Escalade (ESCA) Q3 2026 Earnings Call Transcript

This expansion was driven by a favorable sales mix, higher fixed cost absorption, and strong operational execution. We also continued to make progress improving asset utilization. Despite the additional inventory from the Gold Tip and AllCornhole acquisitions in the second half of last year and the ASL Solutions acquisition during this year's third quarter, total inventory was $2.9 million below the prior year level. This progress reflects our focus on driving working capital efficiency and generating free cash flow. We continue to work towards our longer-term inventory turn target of 3x.

As we move towards the heart of the holiday season, we continue to collaborate with our retail partners to deliver a more frequent cadence of promotions that highlight newness as well as value and engage consumers to accelerate sell-through. Although inflation and broader economic uncertainty continue to pressure discretionary consumer spending, our more resilient operating model gives us confidence in our ability to manage through these challenging market conditions. We expect recent and upcoming new product introductions to support market share gains across several key categories as we move into 2027. In pickleball, we had several new paddle launches from Onix, including the Praxis.

The Praxis features an Endurafoam core designed for durability and a raw carbon fiber surface that enhances spin and control. The new Onix Aeris offers an accessible entry price, a range of colors, and lightweight construction that helps players react quickly and stay comfortable during extended play. We've also been active in the game room with several new products in both table tennis and billiards. The STIGA Onyx18 tennis table features a QuickPlay design that assembles in minutes and has premium features such as integrated ball storage and locking caster wheels for easy mobility. Our new Pro Carbon Cybershape racket's unique profile combines a larger optimal hitting area with carbon-powered performance.

Within billiards, we launched the American Heritage Ann Arbor 8-ft table, which features a modern architectural design that makes it a showpiece for the home game room, 1 in, three-piece slate delivers exceptional playability and consistent ball roll. These launches illustrate our increased investment in product innovation across our portfolio. We expect our current and ongoing investments in innovation to drive an acceleration in new product introductions as we move into 2027. Strengthening the balance sheet remains a priority. During the third quarter, we repaid $1.8 million of debt and increased our cash balance by $8.1 million, ending the quarter with a net cash position of $11.4 million.

Our low-cost fixed-rate debt and higher cash balances also contributed to increased net interest income. Our consistent free cash flow and strong balance sheet also positions us to invest in innovation, accretive acquisitions, and our facilities to improve capacity as well as efficiency to support future growth. We remain focused on strategic, accretive acquisitions that enhance our existing platforms, expand our presence in attractive new categories, and strengthen our competitive positioning. We are encouraged by our growing pipeline of acquisitions opportunities that meet this criteria. In closing, our third quarter results demonstrated our ability to improve gross margins and cash generation in a challenging macroeconomic and geopolitical environment that is impacting consumer discretionary spending.

We expanded margins, improved working capital efficiency, and strengthened our balance sheet. Looking ahead, we believe our more efficient operating model, recent acquisitions, disciplined capital allocation, and financial flexibility position us to continue to pursue growth opportunities and create long-term shareholder value. With that, I will turn the call over to Stephen to walk through our third quarter financial results.

Stephen Wawrin:Thank you, Patrick. For the three months ended September 30, 2026, Escalade reported net income of $6.7 million or $0.48 per diluted share on net sales of $65.6 million. Gross margin was 29.4% compared to 28.1% in the prior year period. The 123 basis point improvement was a result of lower operational costs driven by better absorption and a favorable sales mix. Gold Tip, which we acquired in September 2025, contributed to the favorable mix as we continued to ramp up the business over the past year.

Selling, general, and administrative expenses were $11.6 million during the third quarter, a $0.4 million increase compared to the prior year period, largely related to costs associated with the AllCornhole and Gold Tip businesses, acquisition-related professional fees, and an increase in advertising expenses. Earnings before interest, taxes, depreciation, and amortization increased by $1.4 million to $10 million in the third quarter of 2026 versus $8.6 million in the prior year period. This increase reflects the year-over-year improvement in our gross profit as well as the benefit of recovery for previously paid tariffs received during the quarter of $1.6 million.

