ESCALADE, INCORPORATED 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 Interim 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 theSecurities 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. OverviewEscalade, Incorporated (Escalade, the Company, we, us or our) is focused on growing its Sporting Goods business through organic growth of existing categories, strategic acquisitions, and new product development. The Sporting Goods business competes in a variety of categories including basketball goals, archery, pickleball, billiards, indoor and outdoor game recreation, water sports, 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 enables it to be a low cost supplier. To enhance growth opportunities, the Company has focused on promoting new product innovation and development and brand marketing. In addition, the Company has embarked on a strategy of acquiring companies or product lines that complement or expand the Company's existing product lines or provide expansion into new or emerging categories in sporting goods. A key objective is the acquisition of product lines with barriers to entry that the Company can take to market through its established distribution channels or through new market channels. Significant synergies are achieved through assimilation of acquired product lines into the existing Company structure. The Company also sometimes divests or discontinues certain operations, assets, brands, 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.
13
--------------------------------------------------------------------------------COVID-19 Pandemic The novel coronavirus (COVID-19) pandemic continued to affect the Company's operations through the third quarter of 2021 and may continue to do so indefinitely thereafter. Increased customer demand the Company experienced through 2020, likely caused in part by consumers remaining home to limit the spread of COVID-19, has carried over into the 2021 fiscal year. While the Company continues to meet these demands through accelerated ordering schedules and increased inventory, a substantial decrease in customer demand or slower payments by the Company's mass merchants, specialty dealers or other customers could adversely impact the Company's liquidity. 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, 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. In particular, uncertainty concerning the ongoing severity of the pandemic, potential government actions in response to the pandemic, the length of time it takes for normal economic operating conditions to resume, and potential changes in consumer habits following the lifting of COVID restrictions, all contribute to a volatile environment for conducting business. Due to the above circumstances and as described generally in this Form 10-Q, the Company's results of operations for the period endedOctober 2, 2021 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 ends.
Results of Operations
The following schedule sets forth certain consolidated statement of operations data as a percentage of net revenue:
Three Months Ended Nine Months Ended
October 2, October 3, October 2, October 3,
2021 2020 2021 2020Net revenue 100.0 % 100.0 % 100.0 % 100.0 % Cost of products sold 77.5 % 69.9 % 74.7 % 71.4 % Gross margin 22.5 % 30.1 % 25.3 % 28.6 % Selling, administrative and general expenses 12.6 % 13.3 % 14.1 % 15.0 % Amortization 0.5 % 0.4 % 0.6 % 0.5 % Operating income 9.4 % 16.4 % 10.6 % 13.1 % Revenue and Gross Margin Sales increased by 4.1% for the third quarter of 2021, compared with the same period in the prior year. The increase in sales was driven by continued demand for our products, primarily in the archery and games product lines. For the first nine months of 2021, sales were up 20.8% compared to prior year. The overall gross margin percentage decreased to 22.5% for the third quarter of 2021, compared to 30.1% for 2020. Gross margin was negatively impacted by higher transportation expenses, raw material costs, currency exchange rates, increased wage pressure, and inventory handling costs.
Gross margin percentage decreased to 25.3% for the first nine months of 2021, compared to 28.6% for the same period in the prior year.
Selling, General and Administrative Expenses
Selling, general and administrative expenses (SG&A) were$10.2 million for the third quarter of 2021 compared to$10.4 million for the same period in the prior year, a decrease of$0.2 million or 1.7%. SG&A as a percent of sales is 12.6% for the third quarter of 2021 compared with 13.3% for the same period in the prior year. For the first nine months of 2021, SG&A were$33.9 million compared to$29.8 million for the same period in 2020, an increase of$4.1 million or 13.9%. As a percent of sales, SG&A is 14.1% for the first nine months of 2021 compared with 15.0% for the same period in the prior year.
Provision for Income Taxes
The effective tax rate for the first nine months of 2021 was 20.5% compared to 20.0% for the same period last year.
14
--------------------------------------------------------------------------------Financial Condition and Liquidity
Total debt at the end of the first nine months of 2021 was
October 2, December 26, October 3,
In thousands 2021 2020 2020
Current portion of long-term debt $ 7,143 $ -- $ --
Long term debt $ 51,874 $ 30,073 $ --
As a percentage of stockholders' equity, total debt was 40.8%, 21.6% and zero at
OnJuly 7, 2021 , the Company and its wholly owned subsidiary,Indian Industries, Inc. ("Indian") entered into the Fourth Amendment dated as ofJuly 7, 2021 (the "Fourth Amendment") to the 2019 Restated Credit Agreement dated as ofJanuary 21, 2019 among the Company, Indian, each of their domestic subsidiaries, and Chase, as Administrative Agent and as Lender (the "Lender"). Under the terms of the Fourth Amendment, the Lender extended a$50.0 million term loan to the Company and reduced the maximum availability under the senior revolving credit facility from$75.0 million to$50.0 million . The maturity date of the term loan isJuly 7, 2026 and the maturity date of the revolving credit facility likewise was extended toJuly 7, 2026 . The Company may prepay the revolving credit facility, in whole or in part, and reborrow prior to the revolving loan maturity date. The Company's indebtedness under the Credit Agreement continues to be collateralized by liens on all of the present and future equity of each of the Company's domestic subsidiaries and substantially all of the assets of the Company (excluding real estate). The Company funds working capital requirements, shareholder dividends, and stock repurchases through operating cash flows and revolving credit agreements with its bank. The Company expects to have access to adequate levels of revolving credit to meet growth needs.
© Edgar Online, source
