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 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 of divestitures or discontinuances of certain operations, assets, brands,
and products; the continuation and development of key customer, supplier,
licensing and other business relationships; the 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 supply
chain, including potential disruptions or delays arising from political unrest,
war, labor strikes, natural disasters, and public health crises such as the
coronavirus pandemic; 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 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 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.



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.



                                       17





In 2017, the Company acquired Lifeline Products, LLC, a fitness leader of over
40 years, providing products used for bodyweight, progressive variable
resistance and functional training. In 2018, the Company acquired Victory
Tailgate, LLC, a brand known for its premium licensed and custom tailgating
games. These and other acquisitions strengthen the Company's leadership in
various product categories, while providing exciting new opportunities within
the sports licensing and customization space. 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:



                  2019         2018        2017
Net revenue
Sporting Goods       2.7 %      (0.9 %)      3.3 %
Total                2.7 %      (0.9 %)      3.3 %

Net income
Sporting Goods     (39.2 %)     14.4 %      (1.7 %)
Total              (64.5 %)     45.4 %      22.3 %




Results of Operations

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





                                                2019        2018        2017
Net revenue                                      100.0 %     100.0 %     100.0 %
Cost of products sold                             76.5 %      74.4 %      74.8 %
Gross margin                                      23.5 %      25.6 %      25.2 %
Selling, administrative and general expenses      17.6 %      16.9 %      16.1 %
Amortization                                       0.8 %       0.8 %       0.9 %
Operating income                                   5.1 %       7.9 %       8.2 %




Revenue and Gross Margin

Net revenue increased 2.7% in 2019 compared to 2018.





The overall gross margin percentage decreased to 23.5% in 2019 compared with
25.6% in 2018 due primarily to customer allowances, lower factory utilization,
tariffs and sales mix.

Selling, General and Administrative Expenses





Selling, general and administrative expenses (SG&A) were $31.6 million in 2019
compared to $29.8 million in 2018, an increase of $1.8 million or 6.1%. SG&A
increased due to operating costs associated with Victory Tailgate, which was
acquired during the fourth quarter of 2018 and an investment in basketball
displayers. SG&A as a percent of sales is 17.6% in 2019 compared with 16.9%

in
2018.



Other Income




During 2018, the Company recognized a $13.0 million gain in other income on the
sale of our 50% owned equity method investment, Stiga, a Swedish entity. Equity
in earnings of affiliates was $0.1 million in 2018.



                                       18





Provision for Income Taxes




The effective tax rate for 2019 and 2018 was 18.8% and 22.7%, respectively. The
2019 effective tax rate is lower than the statutory rate primarily due to the
federal benefit of state income taxes and federal income tax credits. The 2018
effective tax rate was higher than the statutory rate primarily due to the
impact of state income taxes and additional provisional expenses booked relative
to the 2017 U.S. Tax Reforms signed into law on December 22, 2017 making
significant changes to the Internal Revenue Code. Specifically, 2018 included
the impact of the Section 965 Transition Tax paid on the untaxed foreign
earnings of a controlled foreign corporation as if those earnings had been
repatriated to the United States.



Sporting Goods

Net revenues, operating income, and net income for the Sporting Goods segment for the three years ended December 28, 2019 were as follows:





In Thousands         2019          2018          2017
Net revenue        $ 180,541     $ 175,780     $ 177,333
Operating income       8,611        13,999        15,600
Net income             5,997         9,869         8,626

Net revenue increased 2.7% in 2019 compared to 2018.





The gross margin ratio in 2019 was 23.5% compared to 25.6% in 2018. The decrease
was primarily due to increased customer allowances, lower factory utilization,
tariffs and sales mix. Operating income, as a percentage of net revenue,
decreased to 4.8% in 2019 compared to 8.0% in 2018.

Financial Condition and Liquidity


The current ratio, a basic measure of liquidity (current assets divided by
current liabilities), for 2019 was 4.8, compared to 5.3 in 2018. Receivable
levels decreased to $35.5 million in 2019 compared with $40.7 million in 2018
and net inventory increased $3.2 million to $42.3 million in 2019 from $39.1
million in 2018.