Cash flow from operations was $14.9 million in the third quarter compared to cash used of $1 million in the prior year period. The increase primarily reflects our higher net income and lower working capital requirements. As of September 30, 2026, the company had total cash and equivalents of $24.5 million. As of September 30, 2026, we had $13.1 million of total debt outstanding, all of which was classified as current as of the end of the quarter. With that, operator, we will open the call for questions.

Operator:We will now begin the question and answer session. To ask a question, you may press star, then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Rommel Dionisio with Aegis Capital. Please go ahead.

Rommel Dionisio:Good morning. Thank you. In your prepared comments, Patrick, you talk about favorable sales mix. Could you just walk us through? Is that more consumers moving up to more premium priced products within specific categories, or is it that kind of shift from, say, basketball to archery? How should we think about that? Thanks.

Patrick Griffin:Hey, Rommel. Patrick. That is a great question. What we kind of meant by the favorable sales mix is our customer base changed a little bit in the quarter, so we were doing more dealer business and customers that have fewer maybe programs, and then also more direct-to-consumer business, which is generally a higher margin business for us.

Rommel Dionisio:Okay, that is very helpful. Just on that theme, you talked about working through the holiday season with exciting promotions. Is that kind of promotional activity focused on gaining market share, or do you sense that there is any issue on retail inventories that you need to work through, that is why putting forth promotions? How should we kind of think about that as well?

Patrick Griffin:No, that is a great question. We are very comfortable with our current inventory levels. For us, I think it is just about having exciting promotions. We know it is going to be a promotional environment, so we want to have regular promotions, more promotions, and we want to get the consumer sooner in that buying cycle for the holidays.

Rommel Dionisio:Okay. And maybe just one last one. You're up to $25 million in cash now. Could you maybe walk us through kind of to the extent that you feel comfortable, your plans with free cash flow? I mean, you're obviously continuing to generate cash. Are you just kind of building war chests for future acquisitions, or how do you kind of think about whether that's paying down debt, all the different levers you can pull there? Thanks.

Patrick Griffin:Yep. No, thank you for the question. We're thinking about capital allocation in a couple different ways, but we're comfortable having We've talked about having at least a turn of EBITDA, which is around that number you mentioned on the balance sheet. So we have a pretty active pipeline of acquisition opportunities, so we're continuing to look at that. We're anticipating that some of that cash could be used towards acquisitions to the extent that we get to the finish line with those. And we've also talked about investing more in our businesses, so we've got some capital expenditure projects.

You'll see probably a little bit more of that in the fourth quarter, and a little bit more into next year as well and we continue to pay a dividend and buy back our shares from time to time when that makes sense for the board of directors.

Rommel Dionisio:Perfect. Thanks so much.

Patrick Griffin:You are welcome.

Operator:Again, if you have a question, please press star, then one. The next question comes from Michael Legg with Ladenburg. Please go ahead.

Michael Legg:Hi. Thanks. Congratulations on the operational progress. I wanted to ask a couple questions related to the tariff refund. I think you got roughly $10 million in the second quarter, and $9 million of that was receivable that you subsequently received. Does that mean your cash is now the $24 million plus the $9 million over $30 million?

Patrick Griffin:No. No, that is reflective of what you see on the balance sheet, includes the tariff refund that we received.

Michael Legg:Okay. Did the tariff impact the free cash flow this quarter?

Patrick Griffin:Yes, it did.

Michael Legg:Okay. Thank you.

Patrick Griffin:You are welcome. Thanks, Mike, for the question.

Operator:This concludes our question and answer session. I would like to turn the conference back over to Wes Smith for any closing remarks.

Wes Smith:Thank you, operator. Once again, thank you for your interest in Escalade and for joining our call. Should you have any questions, please feel free to contact us at ir@escaladeinc.com and a member of our team will follow up with you. This concludes our call today. You may now disconnect.

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Escalade (ESCA) Q3 2026 Earnings Call Transcript was originally published by The Motley Fool