The following section should be read in conjunction with Item 1: Business; Item 1A: Risk Factors; and Item 8: Financial Statements and Supplementary Data.


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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; 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, 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 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; 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; 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.



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.



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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. In January 2022, the Company acquired the assets of the Brunswick
Billiards® business, complementing its existing portfolio of billiards brands
and other offerings in the Company's indoor recreation market. These and other
acquisitions strengthen the Company's leadership in 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:



                  2022         2021        2020

Net revenue
Sporting Goods       0.1 %      14.6 %       51.6 %
Total                0.1 %      14.6 %       51.6 %

Net income
Sporting Goods     (26.4 %)     (7.3 %)     293.9 %
Total              (26.3 %)     (5.9 %)     257.3 %




As the impact of the COVID-19 pandemic evolves and may be waning, the Company
continues to respond to the challenges and opportunities arising from the
pandemic. Even though the pandemic may not have had a material adverse direct
effect on the Company, the pandemic's effects on the global supply chain, higher
freight and materials costs, supplier product delays, workforce availability and
labor costs have caused operational challenges for the Company. The ultimate
extent of the effects of the COVID-19 pandemic on the Company is highly
uncertain and will depend on future developments, and such effects could exist
for an extended period of time. Consumer demand for the Company's products may
be slowing due to additional factors such as general economic conditions,
inflation, recessionary fears, rising interest rates, changes in the housing
market and declining consumer confidence. Management cannot predict the full
impact of these factors on the Company. Due to the above circumstances and as
described generally in this Form 10-K, the Company's results of operations for
the 2022 fiscal year are not necessarily indicative of the results to be
expected for fiscal year 2023.



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Results of Operations

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





                                                2022        2021        2020
Net revenue                                      100.0 %     100.0 %     100.0 %
Cost of products sold                             76.5 %      75.4 %      72.7 %
Gross margin                                      23.5 %      24.6 %      27.3 %
Selling, administrative and general expenses      14.3 %      13.8 %      14.7 %
Amortization                                       0.8 %       0.6 %       0.5 %
Operating income                                   8.4 %      10.2 %      12.1 %




Revenue and Gross Margin



Net revenue increased 0.1% in 2022 compared to 2021. The Company recognized
increased sales due to the Brunswick Billiards acquisition completed in January
2022 and increases in pickleball and indoor games categories due to category
growth and market share gains. These increases were partially offset with lower
sales in our outdoor categories including archery, basketball, games, water
sports and playground.

The overall gross margin decreased to 23.5% in 2022 compared with 24.6% in 2021. Gross margins were unfavorably impacted by increased logistics expenses associated with ongoing inventory handling and storage costs.

Selling, General and Administrative Expenses





Selling, general and administrative expenses (SG&A) were $44.8 million in 2022
compared to $43.4 million in 2021, an increase of $1.4 million or 3.2%. The
increase in SG&A is attributable to the Brunswick Billiards acquisition
completed in 2022. SG&A as a percent of sales is 14.3% in 2022 compared with
13.8% in 2021.



Provision for Income Taxes



The effective tax rate for 2022 and 2021 was 20.5% and 20.1%, respectively. The
2022 effective tax rate is slightly lower than the federal statutory rate
primarily due to the captive insurance premiums being tax exempt, with federal
income tax credits helping to offset the impact of the state taxes and lower the
statutory rate. The 2021 effective tax rate is slightly lower than the federal
statutory rate primarily due to the captive insurance premiums being tax exempt,
with federal income tax credits helping to offset the impact of the state taxes
and lower the statutory rate.



                                       24

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Sporting Goods

Net revenues, operating income, and net income for the Sporting Goods segment for the three years ended December 31, 2022 were as follows:





In Thousands         2022          2021          2020

Net revenue        $ 313,757     $ 313,612     $ 273,649
Operating income      25,925        31,534        32,685
Net income            16,117        21,892        23,625

Net revenue increased 0.1% in 2022 compared to 2021.





Gross margin in 2022 was 23.5% compared to 24.6% in 2021. Gross margins were
unfavorably impacted by increased logistics expenses associated with ongoing
inventory handling and storage costs. Operating income, as a percentage of net
revenue, decreased to 8.3% in 2022 compared to 10.1% in 2021.

Financial Condition and Liquidity





The current ratio, a basic measure of liquidity (current assets divided by
current liabilities), for 2022 was 4.8, compared to 3.5 in 2021. Receivable
levels decreased to $57.4 million in 2022 compared with $66.0 million in 2021
and net inventory increased $29.5 million to $121.9 million in 2022 from $92.4
million in 2021, due partially to the acquisition of Brunswick Billiards. Trade
accounts payable and accrued liabilities decreased $9.5 million to $30.7 million
from $40.2 million in 2021.



