Acushnet Holdings Corp. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018; unaudited. Acushnet designs, manufactures and distributes golf equipment and apparel, principally under the Titleist and FootJoy brands.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $478.1m | $428.0m | $919.9m | $861.6m |
| Gross profit / margin | $250.8m / 52.5% | $223.0m / 52.1% | $478.5m / 52.0% | $449.4m / 52.2% |
| Operating income | $64.6m | $57.9m | $126.9m | $122.4m |
| Net income attributable to Acushnet | $39.9m | $33.0m | $81.4m | $71.1m |
| Diluted EPS | $0.53 | $0.44 | $1.09 | $0.96 |
| Adjusted EBITDA / margin | $79.4m / 16.6% | $71.8m / 16.8% | $156.4m / 17.0% | $150.3m / 17.4% |
Q2 sales increased 11.7% reported and 9.0% at constant currency. Six-month sales increased 6.8% reported and 3.4% at constant currency. Q2 operating income and net income improved, while Adjusted EBITDA margin contracted. Six-month gross margin and Adjusted EBITDA margin also declined slightly.
- Growth drivers: Newly introduced Titleist irons and wedges lifted club sales; AVX premium golf balls contributed to Q2 ball growth. Q2 club sales rose 26.3% and ball sales rose 11.1%.
- Segment pressures: Gear sales and operating income declined in Q2. For the six months, ball, gear and FootJoy segment operating income fell year over year; club operating income rose 66.0%.
- Costs and taxes: Q2 SG&A rose $20.1m, including higher selling and product-launch advertising costs and unfavorable currency effects. Six-month SG&A increased $23.7m. The six-month effective tax rate fell to 28.7% from 35.6%, largely reflecting U.S. tax reform and geographic earnings mix.
Cash flow, debt and liquidity
- Six-month operating cash flow was $64.6m, versus cash use of $89.9m in 2017. The comparison was substantially affected by a $151.5m payment under an equity appreciation rights plan in the 2017 period.
- Investing cash use was $16.1m, including $13.7m of capital expenditures. Financing cash use was $47.5m, including $19.6m of common dividends and $6.5m paid to noncontrolling interests. Cash and restricted cash ended at $47.7m; unrestricted cash was $45.5m.
- Debt and capital lease obligations totaled approximately $444.2m at June 30, 2018, compared with approximately $464.1m at year-end 2017. Revolver borrowings were $37.2m. The company had $230.6m available under its revolving facility and $64.0m under local facilities; it reported covenant compliance.
- Receivables increased to $307.9m from $190.9m at year-end, consistent with stated seasonal patterns; inventory decreased to $317.4m from $364.0m.
Outlook, risks and notable items
- Management provided no full-year sales or earnings guidance in the supplied filing text. It expected operating cash flows, cash on hand and available credit to cover liquidity needs for at least 12 months, subject to customary borrowing conditions.
- Management planned approximately $20.3m of additional capital expenditures during the remainder of 2018, primarily maintenance, with further investment in innovation and technology.
- The business is seasonal and exposed to golf participation and weather, demand and product-launch timing, foreign exchange, raw-material costs, suppliers, competition and variable interest rates. A $100m interest-rate swap was entered into in May; the filing estimates a 1 percentage-point rate increase would raise annual pretax interest expense by $3.5m after hedging.
- Foreign-exchange forwards had $275.7m notional value. A hypothetical uniform 10% weakening of the U.S. dollar would reduce their reported net settlement asset by $22.1m, producing a liability; the sensitivity excludes offsetting movements in underlying exposures.
- The June credit amendment permitted an additional $150m of certain dividends and other payments, subject to conditions. The board also authorized up to $20m of share repurchases; none were made in Q2. A $0.13-per-share dividend was declared in the third quarter.
- ASC 606 adoption reduced opening retained earnings by $1.6m; its effect increased six-month sales by $4.2m and cost of sales by $1.6m. The company expected the new lease standard to materially increase recognized assets and liabilities.
- Pending ordinary-course litigation could be resolved unfavorably, but the company could not estimate aggregate losses and recorded no liability. Purchase obligations were $175.3m in total, including $145.1m due in the remainder of 2018.
Important facts for investors to verify
- Whether new club and AVX product demand persists, and whether older-model ball and club sales recover or continue to weigh on segment results.
- Whether operating cash generation and working-capital movements support dividends, planned capital spending and debt service through seasonal fluctuations.
- Debt balances, borrowing availability, covenant headroom, and the impact of rates and foreign exchange on earnings and cash flows.
- How tax reform estimates and lease-standard adoption affect future reported results and balance-sheet metrics.
- Any developments in litigation, purchase commitments, product warranty exposure, or execution of the authorized repurchase program.