year. The demand forecast is based on historical usage, sales forecasts and current as well as anticipated market conditions. All amounts in excess of the demand forecast are deemed to be potentially excess or obsolete and a reserve is established based on the anticipated net realizable value. To the extent that demand forecasts are greater than actual demand and the Company fails to reduce manufacturing output accordingly, the Company could be required to record additional inventory reserves which would have a negative impact on gross margin.

 

Allowance for 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 a quantitative assessment, in which the fair value of the reporting unit is compared to its carrying value. If the carrying value of goodwill exceeds the implied estimated fair value calculated, an impairment charge to current operations is recorded to reduce the carrying value to the implied estimated fair value.

 

21

 

If a quantitative assessment of 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 $32.7 million at December 26, 2020, the entire amount was allocated to the Escalade Sports reporting unit. The results of the qualitative impairment assessment of the Escalade Sports reporting unit indicated that it was not “more likely than not” that the fair value of the reporting unit was less than the carrying value as of December 26, 2020.

 

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 had a minority equity position in a company strategically related to the Company’s business, but did not have control over this company. The accounting method employed was dependent on the level of ownership and degree of influence the Company can exert on operations. Where the equity interest was less than 20% and the degree of influence was not significant, the cost method of accounting is employed. Where the equity interest was 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 was recorded in equity in earnings of affiliates on the consolidated statements of operations. The proportionate share of net income was $0.1 million in 2018. Total cash dividends received from this equity investment amounted to $2,323 thousand in 2018. On May 17, 2018, the company completed the sale of its 50% interest for $33.7 million, resulting in a gain on sale of $13.0 million. In conjunction with the sale, the Company entered into a new license agreement with Stiga for the licensing rights to manufacture, market, promote, sell and distribute Stiga-branded table tennis hobby products in the United States, Mexico and Canada. The Company has had the licensing rights for such products since 1995 pursuant to an existing license agreement that expired December 31, 2018. The new license agreement went into effect on January 1, 2019.

 

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 26, 2020, the Company had no material commitments for capital expenditures. In 2021, the Company estimates capital expenditures to be approximately $7.0 million.

 

ITEM 7A — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK [Not Required]

 

22

 

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. On December 4, 2020, the Company acquired substantially all of the business and assets of Revel Match LLC, dba RAVE Sports. The Company is in the process of evaluating the existing controls and procedures of the acquired business and integrating them into our system of internal control over financial reporting. In accordance with guidance provided by SEC Staff permitting the exclusion of an acquired business from management’s assessment of the effectiveness of internal control over financial reporting for the year in which the business was acquired, we have excluded from the following assessment of the Company’s disclosure controls and procedures the disclosure controls and procedures of RAVE Sports, and we have excluded RAVE Sports from our assessment of the effectiveness of internal control over financial reporting as of December 26, 2020.

 

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’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.

 

23

 

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 26, 2020. 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) in Internal 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 26, 2020, 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., Interim 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 2020. 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 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

ITEM 9B — OTHER INFORMATION

 

None.

 

24

 

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 April 30, 2021 under the captions “Certain Beneficial Owners,” “Election of Directors,” “Executive Officers of the Registrant,” “Board of Directors, Its Committees, Meetings and Functions,” and “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 April 30, 2021 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 April 30, 2021 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)

    10,000     $ 14.39       1,196,059  

Equity compensation plans not approved by security holders

    -       -       -  

Total

    10,000               1,196,059  

 

(1) These plans include the Escalade, Incorporated 2007 Incentive Plan, including an additional 1,500,000 shares added under a 2012 amendment to the Escalade 2007 Incentive Plan, and the Escalade, Incorporated 2017 Incentive Plan. All plans were approved by stockholders at Escalade’s Annual Meetings of Stockholders in 2007, 2012, and 2017, respectively.

 

(2) Does not include 244,076 shares subject to outstanding, unvested restricted stock awards.

 

25

 

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 April 30, 2021 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 April 30, 2021 under the caption “Certain Relationships and Related Person Transactions” and is incorporated herein by reference.

