UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

x Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 21, 2015 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)

 

812-467-4449

(Registrant's Telephone Number)

 

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 x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).

Yes x No ¨

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

 

Large accelerated filer ¨   Accelerated filer x
Non-accelerated filer ¨    (Do not check if
a smaller reporting company)
  Smaller reporting company ¨

 

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

Yes ¨ No x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class   Outstanding at April 10, 2015
Common, no par value   14,031,686

 

 
 

 

INDEX

 

      Page
No.
       
Part I. Financial Information:    
       
Item 1 - Financial Statements:    
       
  Consolidated Condensed Balance Sheets as of March 21, 2015, December 27, 2014, and  March 22, 2014   3
       
  Consolidated Condensed Statements of Operations for the Three Months Ended March 21, 2015 and March 22, 2014   4
       
  Consolidated Condensed Statements of Comprehensive Income for the Three Months Ended March 21, 2015 and March 22, 2014   5
       
  Consolidated Condensed Statements of Cash Flows for the Three Months Ended March 21, 2015 and March 22, 2014   6
       
  Notes to Consolidated Condensed Financial Statements   7
       
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations   13
       
Item 3 - Quantitative and Qualitative Disclosures About Market Risk   15
       
Item 4 - Controls and Procedures   15
       
Part II. Other Information    
       
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds   16
       
Item 6 - Exhibits   17
       
  Signature   17

 

2
 

 

PART I - FINANCIAL INFORMATION

 

Item 1. FINANCIAL STATEMENTS

 

ESCALADE, INCORPORATED AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

 

All Amounts in Thousands Except Share Information  March 21,
2015
   December 27,
2014
   March 22,
2014
 
   (Unaudited)   (Audited)   (Unaudited) 
ASSETS               
Current Assets:               
Cash and cash equivalents  $1,522   $3,232   $1,603 
Time deposits   1,450    1,450    1,450 
Receivables, less allowance of $864; $900; and $1,127; respectively   28,419    32,150    26,973 
Inventories   29,981    23,775    23,393 
Prepaid expenses   1,712    1,622    907 
Deferred income tax benefit   1,126    925    2,104 
Prepaid income tax   3,610    5,697    604 
Assets held for sale           16,170 
TOTAL CURRENT ASSETS   67,820    68,851    73,204 
                
Property, plant and equipment, net   11,592    11,596    10,487 
Intangible assets, net   12,831    13,465    10,428 
Goodwill   14,875    14,875    13,113 
Investments   17,727    18,949    19,979 
Other assets   21    145    145 
Assets held for sale           6,263 
TOTAL ASSETS  $124,866   $127,881   $133,619 
                
LIABILITIES AND STOCKHOLDERS' EQUITY               
Current Liabilities:               
Notes payable  $13,742   $16,200   $13,871 
Current portion of long-term debt   1,592    1,586    1,569 
Trade accounts payable   4,816    1,853    3,610 
Accrued liabilities   8,544    12,107    8,117 
Liabilities held for sale           6,432 
TOTAL CURRENT LIABILITIES   28,694    31,746    33,599 
                
Other Liabilities:               
Long-term debt   2,960    3,360    4,551 
Deferred income tax liability   2,997    2,996    5,393 
TOTAL LIABILITIES   34,651    38,102    43,543 
                
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 – 14,025,184; 13,998,090; and 13,786,966; shares respectively   14,025    13,998    13,787 
Retained earnings   80,042    77,745    70,944 
Accumulated other comprehensive income (loss)   (3,852)   (1,964)   5,345 
TOTAL STOCKHOLDERS' EQUITY   90,215    89,779    90,076 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY  $124,866   $127,881   $133,619 

See notes to Consolidated Condensed Financial Statements.

