ESCALADE INC (ESCA) FY 2025 MD&A

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 statements that we believe are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Rule 175 promulgated thereunder, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 3b-6 promulgated thereunder. All statements, other than statements of historical fact, are forward-looking statements. These statements relate to our financial condition, results of operations, plans, objectives, future performance, capital actions or business. They usually can be identified by the use of forward-looking language such as “will likely result,” “may,” “are expected to,” “is anticipated,” “potential,” “estimate,” “forecast,” “projected,” “intends to,” or may include other similar words or phrases such as “believes,” “plans,” “trend,” “objective,” “continue,” “remain,” or similar expressions, or future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” or similar verbs. You should not place undue reliance on these statements, as they are subject to risks and uncertainties. These risks include, but are not limited to: Escalade’s ability to achieve its business objectives; Escalade’s plans and expectations surrounding the transition to its new Chief Executive Officer and all potential related effects and consequences; Escalade’s ability to successfully implement actions to lessen the potential impacts of tariffs, a potential trade war with China 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; our international operations, including any related to political uncertainty and geopolitical tensions; 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 protect its intellectual property; Escalade’s ability to develop and implement our own direct to consumer e-commerce distribution channel; the impact of competitive products and pricing; product demand and market acceptance; new product development; 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, terrorist attacks, labor strikes, natural disasters, public health crises such as the coronavirus pandemic, and other events and circumstances beyond our control; the evaluation and implementation of remediation efforts designed and implemented to enhance the Company’s control environment; the potential identification of one or more additional material weaknesses in the Company’s internal control of which the Company is not currently aware or that have not yet been detected; Escalade’s ability to control costs, including managing inventory levels; general economic conditions, including inflationary pressures; fluctuation in operating results; changes in foreign currency exchange rates; changes in the securities markets; continued listing of the Company’s common stock on the NASDAQ Global Market; the Company’s inclusion or exclusion from certain market indices; Escalade’s ability to obtain financing, to maintain compliance with the terms of such financing and to manage debt levels; the availability, integration and effective operation of information systems and other technology, and the potential interruption of such systems or technology; the potential impact of actual or perceived defects in, or safety of, our products, including any impact of product recalls or legal or regulatory claims, proceedings or investigations involving our products; risks related to data security of privacy breaches; the potential impact of regulatory claims, proceedings or investigations involving our products; Escalade’s use of estimates in its financial reporting as well as in its forward looking statements; 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.

22

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.

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 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 September 2025, Escalade acquired the assets of Gold Tip, a leading brand of products for target archery and bow and crossbow hunting from Revelyst, Inc., strengthening the Company’s market position in archery. In December 2025, Escalade acquired AllCornhole, a leading brand and supplier of cornhole bags and equipment for competitive cornhole play.

Management seeks acquisitions that strengthen the Company’s leadership in various product categories or provide entry into attractive new product categories. 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. Consistent with that philosophy, the Company completed the discontinuance of its Mexico operations, sale of its Mexican facilities, discontinuance of its Orlando, FL operations and terminated its long-term lease for the Orlando, FL facility in 2024.

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 two years:

General economic conditions, inflation, recessionary fears, rising interest rates, changes in the housing market and declining consumer confidence may impact the Company adversely. Management cannot predict the full impact of these factors on the Company. Due to the above circumstances and as described generally in this Form 10-K, the Company’s results of operations for the 2025 fiscal year are not necessarily indicative of the results to be expected for fiscal year 2026.

23

Results of Operations

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

Revenue and Gross Margin

Net sales decreased 4.5% in 2025 compared to 2024. The Company recognized declines in sales across multiple categories due to softer consumer demand, partially offset by improved demand in the archery, billiards, and fitness categories.

The overall gross margin increased to 26.9% in 2025 compared with 24.7% in 2024. Gross margins were favorably impacted by lower manufacturing costs due to a smaller operational footprint, when compared to the prior-year period.

Selling, General and Administrative Expenses

Selling, general and administrative expenses (SG&A) were $43.6 million in 2025 compared to $43.3 million in 2024, an increase of $0.3 million or 0.7%. The increase in SG&A was primarily related to CEO transition costs incurred during 2025. SG&A as a percent of sales is 18.2% in 2025 compared with 17.2% in 2024.

Provision for Income Taxes

The effective tax rate for 2025 and 2024 was 24.0% and 26.9%, respectively. The 2025 effective tax rate is higher than the federal statutory rate primarily due to the impact of state taxes and nondeductible expenses. The 2024 effective tax rate is higher than the federal statutory rate primarily due to state income tax expense, nondeductible expenses, and the sale of Harvard Sports, partially offset by federal income tax credits.

Sporting Goods

Net sales, operating income, and net income for the Sporting Goods segment for the two years ended December 31, 2025 were as follows:

Net sales decreased 4.5% in 2025 compared to 2024.