 

ITEM 14 — PRINCIPAL ACCOUNTING FEES AND SERVICES

 

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 April 30, 2021 under the caption “Principal Accounting Firm Fees” and is incorporated herein by reference.

 

Part IV

 

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 26, 2020 and December 28, 2019

Consolidated statements of operations—fiscal years ended December 26, 2020, December 28, 2019, and December 29, 2018

Consolidated statements of comprehensive income—fiscal years ended December 26, 2020, December 28, 2019, and December 29, 2018

Consolidated statements of stockholders’ equity—fiscal years ended December 26, 2020, December 28, 2019, and December 29, 2018

Consolidated statements of cash flows—fiscal years ended December 26, 2020, December 28, 2019, and December 29, 2018

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

Articles of Incorporation of Escalade, Incorporated (a)

 

3.2

Amended By-Laws of Escalade, Incorporated (f)

 

10.1

Amended and Restated Credit Agreement dated as of January 21, 2019 among Escalade, Incorporated, Indian Industries, Inc., each of their domestic subsidiaries, and JPMorgan Chase Bank, N.A., as Administrative Agent (without exhibits and schedules, which Escalade has determined are not material) (b)

 

10.2

First Amendment dated as of September 3, 2019 to Amended and Restated Credit Agreement dated as of January 21, 2019 among Escalade, Incorporated, Indian Industries, Inc., each of their domestic subsidiaries, and JPMorgan Chase Bank, N.A., as Administrative Agent (j)

 

10.3

Pledge and Security Agreement dated as of January 21, 2019 among Escalade, Incorporated, Indian Industries, Inc., each of their domestic subsidiaries, and JPMorgan Chase Bank, N.A., as Administrative Agent (without exhibits and schedules, which Escalade has determined are not material) (c)

  10.4 Second Amendment dated as of March 24, 2020 to Amended and Restated Credit Agreement date as of January 21, 2019 among Escalade, Incorporated, Indian Industries, Inc., each of their domestic subsidiaries, and JPMorgan Chase Bank, N.A., as Administrative Agent (k) 
 

10.5

Third Amendment dated as of December 14, 2020 to Amended and Restated Credit Agreement dated as of January 21, 2019 among Escalade, Incorporated, Indian Industries, Inc., each of their domestic subsidiaries, and JPMorgan Chase Bank, N.A., as Administrative Agent (l)

 

26

 

 

(4)

Executive Compensation Plans and Arrangements

 

10.6

Escalade, Incorporated 2007 Incentive Plan, as amended, incorporated by reference herein from Annex 1 and 2 to the Registrant’s 2012 Definitive Proxy Statement (e)

 

10.7

Escalade, Incorporated 2017 Incentive Plan, incorporated by reference herein from Annex 1 to the Registrant’s 2017 Definitive Proxy Statement (i)

 

10.8

Form of Stock Option Award Agreement utilized in Stock Option grants to employees pursuant to the Escalade, Incorporated 2017 Incentive Plan (d)

 

10.9

Form of Stock Option Award Agreement utilized in Stock Option grants to Directors pursuant to the Escalade, Incorporated 2017 Incentive Plan (d)

 

10.10

Form of Restricted Stock Unit Agreement utilized in Restricted Stock Unit grants to employees pursuant to the Escalade Incorporated 2017 Incentive Plan (d)

 

10.11

Form of Restricted Stock Unit Agreement utilized in Restricted Stock Unit grants to Directors pursuant to the Escalade, Incorporated 2017 Incentive Plan (d)

  10.12 Offer Letter dated March 30, 2020, by and between Scott J. Sincerbeaux and Escalade, Incorporated (h) 
 

10.13

Executive Severance agreement, dated March 30, 2020 and effective as of April 27, 2020, between Scott J. Sincerbeaux and Escalade, Incorporated (h)

 

21

Subsidiaries of the Registrant

 

23.1

Consent of BKD, LLP

 

31.1

Chief Executive Officer Rule 13a-14(a)/15d-14(a) Certification

 

31.2

Chief Financial Officer Rule 13a-14(a)/15d-14(a) Certification

 