 

3
 

 

ESCALADE, INCORPORATED AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)

 

   Three Months Ended 
All Amounts in Thousands Except Per Share Data  March 21,
2015
   March 22,
2014
 
         
Net sales  $33,419   $27,721 
           
Costs, Expenses and Other Income          
Cost of products sold   22,585    18,713 
Selling, administrative and general expenses   5,914    5,115 
Amortization   633    571 
           
Operating Income   4,287    3,322 
           
Interest expense   101    87 
Other expense (income)   (733)   (189)
           
Income Before Income Taxes from Continuing Operations   4,919    3,424 
           
Provision for Income Taxes from Continuing Operations   1,422    1,159 
           
Net Income from Continuing Operations   3,497    2,265 
           
Discontinued Operations          
Income from operations       143 
Provision for income taxes       157 
Net Loss from Discontinued Operations       (14)
           
Net Income  $3,497   $2,251 
           
Basic Earnings Per Share Data:          
Income from continuing operations  $0.25   $0.16 
Loss from discontinued operations   0.00    0.00 
Net Income  $0.25   $0.16 
           
Diluted Earnings Per Share Data:          
Income from continuing operations  $0.25   $0.16 
Loss from discontinued operations   0.00    0.00 
Net Income  $0.25   $0.16 
           
Dividends declared  $0.10   $0.09 

 

See notes to Consolidated Condensed Financial Statements.

 

4
 

 

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 

   Three Months Ended 
All Amounts in Thousands Except Share Information  March 21,
2015
   March 22,
2014
 
         
Net Income  $3,497   $2,251 
           
Foreign currency translation adjustment   (1,888)   425 
           
Comprehensive Income  $1,609   $2,676 

 

All amounts are net of tax

See notes to Consolidated Condensed Financial Statements.

 

5
 

 

ESCALADE, INCORPORATED AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

   Three Months Ended 
All Amounts in Thousands  March 21,
2015
   March 22,
2014
 
         
Operating Activities:          
Net income  $3,497   $2,251 
Depreciation and amortization   1,104    1,012 
Gain on disposal of property and equipment       (1)
Stock-based compensation   107    133 
Additional discontinued operations activities       479 
Adjustments necessary to reconcile net income to net cash provided by operating activities   (1,819)   5,674 
Net cash provided by operating activities   2,889    9,548 
           
Investing Activities:          
Purchase of property and equipment   (468)   (276)
Proceeds from sale of property and equipment       7 
Proceeds from disposal of short-term time deposits       250 
Discontinued operations activities       (3)
Net cash used by investing activities   (468)   (22)
           
Financing Activities:          
Net decrease in notes payable   (2,458)   (7,828)
Principal payments on long-term debt   (394)   (389)
Proceeds from exercise of stock options   96    533 
Cash dividends paid   (1,403)   (1,244)
Director stock compensation   28    23 
Net cash used by financing activities   (4,131)   (8,905)
Effect of exchange rate changes on cash       60 
Net increase (decrease) in cash and cash equivalents   (1,710)   681 
Cash and cash equivalents, beginning of period (includes zero and $1,255 respectively of cash reported as assets held for sale)   3,232    2,346 
Cash and cash equivalents, end of period (includes zero and $1,424 respectively of cash reported as assets held for sale)  $1,522   $3,027 
           
Supplemental Cash Flows Information          
Dividends payable  $1   $39 

 

See notes to Consolidated Condensed Financial Statements.

 

6
 

 

ESCALADE, INCORPORATED AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

 

Note A – Summary of Significant Accounting Policies

 

Presentation of Consolidated Condensed Financial Statements – The significant accounting policies followed by the Company and its wholly owned subsidiaries for interim financial reporting are consistent with the accounting policies followed for its annual financial reporting. All adjustments that are of a normal recurring nature and are in the opinion of management necessary for a fair statement of the results for the periods reported have been included in the accompanying consolidated condensed financial statements. The consolidated condensed balance sheet of the Company as of December 27, 2014 has been derived from the audited consolidated balance sheet of the Company as of that date. Certain information and note disclosures normally included in the Company’s annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) have been condensed or omitted. These consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 10-K annual report for 2014 filed with the Securities and Exchange Commission.

 

Reclassifications – Certain reclassifications have been made to prior year financial statements to conform to the current year financial statement presentation. These reclassifications had no effect on net earnings.

 

Note B - Seasonal Aspects

 

The results of operations for the three month period ended March 21, 2015 and March 22, 2014 are not necessarily indicative of the results to be expected for the full year.

 

Note C - Inventories

 

In thousands  March 21,
2015
   December 27,
2014
   March 22,
2014
 
             
Raw materials  $3,870   $3,950   $4,523 
Work in progress   4,306    3,967    4,280 
Finished goods   21,805    15,858    14,590 
   $29,981   $23,775   $23,393 

 

Additionally, the Company had inventory totaling, zero, zero and $9,540 that has been reclassified to assets held for sale at March 21, 2015, December 27, 2014 and March 22, 2014, respectively.

