Quarterly Report for Quarter Ending June 30, 2026 (Form 10-Q)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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.

Overview

Escalade, 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, billiards, indoor and outdoor game recreation, safety 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 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.

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 United States Government has made a series of announcements concerning tariffs enacted and/or proposed to be enacted on the importation of goods into the United States including a baseline tariff rate and individualized higher rates on many countries including countries that supply goods to the Company, including China from which the Company imports a substantial amount of goods. While the United States Supreme Court issued a ruling earlier this year striking down tariffs previously imposed under the International Emergency Economic Powers Act ("IEEPA"), the U.S. government has since initiated new tariffs under Section 122 of the Trace Act. Although the Company has recognized and received recoveries of certain IEEPA tariffs and may recover additional IEEPA claims as well, the Company still faces challenges from these newly imposed tariffs and uncertainties regarding international trade policy and practices including retaliatory tariffs and trade restrictions.

Additionally, hostilities in the Middle East have adversely affected shipping routes and oil prices and may have effects on the economy in general. Tariffs, restrictions on trade, rising energy costs and disrupted shipping routes have in the past and may again in the future result in increased costs and/or the unavailability of goods purchased by the Company, which in turn may result in lower profitability and/or a decline in sales as well as the loss of goodwill among customers.

General economic conditions, inflation, recessionary fears, rising energy costs, rising interest rates, changes in the housing market and declining consumer confidence also 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-Q, the Company's results of operations for the period ended June 30, 2026 are not necessarily indicative of the results to be expected for fiscal year 2026.

Results of Operations

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

		Three Months Ended								Six Months Ended
		June 30, 2026				June 30, 2025				June 30, 2026				June 30, 2025
Net revenue			100.0	%			100.0	%			100.0	%			100.0	%
Cost of products sold			73.8	%			75.3	%			71.6	%			74.3	%
Gross margin			26.2	%			24.7	%			28.4	%			25.7	%
Selling, administrative and general expenses			21.6	%			18.9	%			20.4	%			19.0	%
Amortization			1.0	%			1.0	%			1.0	%			1.0	%
Tariff recovery			(17.1	%)			--				(8.7	%)			--
Operating income			20.7	%			4.8	%			15.7	%			5.7	%

Revenue and Gross Margin

Sales increased 6.2% for the second quarter of 2026, compared with the same period in the prior year. Sales increased largely due to increases in our archery categories, including the incremental contribution from our September 2025 acquisition of Gold Tip assets. Net sales also benefited from increased demand in the safety, table tennis and basketball categories. These increases were partially offset by lower sales in outdoor game categories.

For the six months ended June 30, 2026, net sales increased 3.3% compared with the same period in the prior year, driven by the same factors that impacted the second quarter.

Gross margin increased 146 basis points to 26.2% for the second quarter of 2026 compared to 24.7% for the same period in 2025, primarily driven by better absorption, operating leverage and a favorable sales mix. For the six months ended June 30, 2026, gross margin increased to 28.4% compared to 25.7% for the same period in 2025.

Selling, General and Administrative Expenses

Selling, general and administrative expenses (SG&A) were $12.5 million for the second quarter of 2026 compared to $10.2 million for the same period in the prior year, an increase of $2.2 million or 21.7%. The increase in SG&A is largely driven by selling and marketing expenses related to recent acquisitions and an increase in variable compensation.

SG&A as a percent of sales is 21.6% for the second quarter of 2026 compared with 18.9% for the same period in the prior year.

For the six months ended June 30, 2026, SG&A were $23.2 million compared to $20.8 million for the same period in the prior year.

Tariff Recovery

During the three months ended June 30, 2026, the Company recognized $10.2 million of tariff recoveries related to the U.S. Court of International Trade ruling stating importers who paid IEEPA tariffs were entitled to refunds plus interest. The Company recognized approximately $9.9 million in operating income and $0.3 million of interest income related to the IEEPA recoveries.

Provision for Income Taxes

The effective tax rate for the three months ending June 30, 2026 was 22.7% compared to 25.8% for the same three month period last year. The effective tax rate for the first six months ending June 30, 2026 was 23.0% compared to 24.7% for the same period last year. The effective tax rate for the three and six months ending June 30, 2026 decreased primarily due to refinements to expected state apportionment factors, which reduced state income tax expense.

Financial Condition and Liquidity

Total debt as of June 30, 2026 was $14.9 million, a decrease of $3.6 million from December 31, 2025. The following schedule summarizes the Company's total debt:

In thousands		June 30, 2026				December 31, 2025				June 30, 2025
Current portion of long-term debt		$	14,881			$	7,143			$	7,143
Long term debt			--				11,309				14,881
Total Debt		$	14,881			$	18,452			$	22,024

As a percentage of stockholders' equity, total debt was 8.1%, 10.7% and 13.1% at June 30, 2026, December 31, 2025, and June 30, 2025 respectively.

On October 11, 2024, the Company entered into the Fifth Amendment (the "Fifth Amendment") to its Amended and Restated Credit Agreement with its issuing bank, JPMorgan Chase Bank, N.A. and the other lenders identified therein (the "Restated Credit Agreement"). The Fifth 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. Under the terms of the Fifth Amendment, the Company and the Lender also agreed to decrease the maximum availability under the senior revolving credit facility from $75.0 million to $60.0 million, but added an accordion feature that could increase the facility in an amount not to exceed $85.0 million. The Fifth 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 June 30, 2026.

As of June 30, 2026, the outstanding principal amount of the term loan was $14.9 million and total amount drawn under the revolving facility was zero. The term loan and revolving facility have a maturity date of January 21, 2027.

The Company funds working capital requirements and shareholder dividends through operating cash flows and revolving credit agreements with its Lenders. The Company expects that cash generated from its 2026 and Q1 2027 operations will be sufficient to pay the remaining term loan balance of $11.3 million due on January 21, 2027.