32.1

Chief Executive Officer Section 1350 Certification

 

32.2

Chief Financial Officer Section 1350 Certification

 

101.Cal

Inline XBRL Taxonomy Extension Calculation Linkbase Document

 

101.Def

Inline XBRL Taxonomy Extension Definition Linkbase Document

 

101.Lab

Inline XBRL Taxonomy Extension Label Linkbase Document

 

101.Pre

Inline XBRL Taxonomy Extension Presentation Linkbase Document

 

101.Ins

Inline XBRL Instance Document

 

101.Sch

Inline XBRL Taxonomy Extension Schema Document

  104 Cover Page Interactive Data File (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 Form 8-K/A filed on February 1, 2019. The 2019 Amended and Restated Credit Agreement supersedes the 2016 Credit Agreement with JPMorgan Chase Bank, N.A. previously entered into by the Company and Indian Industries, Inc. The domestic subsidiaries of the Company and Indian Industries are parties to the 2019 Amended and Restated Credit Agreement as subsidiary guarantors, which supersedes the Unlimited Continuing Guarantees previously entered into by those subsidiaries.

 

(c)

Incorporated by reference from the Company’s Form 8-K filed on January 25, 2019. The 2019 Pledge and Security Agreement supersedes the pledge agreements previously entered into by the Company, Indian Industries, Inc. and their domestic subsidiaries

 

(d)

Incorporated by reference from the Company’s Form 10-K for the fiscal year ended December 30, 2017 and filed on February 27, 2018

 

(e)

Incorporated by reference from the Company’s 2012 Proxy Statement

 

(f)

Incorporated by reference from the Company’s 2014 First Quarter Report on Form 10-Q filed on April 22, 2014

 

(g)

Incorporated by reference from the Company’s 2016 First Quarter Form 10-Q filed on April 15, 2016

 

(h)

Incorporated by reference from the Company’s Form 8-K filed on April 1, 2020

 

(i)

Incorporated by reference from the Company’s 2017 Proxy Statement

 

(j)

Incorporated by reference from the Company’s Form 8-K filed on September 3, 2019

  (k) Incorporated by reference from the Company’s Form 8-K filed on March 24, 2020 
 

(l)

Incorporated by reference from the Company’s Form 8-K filed on December 14, 2020

 

ITEM 16—FORM 10-K SUMMARY

 

None.

 

27

 

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:

 

    Page
     
 

Reports of Independent Registered Public Accounting Firm

29
     
  Consolidated financial statements of Escalade, Incorporated and subsidiaries:  
     
 

Consolidated balance sheets—December 26, 2020 and December 28, 2019

33
     
  Consolidated statements of operations—fiscal years ended December 26, 2020, December 28, 2019 and December 29, 2018  34
     
  Consolidated statements of comprehensive income—fiscal years ended December 26, 2020, December 28, 2019 and December 29, 2018 35
     
  Consolidated statements of stockholders’ equity—fiscal years ended December 26, 2020, December 28, 2019 and December 29, 2018  35
     
  Consolidated statements of cash flows—fiscal years ended December 26, 2020, December 28, 2019 and December 29, 2018  36
     
 

Notes to consolidated financial statements

37

 

28

 

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Reports of Independent Registered Public Accounting Firms

 

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 26, 2020, and December 28, 2019, 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 26, 2020, 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 26, 2020 and December 28, 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended December 26, 2020, 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 26, 2020, 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 22, 2021, expressed an unqualified opinion on the effectiveness of Escalade, Incorporated’s internal control over financial reporting.

 

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 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 U.S. Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the 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 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 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 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 consolidated 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 consolidated 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 18 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 totaled $21,267,000 for the year ended December 26, 2020, which are included as part of Net Sales on the consolidated statement of operations. At December 26, 2020, the total accrued for these customer allowances was $7,532,000 and were presented as part of accrued liabilities on the consolidated balance sheet.

 

29

 

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 exercises judgment in computing the amount of sales subject to the allowances and tracks the amount of the various allowances taken by customers over time. All of this in turn led to a high degree of auditor judgment, subjectivity and effort 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 from 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.