The Company's working capital requirements are primarily funded through cash
flows from operations and revolving credit agreements with its bank. During
2019, the Company's maximum borrowings under its primary revolving credit lines
and overdraft facility totaled $10.5 million compared to $24.2 million in 2018.
The overall effective interest rate in 2019 was 8.7% compared to the effective
rate of 4.9% in 2018. Proceeds from the sale of the Company's 50% interest in
Stiga were used to pay off outstanding debt, including the repayment of the
Company's outstanding term loan facility during 2018. Total long-term debt at
the end of the Company's 2019 fiscal year was zero.



On January 21, 2019, the Company entered into an Amended and Restated Credit
Agreement ("2019 Restated Credit Agreement") with the its issuing bank, JPMorgan
Chase Bank, N.A. ("Chase"), and the other lenders identified in the 2019
Restated Credit Agreement (collectively, the "Lender"). Under the terms of the
2019 Restated Credit Agreement, the Lender has made available to the Company a
senior revolving credit facility with increased maximum availability of $50.0
million. The maturity date was extended to January 31, 2022. In addition to the
increased borrowing amount and extended maturity date, other significant changes
reflected in the 2019 Restated Credit Agreement include: more favorable interest
rate provisions; increases in borrowing base availability; releases of existing
mortgages on the Company's real property; and increasing to $25.0 million the
total consideration that the Company may use for acquisitions without obtaining
the Lender's consent, as long as no event of default exists.

Operating cash flows were used to fund acquisitions, to pay shareholder dividends, and to fund stock repurchases.

In 2020, the Company estimates capital expenditures to be approximately $2.9 million.





                                       19

The Company believes that cash generated from its projected 2020 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 2020.
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".

Off Balance Sheet Financing Arrangements

The Company has no financing arrangements that are not recorded on the Company's balance sheet.





Contractual Obligations



The following schedule summarizes the Company's material contractual obligations
as of December 28, 2019:



Amounts in thousands            Total           2020         2021 - 2022       2023 - 2024       Thereafter
Debt                          $        -     $        -     $           -     $           -     $          --
Future interest payments               -              -                 -                 -                --
Operating leases                   1,207            715               448                44                --
Minimum payments under
purchase, royalty and
license agreements                 3,724          1,662             1,522               540                --
Total                         $    4,931     $    2,377     $       1,970     $         584     $          --

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 90 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.



                                       20





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 step one of the two-step goodwill impairment test,
in which the fair value of the reporting unit is compared to its carrying value.
If not, then performance of the second step of the goodwill impairment test is
not necessary. If the carrying value of goodwill exceeds the implied estimated
fair value calculated in the second step, an impairment charge to current
operations is recorded to reduce the carrying value to the implied estimated
fair value.



If the second step of the 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 $26.7 million at December 28,
2019, 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

28,
2019.



                                       21





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.

Non-Marketable Equity Method Investment





The Company had a minority equity position in a company strategically related to
the Company's business, but did not have control over this company. The
accounting method employed was dependent on the level of ownership and degree of
influence the Company can exert on operations. Where the equity interest was
less than 20% and the degree of influence was not significant, the cost method
of accounting is employed. Where the equity interest was greater than 20% but
not more than 50%, the equity method of accounting is utilized. Under the equity
method, the Company's proportionate share of net income was recorded in equity
in earnings of affiliates on the consolidated statements of operations. The
proportionate share of net income was $0.1 million and $1.6 million in 2018 and
2017, respectively. Total cash dividends received from this equity investment
amounted to $2,323 thousand and $2,168 thousand in 2018 and 2017, respectively.
On May 17, 2018, the company completed the sale of its 50% interest for $33.7
million, resulting in a gain on sale of $13.0 million. In conjunction with the
sale, the Company entered into a new license agreement with Stiga for the
licensing rights to manufacture, market, promote, sell and distribute
Stiga-branded table tennis hobby products in the United States, Mexico and
Canada. The Company has had the licensing rights for such products since 1995
pursuant to an existing license agreement that expired December 31, 2018. The
new license agreement went into effect on January 1, 2019.



Effect of Inflation



The Company cannot accurately determine the precise effects of inflation. The
Company attempts to pass on increased costs and expenses through price increases
when necessary. The Company is working on reducing expenses; improving
manufacturing technologies; and redesigning products to keep these costs under
control.



Capital Expenditures

As of December 28, 2019, the Company had no material commitments for capital expenditures. In 2020, the Company estimates capital expenditures to be approximately $2.9 million.

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