 

Note D – Equity Interest Investments

 

The Company has a 50% interest in a joint venture, Stiga Sports AB (Stiga). The joint venture is accounted for under the equity method of accounting. Stiga, located in Sweden, is a global sporting goods company producing table tennis equipment and game products. Financial information for Stiga reflected in the table below has been translated from local currency to U.S. dollars using exchange rates in effect at the respective period-end for balance sheet amounts, and using average exchange rates for statement of operations amounts. Certain differences exist between U.S. GAAP and local GAAP in Sweden, and the impact of these differences is not reflected in the summarized information reflected in the table below. The most significant difference relates to the accounting for goodwill for Stiga which is amortized over eight years in Sweden but is not amortized for U.S. GAAP reporting purposes. The goodwill for Stiga was fully amortized as of December 27, 2014. The effect on Stiga’s net assets resulting from the cumulative amortization of goodwill for the periods ended March 21, 2015 and March 22, 2014 are addbacks to Stiga’s consolidated financial information of $10.3 million and $13.8 million, respectively. These net differences are comprised of cumulative goodwill adjustments of $14.4 million offset by the related cumulative tax effect of $4.1 million as of March 21, 2015 and cumulative goodwill adjustments of $19.3 million offset by the related cumulative tax effect of $5.5 million as of March 22, 2014. The Company’s 50% portion of the statement of operations impact of these goodwill and tax adjustments and other individually insignificant U.S. GAAP adjustments for the periods ended March 21, 2015, and March 22, 2014 are to increase Stiga’s net income by approximately zero and $0.2 million, respectively. The Company’s 50% portion of net income for Stiga for the periods ended March 21, 2015 and March 22, 2014 was $666 thousand and $189 thousand, respectively, and is included in other income (expense) on the Company’s statements of operations.

 

7
 

 

Summarized financial information for Stiga Sports AB balance sheets as of March 21, 2015, December 27, 2014, and March 22, 2014 and statements of operations for the three months ended March 21, 2015 and March 22, 2014 is as follows:

 

In thousands  March 21,
2015
   December 27,
2014
   March 22,
2014
 
             
Current assets  $25,295   $30,539   $26,775 
Non-current assets   7,869    8,082    9,444 
Total assets   33,164    38,621    36,219 
                
Current liabilities   4,334    7,669    5,498 
Non-current liabilities   4,167    4,229    4,991 
Total liabilities   8,501    11,898    10,489 
                
Net assets  $24,663   $26,723   $25,730 

 

   Three Months Ended 
   March 21,
2015
   March 22,
2014
 
         
Net sales  $5,599   $5,345 
Gross profit   2,871    2,856 
Net income   518    93 

 

Note E – Income Taxes

 

The provision for income taxes was computed based on financial statement income. In accordance with FASB Accounting Standards Codification (ASC) 740, the Company has recorded the following changes in uncertain tax positions:

 

    Three Months Ended  
In thousands   March 21, 2015    March 22, 2014 
Beginning balance  $   $ 
Additions for current year tax positions        
Additions for prior year tax positions        
Settlements        
Reductions or settlements        
Reductions for prior year tax positions        
Ending balance  $   $ 

 

Note F – Fair Values of Financial Instruments

 

The following methods were used to estimate the fair value of all financial instruments recognized in the accompanying balance sheets at amounts other than fair values.

 

Cash and Cash Equivalents and Time Deposits

 

Fair values of cash and cash equivalents and time deposits approximate cost due to the short period of time to maturity.

 

8
 

 

Notes Payable and Long-term Debt

 

Fair values of notes payable and long-term debt is estimated based on borrowing rates currently available to the Company for bank loans with similar terms and maturities and determined through the use of a discounted cash flow model.

 

The following table presents estimated fair values of the Company’s financial instruments and the level within the fair value hierarchy in which the fair value measurements fall in accordance with FASB ASC 825 at March 21, 2015, December 27, 2014 and March 22, 2014.