 

Assumptions Used in Estimating Goodwill and Intangible Assets Associated with Business Combinations

 

As described in Note 15 to the consolidated financial statements, the Company consummated the acquisition of the assets of Revel Match LLC d/b/a Rave Sports during the year ended December 26, 2020, resulting in the expansion of the Company’s operating product lines and additional goodwill of $5,946,000 and additional intangible assets of $5,000,000 being recognized on the Company’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;

 

 

Obtaining and reviewing management’s acquisition checklist to gain an understanding of cut-off procedures performed and asset/liability identification considerations made;

 

 

Testing management’s purchase price allocation spreadsheet focusing on the completeness and accuracy of the balance sheet acquired and related fair value purchase price allocations made to identified assets acquired 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;

 

 

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;

 

 

Utilizing internal valuation specialists to assist with testing the related fair value purchase price allocations made to identified assets acquired and liabilities assumed;

 

 

Reviewing and evaluating the adequacy of the disclosures made in the footnotes of the Company’s SEC filings.

 

 

We have served as Escalade, Incorporated’s auditor since 1977.

 

 

/s/ BKD, LLP

 

Evansville, Indiana

February 22, 2021

 

30

 

bkd.jpg

 

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 26, 2020, based on criteria established in Internal Control––Integrated Framework: (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 26, 2020, based on criteria established in Internal Control–– Integrated Framework: (2013) issued by COSO.

 

Escalade, Incorporated acquired substantially all of the assets of Revel Match LLC, dba RAVE Sports (RAVE) in December 2020, and management excluded RAVE from its assessment of the effectiveness of Escalade, Incorporated’s internal control over financial reporting as of December 26, 2020. RAVE represented 6.8 percent and 0.05 percent of Escalade, Incorporated’s total assets and total revenues, respectively, as of and for the year ended December 26, 2020. Our audit of internal control over financial reporting of Escalade Incorporated also excluded an evaluation of the internal control over financial reporting of RAVE.

 

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 and our report dated February 22, 2021, expressed an unqualified opinion thereon.

 

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 accompanying Management’s Report on Internal Control over 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 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 U.S. Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the 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.

 

31

 

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 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 Escalade, Incorporated; (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 Escalade, Incorporated are being made only in accordance with authorizations of management and directors of Escalade, Incorporated; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of Escalade, Incorporated’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/ BKD, LLP

 

Evansville, Indiana

February 22, 2021

 

32

 

 

Escalade, Incorporated and Subsidiaries

Consolidated Balance Sheets

 

 

All Amounts in Thousands Except Share Information

 

December 26,

2020

  

December 28,

2019

 
         

ASSETS

        

Current Assets:

        

Cash and cash equivalents

 $3,505  $5,882 

Receivables, less allowances of $896 and $483; respectively

  65,280   35,450 

Inventories

  72,488   42,269 

Prepaid expenses

  4,068   3,151 

Prepaid income tax

  57   163 

TOTAL CURRENT ASSETS

  145,398   86,915 
         

Property, plant and equipment, net

  18,232   15,111 

Operating lease right-of-use assets

  1,608   1,080 

Intangible assets

  22,645   18,847 

Goodwill

  32,695   26,749 

Other assets

  127   77 

TOTAL ASSETS

 $220,705  $148,779 
         

LIABILITIES AND STOCKHOLDERS’ EQUITY

        

Current liabilities:

        

Note payable

 $-  $135 

Trade accounts payable

  20,947   7,765 

Accrued liabilities

  24,271   9,689 

Current operating lease liabilities

  854   621 

TOTAL CURRENT LIABILITIES

  46,072   18,210 
         

Long-term debt

  30,073   - 

Deferred income tax liability

  4,193   3,537 

Operating lease liabilities

  763   475 

Other liabilities

  448   387 

TOTAL LIABILITIES

  81,549   22,609 
         

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: 2020 —13,919,380 shares, 2019 —14,214,777 shares

  13,919   14,215 

Retained earnings

  125,237   111,955 

TOTAL STOCKHOLDERS’ EQUITY

  139,156   126,170 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 $220,705  $148,779 

 

See notes to consolidated financial statements.