Gross margin in 2025 was 26.9% compared to 24.7% in 2024. Operating income, as a percentage of net sales, decreased to 8.9% in 2025 compared to 9.2% in 2024.

24

Financial Condition and Liquidity

The current ratio, a basic measure of liquidity (current assets divided by current liabilities), for 2025 was 4.3, compared to 3.9 in 2024. Receivable levels decreased to $46.3 million in 2025 compared with $48.8 million in 2024 as a result of lower sales. Net inventory decreased $7.5 million to $68.5 million in 2025 from $76.0 million in 2024, due to continued efforts to right size our on hand inventory. Trade accounts payable and accrued liabilities decreased $4.1 million to $22.8 million from $26.9 million in 2024.

The Company’s working capital requirements are primarily funded through cash flows from operations and revolving credit agreements with its bank. During 2025, the Company’s maximum borrowings under its primary revolving credit lines and overdraft facility totaled $27.0 million compared to $58.7 million in 2024. The overall effective interest rate in 2025 was 3.7% compared to the effective rate of 5.4% in 2024. Total debt at the end of the Company’s 2025 fiscal year was $18.5 million.

On January 21, 2022, the Company and its wholly owned subsidiary, Indian Industries, Inc. (“Indian”), entered into an Amended and Restated Credit Agreement (the “2022 Restated Credit Agreement”) with its issuing bank, JPMorgan Chase Bank, N.A. (“Chase”), and the other lenders identified in the Restated Credit Agreement (collectively, the “Lenders”). Pursuant to the October 11, 2024 amendments to the 2022 Restated Credit Agreement, the Lenders have now made available to Escalade and Indian a senior revolving credit facility with maximum availability of $60.0 million (the “Revolving Facility”), which includes a $7.5 million swingline commitment by Chase, plus an accordion feature that would allow borrowings up to $85.0 million under the Revolving Facility subject to certain terms and conditions. The maturity date of the revolving credit facility is January 21, 2027. The Company may prepay the Revolving Facility, in whole or in part, and reborrow prior to the revolving loan maturity date. The 2022 Restated Credit Agreement further extended the maturity date for the Company’s existing $50.0 million term loan facility to January 21, 2027.

On October 11, 2024, the Company entered into the Fifth Amendment to the 2022 Restated Credit Agreement. This amendment eliminated the fixed charge coverage ratio covenant and related provisions. The fixed charge ratio covenant was replaced by a new minimum interest coverage ratio covenant of 3.50 to 1:00 effective September 30, 2024. The amendment further revised the restricted payments covenant to provide that if at any time the Company’s Funded Debt to EBITDA Ratio would exceed 1.75 to 1.0, then the aggregate combined total of cash dividends and Company share repurchases may not exceed $12.0 million in any trailing twelve-month period.

The Company was in compliance with the debt covenants set forth in the Restated Credit Agreement as of December 31, 2025.

As of December 31, 2025, the outstanding principal amount of the term loan was $18.5 million and total amount drawn under the Revolving Facility was zero.

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

The Company believes cash generated from its projected 2026 operations and the commitment of borrowings from its primary lender will provide it with sufficient cash flows for its operations. The Company expects cash generated from 2026 and Q1 2027 operations will be sufficient to pay the remaining term loan balance of $11.3 million due on January 21, 2027.

It is possible that if economic conditions deteriorate, this could have adverse effects on the Company’s ability to operate profitably during fiscal year 2026. 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.

25

New Accounting Pronouncements

Refer to Note 1 to the consolidated financial statements under the sub-heading “New Accounting Pronouncements”.

Contractual Obligations

The following schedule summarizes the Company’s material contractual obligations as of December 31, 2025:

Note:

(1) Assumes that the Company will not increase borrowings under its long-term credit agreements, the fixed term loan rate of 2.97% was used to calculate future interest payments.

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.

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 the reporting unit exceeds the fair value, an impairment charge to current operations is recorded to reduce the carrying value to the fair value.

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.

26

The Company has one reporting unit that is identical to our operating segment, Sporting Goods. Of the total recorded goodwill of $42.3 million at December 31, 2025, the entire amount was allocated to the Escalade Sports reporting unit. The results of the quantitative impairment assessment of the Escalade Sports reporting unit indicated that the fair value of the reporting unit was greater than the carrying value as of September 1, 2025. The Company performed a qualitative assessment for the interim period from September 1, 2025 to December 31, 2025. The results of the qualitative impairment assessment indicated that it was not “more likely than not” that the fair value of the reporting unit was less than the carrying value as of December 31, 2025.

Capital Expenditures

As of December 31, 2025, the Company had no material commitments for capital expenditures. In 2026, the Company has budgeted capital expenditures in the range of approximately $4.2 million to $5.2 million. Actual expenditures may be higher or lower than budgeted amounts.