 

       Fair Value Measurements Using 
March 21, 2015
In thousands
  Carrying
Amount
   Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
 
Financial assets                    
Cash and cash equivalents  $1,522   $1,522   $   $ 
Time deposits  $1,450   $1,450   $   $ 
                     
Financial liabilities                    
Notes payable  $13,742   $   $13,742   $ 
Current portion of  long-term debt  $1,592   $   $1,592   $ 
Long-term debt  $2,960   $   $2,960   $ 

 

 

       Fair Value Measurements Using 
December 27, 2014
In thousands
  Carrying
Amount
   Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
 
Financial assets                    
Cash and cash equivalents  $3,232   $3,232   $   $ 
Time deposits  $1,450   $1,450   $   $ 
                     
Financial liabilities                    
Notes payable  $16,200   $   $16,200   $ 
Current portion of  long-term debt  $1,586   $   $1,586   $ 
Long-term debt  $3,360   $   $3,360   $ 

 

9
 

 

       Fair Value Measurements Using 
March 22, 2014
In thousands
  Carrying
Amount
   Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
 
Financial assets                    
Cash and cash equivalents  $3,027   $3,027   $   $ 
Time deposits  $1,450   $1,450   $   $ 
                     
Financial liabilities                    
Notes payable  $13,871   $   $13,871   $ 
Current portion of  long-term debt  $1,569   $   $1,569   $ 
Long-term debt  $4,551   $   $4,551   $ 

 

Note G – Stock Compensation

 

The fair value of stock-based compensation is recognized in accordance with the provisions of FASB ASC 718, Stock Compensation.

 

During the three months ended March 21, 2015 and pursuant to the 2007 Incentive Plan, in lieu of director fees, the Company awarded to certain directors 844 shares of common stock. In addition, the Company awarded 8,000 restricted stock units to directors and 38,250 restricted stock units to employees. The restricted stock units awarded to directors time vest over two years (one-half one year from grant date and one-half two years from grant date) provided that the director is still a director of the Company at the vest date. Director restricted stock units are subject to forfeiture, except for termination of services as a result of retirement, death or disability, if on the vesting date the director no longer holds a position with the Company. The 2015 restricted stock units awarded to employees vest over four years (one-third two years from grant date, one-third three years from grant date and one-third four years from grant date) provided that the employee is still employed by the Company and that the performance criteria related to the market price of the Company’s stock is satisfied. The criteria is for any 30 consecutive trading days on the NASDAQ Stock Market (or such other principal securities exchange on which the Company’s shares of common stock are then traded) during the period beginning on the grant date and ending on the fourth anniversary thereof, the cumulative average Volume Weighted Average Price per share is at least 15% higher than the closing price per share on the grant date plus any incremental dividends paid above the current quarterly dividend rate of $0.10 per share by the Company during such four year period. The Company utilizes the Monte Carlo technique to determine the fair value of restricted stock units granted for awards with market conditions.

 

For the three months ended March 21, 2015 and March 22, 2014, the Company recognized stock based compensation expense of $135 thousand and $156 thousand, respectively. At March 21, 2015 and March 22, 2014, respectively, there was $1.1 million and $1.2 million in unrecognized stock-based compensation expense related to non-vested stock awards.

 

Note H – Discontinued Operations

 

On October 1, 2014, the Company completed the sale of the Information Security business. The sale of the Information Security business, coupled with the sale of our Print Finishing business on June 30, 2014, represents the Company’s exit from the Information Security and Print Finishing segment. As a result, the Information Security and Print Finishing segment has been classified as discontinued operations for all periods presented and certain assets and liabilities in prior periods are classified as held for sale.

 

The fair value for these assets was determined by estimating the most likely sale price with a third-party buyer based on market data. Because of the significance of the unobservable inputs and management’s judgment used in the assets held for sale analysis, these measurements were classified in level three of the valuation hierarchy.

 

10
 

 

The results of operations presented as discontinued operations are summarized below.

 

   Three Months Ended 
All Amounts in Thousands  March 21,
2015
   March 22,
2014
 
         
Net sales  $   $6,353 
           
Cost of products sold       4,006 
Selling, administrative and general expenses       2,136 
Interest expense       69 
Other expense (income)       (1)
Income Before Income Taxes       143 
           
Discontinued Operations          
Income from operations        
Provision for income taxes       157 
Net Loss from Discontinued Operations  $   $(14)

 

The assets and liabilities held for sale are summarized below.