 

33

 

 

Escalade, Incorporated and Subsidiaries

Consolidated Statements of Operations

 

  Years Ended 

 

All Amounts in Thousands Except Per Share Data

 

December 26,

2020

  

December 28,

2019

  

December 29,

2018

 
             

Net Sales

 $273,649  $180,541  $175,780 
             

Costs and Expenses

            

Cost of products sold

  198,822   138,181   130,750 

Selling, administrative and general expenses

  40,315   31,616   29,807 

Amortization

  1,480   1,469   1,406 
             

Operating Income

  33,032   9,275   13,817 
             

Other Income (Expense)

            

Interest expense

  (250)  (356)  (427)

Equity in earnings of affiliates

  -   -   121 

Gain on sale of equity method investment (includes ($3,729) of accumulated other comprehensive loss reclassification from foreign currency translation adjustment)

  -   -   13,020 

Other income (expense)

  140   15   (89)
             

Income Before Income Taxes

  32,922   8,934   26,442 
             

Provision for Income Taxes

  6,988   1,676   6,000 
             

Net Income

 $25,934  $7,258  $20,442 
             

Earnings Per Share Data:

            

Basic earnings per share

 $1.84  $0.50  $1.42 

Diluted earnings per share

 $1.82  $0.50  $1.41 

 

See notes to consolidated financial statements.

 

34

 

 

Escalade, Incorporated and Subsidiaries

Consolidated Statements of Comprehensive Income

 

    Years Ended  

 

All Amounts in Thousands

 

December 26,

2020

   

December 28,

2019

   

December 29,

2018

 
                         

Net Income

  $ 25,934     $ 7,258     $ 20,442  
                         

Foreign currency translation adjustment before reclassifications

    -       -       (1,119 )
                         

Amounts reclassified from comprehensive income due to divestiture of equity investment

    -       -       3,729  
                         

Comprehensive Income

  $ 25,934     $ 7,258     $ 23,052  

 

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 30, 2017

    14,372     $ 14,372     $ 99,908     $ (2,610 )   $ 111,670  
                                         

Other comprehensive income

                            2,610       2,610  

Net income

                    20,442               20,442  

Expense of stock options and restricted stock units

                    604               604  

Exercise of stock options

    9       9       45               54  

Settlement of restricted stock units

    47       47       (47 )             -  

Dividends declared

                    (7,215 )             (7,215 )

Stock issued to directors as compensation

    12       12       154               166  

Purchase of stock

    (1 )     (1 )     (9 )             (10 )
                                         

Balances at December 29, 2018

    14,439     $ 14,439     $ 113,882     $ -     $ 128,321  
                                         

Net income

                    7,258               7,258  

Expense of stock options and restricted stock units

                    513               513  

Exercise of stock options

    10       10       108               118  

Settlement of restricted stock units

    29       29       (29 )             -  

Dividends declared

                    (7,204 )             (7,204 )

Stock issued to directors as compensation

    9       9       93               102  

Purchase of stock

    (272 )     (272 )     (2,666 )             (2,938 )
                                         

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  

 

See notes to consolidated financial statements.

 

35

 

 

Escalade, Incorporated and Subsidiaries

Consolidated Statements of Cash Flows

 

   

Years Ended

 

 

All Amounts in Thousands

 

December 26,

2020

   

December 28,

2019

   

December 29,

2018

 

Operating Activities:

                       

Net Income

  $ 25,934     $ 7,258     $ 20,442  

Reconciling adjustments:

                       

Depreciation and amortization

    4,016       4,031       3,857  

Provision for doubtful accounts

    473       322       155  

Stock option and restricted stock unit expense

    1,016       513       604  

Equity in net income of joint venture investments

    -       -       (121 )

Deferred income taxes

    656       128       940  

Gain on sale of equity method investment

    -       -       (13,020 )

Gain on insurance proceeds received for damage to property

    -       -       (377 )