The Company's working capital requirements are primarily funded through cash
flows from operations and revolving credit agreements with its bank. During
2022, the Company's maximum borrowings under its primary revolving credit lines
and overdraft facility totaled $113.8 million compared to $69.2 million in 2021.
The overall effective interest rate in 2022 was 3.8% compared to the effective
rate of 2.9% in 2021. Total debt at the end of the Company's 2022 fiscal year
was $94.9 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"). The 2022 Restated Credit
Agreement amended and restated the Amended and Restated Credit Agreement dated
as of January 21, 2019, as amended, in its entirety, and continues the existing
Company's credit facilities which have been in place since April 30, 2009. The
Company's indebtedness under the 2022 Restated Credit Agreement continues to be
collateralized by liens on all of the present and future equity of each of the
Company's domestic subsidiaries and substantially all of the assets of the
Company (excluding real estate). Under the terms of the 2022 Restated Credit
Agreement, Old National Bank was added as a Lender. The Lenders have now made
available to Escalade and Indian a senior revolving credit facility with
increased maximum availability of $65.0 million (the "Revolving Facility"), up
from $50.0 million, plus an accordion feature that would allow borrowings up to
$90.0 million under the Revolving Facility subject to certain terms and
conditions. The maturity date of the revolving credit facility was extended to
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 existing $50.0
million term loan facility to January 21, 2027.



In addition to the increased borrowing amount and extended maturity date, the
2022 Restated Credit Agreement provided a $7.5 million swingline commitment by
Chase, replaced LIBOR with the replacement benchmark secured overnight financing
rate, and adjusted certain financial covenants relating to the fixed charge
coverage ratio.



                                       25

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On July 18, 2022, the Company entered into the First Amendment to the 2022
Restated Credit Agreement. Under the terms of the First Amendment, the Lender
increased the maximum availability under the senior revolving credit facility
from $65.0 million to $75.0 million pursuant to the accordion feature in the
2022 Restated Credit Agreement. The First Amendment also adjusted the funded
debt to EBITDA ratio financial covenant to 3:00 to 1:00 as of the end of the
Company's third and fourth fiscal quarters of 2022.



On October 26, 2022, the Company entered into the Second Amendment ("Second
Amendment") to the 2022 Restated Credit Agreement. Under the terms of the Second
Amendment, the Lender increased the maximum availability under the senior
revolving credit facility from $75.0 million to $90.0 million pursuant to the
accordion feature in the 2022 Restated Credit Agreement. The Second Amendment
adjusted the funded debt to EBITDA ratio financial covenant to 3:25 to 1:00 as
of the end of the Company's third and fourth fiscal quarters of 2022 and 3:00 to
1:00 as of the end of the Company's first fiscal quarter of 2023. The Second
Amendment also modified the EBITDA definition to permit add-backs of a) up to
$2.0 million for disposition related expenses; and b) up to $2.0 million for
unusual or non-recurring expenses which are incurred prior to the end of fiscal
year 2023 and which are subject to the approval of the Administrative Agent.

As of December 31, 2022, the outstanding principal amount of the term loan was $39.9 million and total amount drawn under the Revolving Facility was $55.0 million.

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

In 2023, the Company estimates capital expenditures to be approximately $3.7 million.

The Company believes that cash generated from its projected 2023 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 2023.
To the extent that occurs, management will pursue cost reduction initiatives and
consider realignment of its infrastructure in an effort to match the Company's
overhead and cost structure with the sales level dictated by current market
conditions.



New Accounting Pronouncements

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





Contractual Obligations



The following schedule summarizes the Company's material contractual obligations
as of December 31, 2022:



Amounts in thousands                Total         2023         2024 -2025

2026 -2027 Thereafter



Debt(1)                           $  94,881     $   7,143     $     14,286     $     73,452     $         --
Future interest payments(1)          13,582         3,488            6,158            3,936               --
Operating leases                     12,053         1,454            2,769            2,560            5,270
Minimum payments under
purchase, royalty and license
agreements                            4,567           898            1,145            1,219            1,305
Total                             $ 125,083     $  12,983     $     24,358     $     81,167     $      6,575




Note:

(1) Assumes that the Company will not increase borrowings under its long-term
credit agreements and that the effective interest rate experienced in 2022 of
3.8% will continue for the life of the agreements.



                                       26
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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 fair value, an impairment charge to current operations
is recorded to reduce the carrying value to the fair value.



                                       27
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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 $42.3 million at December 31,
2022, the entire amount was allocated to the Escalade Sports reporting unit. The
results of the qualitative impairment assessment of the Escalade Sports
reporting unit indicated that it was not "more likely than not" that the fair
value of the reporting unit was less than the carrying value as of December 31,
2022.



Long Lived Assets

The Company evaluates the recoverability of certain long-lived assets whenever
events or changes in circumstances indicate that the carrying amount may not be
recoverable. Estimates of future cash flows used to test recoverability of
long-lived assets include separately identifiable undiscounted cash flows
expected to arise from the use and eventual disposition of the assets. Where
estimated future cash flows are less than the carrying value of the assets,
impairment losses are recognized based on the amount by which the carrying value
exceeds the fair value of the assets.



Capital Expenditures

As of December 31, 2022, the Company had no material commitments for capital expenditures. In 2023, the Company estimates capital expenditures to be approximately $3.7 million.

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