 

All Amounts in Thousands  March 21,
2015
   December 27,
2014
   March 22,
2014
 
                
ASSETS               
Cash and cash equivalents  $   $   $1,424 
Receivables, net           4,620 
Inventories           9,540 
Prepaid expenses           554 
Property, plant and equipment, net           4,174 
Intangible assets           1,758 
Investments           331 
Other assets           32 
Assets held for sale  $   $   $22,433 
                
LIABILITIES               
Trade accounts payable  $   $   $898 
Accrued liabilities           5,534 
Liabilities held for sale  $   $   $6,432 

 

Note I - Segment Information

 

The Information Security and Print Finishing segment has been classified as discontinued operations for all periods presented.

 

   As of and for the Three Months
Ended March 21, 2015
 
In thousands  Sporting
Goods
   Discontinued
Operations
   Corp.   Total 
                 
Revenues from external customers  $33,419   $   $   $33,419 
Operating income (loss)   5,244        (957)   4,287 
Net income   3,216        281    3,497 
Total assets  $98,470   $   $26,396   $124,866 

 

11
 

 

   As of and for the Three Months
Ended March 22, 2014
 
In thousands  Sporting
Goods
   Discontinued
Operations
   Corp.   Total 
                 
Revenues from external customers  $27,721   $6,353   $   $34,074 
Operating income (loss)   4,269    211    (946)   3,534 
Net income (loss)   2,619    (14)   (354)   2,251 
Total assets  $84,242   $22,629   $26,748   $133,619 

 

Note J – Dividend Payment

 

On March 20, 2015, the Company paid a quarterly dividend of $0.10 per common share to all shareholders of record on March 13, 2015. The total amount of the dividend was approximately $1.4 million and was charged against retained earnings.

 

Note K - Earnings Per Share

 

The shares used in computation of the Company’s basic and diluted earnings per common share are as follows:

 

   Three Months Ended 
In thousands  March 21,
2015
   March 22,
2014
 
         
Weighted average common shares outstanding   14,015    13,686 
Dilutive effect of stock options and restricted stock units   235    255 
Weighted average common shares outstanding, assuming dilution   14,250    13,941 

 

Stock options that are anti-dilutive as to earnings per share and unvested restricted stock units which have a market condition for vesting that has not been achieved are ignored in the computation of dilutive earnings per share. The number of stock options and restricted stock units that were excluded in 2015 and 2014 were 38,250 and 75,000, respectively.

 

Note L – New Accounting Standards

 

There have been no recent accounting pronouncements or changes in accounting pronouncements during the three months ended March 21, 2015, as compared to the recent accounting pronouncements described in the Company’s Annual Report on Form 10-K for the fiscal year ended December 27, 2014, that are of significance, or potential significance to the Company.

 

Note M – Commitments and Contingencies

 

The Company is involved in litigation arising in the normal course of business. The Company does not believe that the disposition or ultimate resolution of existing claims or lawsuits will have a material adverse effect on the business or financial condition of the Company.

 

Note N – Subsequent Events

 

On April 1, 2015, the Company paid in full the $2.7 million mortgage payable that was secured by the real estate in Wabash, Indiana.

 

12
 

 

Item 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Forward-Looking Statements

 

This report contains forward-looking statements relating to present or future trends or factors that are subject to risks and uncertainties. These risks include, but are not limited to, 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 the divestiture of its Information Security and Print Finishing segment, the continuation and development of key customer and supplier relationships, disruptions or delays in our supply chain, Escalade’s ability to control costs, general economic conditions, fluctuation in operating results, changes in foreign currency exchange rates, changes in the securities market, Escalade’s ability to obtain financing and to maintain compliance with the terms of such financing 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 solely focused on growing its Sporting Goods segment through organic growth of existing categories, strategic acquisitions, and new product development now that the businesses comprising the Information Security and Print Finishing segment have been divested. The Sporting Goods segment competes in a variety of categories including basketball goals, archery, indoor and outdoor game recreation and fitness products. Strong brands and on-going investment in product development provide a solid foundation for building customer loyalty and continued growth.

 

The Company has historically manufactured and distributed products for two industries: Sporting Goods; and Information Security and Print Finishing. On June 30, 2014, the Company announced the sale of its Print Finishing business. On October 1, 2014, the Company announced the sale of its Information Security business. The divestiture of these two divisions accomplishes the Company’s complete exit from the Information Security and Print Finishing segment. The Company’s decision to exit the Information Security and Print Finishing segment was influenced by low performance in this segment and lack of strategic fit. Management believes it can better achieve earnings growth through a more concentrated focus within the sporting goods equipment industry, including the traditional sports and emerging outdoor categories.