Loss (gain) on disposals of assets

    (2 )     7       -  

Dividends received from equity method investments

    -       -       2,323  

Changes in

                       

Accounts receivable

    (29,905 )     4,911       (1,140 )

Inventories

    (26,422 )     (3,147 )     (3,359 )

Prepaids and other assets

    (42 )     1,971       194  

Accounts payable and accrued expenses

    26,909       44       (3,992 )

Net cash provided by operating activities

    2,633       16,038       6,506  
                         

Investing Activities:

                       

Purchase of property and equipment

    (5,455 )     (2,185 )     (2,818 )

Acquisitions

    (15,446 )     (765 )     (7,169 )

Payment on note payable related to an acquisition

    (135 )     -       -  

Proceeds from sale of equity investment

    -       -       33,705  

Insurance proceeds received for damage to property

    -       -       1,154  

Proceeds from sale of property and equipment

    4       4       -  

Net cash provided by (used in) investing activities

    (21,032 )     (2,946 )     24,872  
                         

Financing Activities:

                       

Dividends paid

    (7,466 )     (7,204 )     (7,215 )

Proceeds from issuance of long-term debt

    84,044       77,502       28,024  

Payments on long-term debt

    (53,971 )     (77,502 )     (51,145 )

Proceeds from exercise of stock options

    144       118       54  

Deferred financing fees

    (87 )     (112 )     -  

Purchase of stock

    (6,739 )     (2,938 )     (10 )

Director stock compensation

    97       102       166  

Net cash provided by (used in) financing activities

    16,022       (10,034 )     (30,126 )
                         

Increase (decrease) in Cash and Cash Equivalents

    (2,377 )     3,058       1,252  
                         

Cash and Cash Equivalents, beginning of year

    5,882       2,824       1,572  
                         

Cash and Cash Equivalents, end of year

  $ 3,505     $ 5,882     $ 2,824  
                         

Supplemental Cash Flows Information

                       

Interest paid

  $ 205     $ 346     $ 423  

Income taxes paid

  $ 6,205     $ 1,383     $ 4,844  

Information regarding the Company’s acquisitions in 2020, 2019 and 2018 are as follows:

                       

Fair value of assets acquired

  $ 16,277     $ 900     $ 9,285  

Cash paid for assets

    (15,446 )     (765 )     (7,169 )

Consideration of holdback provision

    -       -       286  

Note payable for deferred purchase price obligation

    -       (135 )     -  

Liabilities assumed

  $ 831     $ -     $ 2,402  

 

See notes to consolidated financial statements.

 

36

 

 

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 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.

 

Fiscal Year End

The Company’s fiscal year is a 52 or 53 week period ending on the last Saturday in December. Fiscal year 2020 was 52 weeks long, ending on December 26, 2020. Fiscal year 2019 was 52 weeks long, ending December 28, 2019. Fiscal year 2018 was 52 weeks long, ending December 29, 2018.

 

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 26, 2020, the Company reclassed $5.0 million of book overdrafts to accrued liabilities.

 

Accounts Receivable

Revenue from the sale of the Company’s products 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. 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. This inventory valuation reserve totaled $697 thousand and $786 thousand at fiscal year-end 2020 and 2019, respectively. Inventories, net of the valuation reserve, at fiscal year-ends were as follows:

 

In Thousands

 

2020

  

2019

 
         

Raw materials

 $9,121  $3,186 

Work in process

  3,538   2,177 

Finished goods

  59,829   36,906 
  $72,488  $42,269 

 

37


 

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

 

2020

  

2019

 
         

Land

 $1,943  $1,943 

Buildings and leasehold improvements

  18,798   16,831 

Machinery and equipment

  28,083   24,721 

Total cost

  48,824   43,495 

Accumulated depreciation and amortization

  (30,592)  (28,384)
  $18,232  $15,111 

 

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 2020, 2019, or 2018.