 

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

 

A majority of the Company's products are in markets that are currently experiencing low growth rates. Where the Company enjoys a commanding market position, such as table tennis tables, revenue growth is expected to be roughly equal to general macro-economic consumer trends.

 

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. 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.

 

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Results of Operations

 

The following schedule sets forth certain consolidated statement of operations data (excluding Discontinued Operations) as a percentage of net revenue:

 

   Three Months Ended 
   March 21, 2015   March 22, 2014 
Net revenue   100.0%   100.0%
Cost of products sold   67.6%   67.5%
Gross margin   32.4%   32.5%
Selling, administrative and general expenses   17.7%   18.4%
Amortization   1.9%   2.1%
Operating income   12.8%   12.0%

  

Revenue and Gross Margin

 

Sales growth across most sales channels of Sporting Goods resulted in an overall increase of 20.6% for the first three months of 2015, compared with the same period in the prior year.

 

The overall gross margin percentage decreased slightly to 32.4% for the first three months of 2015, compared to 32.5% for the same period in the prior year. The decreased gross margin resulted from increased product development investments.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses (SG&A) were $5.9 million for the first three months in 2015 compared to $5.1 million for the same period in the prior year, an increase of $799 thousand or 15.6%. SG&A as a percent of sales is 17.7% for the first three months in 2015 compared with 18.4% for the same period in the prior year. The increase in SG&A is primarily due to increased marketing efforts in new categories acquired during 2014 as well as new products to be introduced in the future.

 

Provision for Income Taxes

 

The effective tax rate on continuing operations for the first three months of 2015 was 28.9% compared to 33.8% for the same period last year. The rate for this quarter is lower than the quarter from the prior year due to an increase in the benefit of the domestic production activities deduction and available foreign tax credits.

 

Financial Condition and Liquidity

 

Total debt at the end of the first three months of 2015 was $18.3 million, a reduction of $2.9 million from December 27, 2014. Cash generated from operating profits was used to reduce debt and pay dividends. Notes payable decreased 8% as compared with same period last year and 13% as compared with year end. The following schedule summarizes the Company’s total debt:

 

In thousands  March 21,
2015
   December 27,
2014
   March 22,
2014
 
                
Notes payable short-term  $13,742   $16,200   $13,871 
Current portion long-term debt   1,592    1,586    1,569 
Long term debt   2,960    3,360    4,551 
Total  $18,294   $21,146   $19,991 

 

As a percentage of stockholders’ equity, total debt was 20%, 24% and 22% at March 21, 2015, December 27, 2014, and March 22, 2014 respectively.

 

The Company funds working capital requirements through operating cash flows and revolving credit agreements with its bank. Based on working capital requirements, the Company expects to have access to adequate levels of revolving credit to meet growth needs.

 

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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The Company is exposed to financial market risks, including changes in currency exchange rates and interest rates. The Company attempts to minimize these risks through regular operating and financing activities and, when considered appropriate, through the use of derivative financial instruments. During the quarter there were no derivatives in use. The Company does not purchase, hold or sell derivative financial instruments for trading or speculative purposes. With the divestiture of its Information Security and Print Finishing business completed, the Company reduced its exposure to changes in currency exchange rates.

 

Interest Rates
The Company’s exposure to market-rate risk for changes in interest rates relates primarily to its revolving variable rate bank debt which is based on LIBOR interest rates. A hypothetical 1% or 100 basis point change in interest rates would not have a significant effect on our consolidated financial position or results of operation.

 

Foreign Currency
The Company conducts business in various countries around the world and is therefore subject to risks associated with fluctuating foreign exchange rates. The Sporting Goods foreign currency transactions are denominated primarily in Mexican Peso and Chinese Yuan. The Company has a 50% interest in a joint venture, Stiga, which is denominated in Swedish Krona. Revenue from discontinued operations was generated from the operations of the Company’s subsidiaries in their respective countries and surrounding geographic areas and was primarily denominated in each subsidiary’s local functional currency. These former subsidiaries incurred most of their expenses (other than inter-company expenses) in their local functional currency and include the Euro, Great Britain Pound Sterling, Mexican Peso, Chinese Yuan, Swedish Krona and South African Rand.