 

Investments

Non-Marketable Equity Investment: The Company had an equity position in a company that strategically related to the Company’s business, but the Company did not have control over that entity. The accounting method employed was dependent on the level of ownership and degree of influence the Company could exert on operations. Where the equity interest was less than 20% and the degree of influence was not significant, the cost method of accounting was employed. Where the equity interest was greater than 20% but not more than 50%, the equity method of accounting was utilized. Under the equity method, the Company’s proportionate share of net income was recorded in equity in earnings of affiliates on the consolidated statement of operations. The proportionate share of net income was $0.1 million in 2018. Total cash dividends received from this equity investment amounted to $2,323 thousand in 2018. The Company considered whether the fair value of its equity investment declined below its carrying value whenever adverse events or changes in circumstances indicated that recorded values may not be recoverable. If the Company considered 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 was recorded to estimated fair value.

 

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 is deemed to have an indefinite life and is not amortized, but is 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, 3 to 14 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 a quantitative assessment, in which the fair value of the reporting unit is compared to its carrying value. If the carrying value of goodwill exceeds the implied estimated fair value calculated, an impairment charge to current operations is recorded to reduce the carrying value to the implied estimated fair value.

 

38

 

Employee Incentive Plan

During 2017, the Company approved an incentive plan explained in Note 10. 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 2020, 2019, and 2018.

 

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.

 

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. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some 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 2020, 2019 and 2018 were approximately $1.5 million, $1.6 million, and $1.5 million, respectively.

 

New Accounting Pronouncements and Changes in Accounting Principles

 

Standards Adopted:

In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU) 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The amendments in this update eliminate Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable.

 

The Company adopted this standard on December 29, 2019. The adoption of this standard did not have an impact to the financial statements of the Company.

 

New Accounting Standards to be Adopted

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This amendment requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss model which requires the use of forward-looking information to calculate credit loss estimates. It also eliminates the concept of other-than-temporary impairment and requires credit losses related to available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. These changes will result in earlier recognition of credit losses. The amendments are effective in fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. We do not expect the standard to have a material impact on our consolidated financial statements. 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.

 

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes. This guidance will be effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. We are currently evaluating the impact of the new guidance on our consolidated financial statements.

 

39

 
 

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. 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 a quantitative assessment, in which the fair value of the reporting unit is compared to its carrying value. If the carrying value of goodwill exceeds the implied estimated fair value calculated, 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, 3 to 14 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 30 days to one year. However, some products carry extended warranties of three-year, five-year, seven-year, ten-year, fifteen-year, and lifetime warranties. The Company records an accrued liability and reduction in sales for estimated future warranty claims based upon historical experience and management’s estimate of the level of future claims. Changes in the estimated amounts recognized in prior years are recorded as an adjustment to the accrued liability and sales in the current year. Changes in product warranty were as follows:

 

In Thousands

 

2020

   

2019

   

2018

 
                         

Beginning balance

  $ 688     $ 702     $ 691  

Additions

    1,648       1,736       1,448  

Deductions

    (1,374 )     (1,750 )     (1,437 )

Ending balance

  $ 962     $ 688     $ 702  

 

40

 

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 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

 

2020

   

2019

   

2018

 
                         

Beginning balance

  $ 786     $ 456     $ 504  

Additions

    831       756       383  

Deductions

    (920 )     (426 )     (431 )

Ending balance

  $ 697     $ 786     $ 456  

 

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

 

2020

   

2019

   

2018

 
                         

Beginning balance

  $ 483     $ 532     $ 623  

Additions

    473       322       155  

Deductions

    (60 )     (371 )     (246 )

Ending balance

  $ 896     $ 483     $ 532  

 

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

 

2019

   

2019

   

2018

 
                         

Beginning balance

  $ 1,292     $ 1,550     $ 3,357  

Additions

    11,940       7,292       6,575  

Deductions

    (10,936 )     (7,550 )     (8,382 )

Ending balance

  $ 2,296     $ 1,292     $ 1,550  

 

 

Note 3 —  Accrued Liabilities

 

Accrued liabilities consist of the following:

 

In Thousands

 

2020

   

2019

 
                 

Employee compensation

  $ 7,685     $ 1,917  

Customer related allowances and accruals

    7,532       4,876  

Other accrued items

    9,054       2,896