 

The geographic areas outside the United States in which the Company operated are generally not considered by management to be highly inflationary. Nonetheless, the Company’s foreign operations are sensitive to fluctuations in currency exchange rates arising from, among other things, certain inter-company transactions that are denominated in currencies other than the respective functional currency. Operating results as well as assets and liabilities are also subject to the effect of foreign currency translation when the operating results, assets and liabilities of our foreign subsidiaries are translated into U.S. dollars in our consolidated financial statements.

 

The Company and its subsidiaries conduct substantially all their business in their respective functional currencies to avoid the effects of cross-border transactions. To protect against reductions in value and the volatility of future cash flows caused by changes in currency exchange rates, the Company carefully considers the use of transaction and balance sheet hedging programs such as matching assets and liabilities in the same currency. Such programs reduce, but do not entirely eliminate the impact of currency exchange rate changes. The Company has evaluated the use of currency exchange hedging financial instruments but has determined that it would not use such instruments under the current circumstances. Changes in currency exchange rates may be volatile and could affect the Company’s performance.

 

Item 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Escalade maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based closely on the definition of “disclosure controls and procedures” in Rules 13a-15(e) and 15d-15(e). In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, could provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Also, the Company has investments in certain unconsolidated entities. As the Company does not control or manage these entities, its disclosure controls and procedures with respect to such entities are necessarily substantially more limited than those it maintains with respect to its consolidated subsidiaries.

 

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The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.

 

Changes in Internal Control over Financial Reporting

 

Management of the Company has evaluated, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, changes in the Company’s internal controls over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the first quarter of 2015.

 

There have been no changes to the Company’s internal control over financial reporting that occurred since the beginning of the Company’s first quarter of 2015 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

PART II. OTHER INFORMATION

 

Item 1. LEGAL PROCEEDINGS.

 

None.

 

Item 1A. RISK FACTORS.

 

Not required.

 

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

c) Issuer Purchases of Equity Securities

 

Period  (a) Total
Number of
Shares (or
Units)
Purchased
   (b) Average Price
Paid per Share (or
Unit)
   (c) Total Number
of Shares (or
Units) Purchased
as Part of Publicly
Announced Plans
or Programs
   (d) Maximum
Number (or
Approximate
Dollar Value) of
Shares (or Units)
that May Yet Be
Purchased Under
the Plans or
Programs
 
Shares purchases prior to 7/12/2014 under the current repurchase program.   982,916   $8.84    982,916   $2,273,939 
First quarter purchases:                    
12/28/2014–1/24/2015   None    None    No Change    No Change 
1/25/2015-2/21/2015   None    None    No Change    No Change 
2/22/2015-3/21/2015   None    None    No Change    No Change 
Total share purchases under the current program   982,916   $8.84    982,916   $2,273,939 

 

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. The repurchase plan has no termination date and there have been no share repurchases that were not part of a publicly announced program.

 

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Item 3. DEFAULTS UPON SENIOR SECURITIES.

 

None.

 

Item 4. MINE SAFETY DISCLOSURES.

 

Not applicable.

 

Item 5. OTHER INFORMATION.

 

None.

 

Item 6. EXHIBITS

 

Number Description
   
3.1 Articles of Incorporation of Escalade, Incorporated.  Incorporated by reference from the Company’s 2007 First Quarter Report on Form 10-Q.
   
3.2 Amended By-laws of Escalade, Incorporated, as amended April 22, 2014.  Incorporated by reference from the Company’s First Quarter Report on Form 10-Q.
   
31.1 Chief Executive Officer Rule 13a-14(a)/15d-14(a) Certification.
   
31.2 Chief Financial Officer Rule 13a-14(a)/15d-14(a) Certification.
   
32.1 Chief Executive Officer Section 1350 Certification.
   
32.2 Chief Financial Officer Section 1350 Certification.
   
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
   
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
   
101.LAB XBRL Taxonomy Extension Label Linkbase Document
   
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
   
101.INS XBRL Instance Document
   
101.SCH XBRL Taxonomy Extension Schema Document

 

 

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  ESCALADE, INCORPORATED  
     
Date: April 21, 2015 /s/ Stephen R. Wawrin
    Vice President and Chief Financial Officer
    (On behalf of the registrant and in his
    capacities as Principal Financial Officer
    and Principal Accounting Officer)

 

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