Acushnet Holdings Corp. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018; unaudited. Acushnet designs, manufactures and distributes golf products under brands including Titleist and FootJoy. Comparisons below are against the corresponding 2017 periods.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $370.4m | $347.3m | $1,290.4m | $1,208.9m |
| Gross profit / margin | $188.9m / 51.0% | $173.1m / 49.8% | $667.4m / 51.7% | $622.5m / 51.5% |
| Operating income | $25.9m | $19.2m | $152.7m | $141.5m |
| Net income attributable to Acushnet | $7.1m | $9.3m | $88.5m | $80.4m |
| Diluted EPS | $0.09 | $0.12 | $1.18 | $1.08 |
| Adjusted EBITDA / margin | $38.3m / 10.4% | $32.2m / 9.3% | $194.8m / 15.1% | $182.5m / 15.1% |
Q3 sales rose 6.7% reported and 7.0% at constant currency; nine-month sales rose 6.7% reported and 4.4% at constant currency. The stronger reported nine-month growth reflected favorable currency translation. Adjusted EBITDA is a non-GAAP measure defined by the company.
- Cash flow: Nine-month operating cash flow was $130.1m, versus cash used of $17.9m in 2017; investing cash use was $23.0m, and financing cash use was $95.7m. Management attributed much of the operating-cash-flow comparison to a $151.5m equity appreciation rights plan payment in 2017.
- Cash and debt: September 30 cash and restricted cash was $58.0m, including $55.9m unrestricted cash. Balance-sheet debt and capital lease obligations totaled approximately $405.8m, versus approximately $464.1m at December 31, 2017. The company reported $255.1m available under its revolving facility and $61.9m under local facilities.
- Liquidity: Management said operating cash flow, cash on hand and available facilities should meet liquidity needs for at least 12 months, subject to customary borrowing conditions. Liquidity is seasonal; 97% of unrestricted cash was held at non-U.S. subsidiaries.
- Dividends and investment: Dividends declared were $0.13 per share in Q3 and $0.39 per share for the nine months. Capital expenditures were $20.7m year to date; management anticipated about $9.3m for the rest of 2018, subject to project timing.
Material changes and business trends
- Titleist golf clubs and balls led Q3 growth: club sales increased 16.9% and ball sales 6.0%. New TS drivers/fairways, wedges and AVX golf balls were key drivers.
- For the nine months, golf-club sales grew 19.2% reported (16.9% constant currency), while golf-ball sales grew 3.7% reported (2.0% constant currency). Growth was concentrated in clubs and newer ball models.
- FootJoy golf wear operating income fell to a Q3 loss of $1.5m from income of $5.1m a year earlier, reflecting lower footwear volume, unfavorable footwear mix and higher expenses. Nine-month segment operating income declined 24.3% to $24.1m.
- Titleist golf gear nine-month segment operating income declined 14.8% to $16.3m. In contrast, golf-club segment operating income rose to $29.8m from $13.7m.
- SG&A increased 5.1% in Q3 and 7.0% for the nine months; R&D increased 18.6% and 8.5%, respectively. Nine-month SG&A included a $6.4m unfavorable foreign-currency impact.
Outlook, risks and unusual items
- The filing gives no specific full-year sales, earnings or margin guidance. Management’s stated outlook includes approximately $9.3m of remaining-2018 capital expenditures and its expectation of adequate liquidity for at least 12 months.
- Q3 net income attributable to Acushnet declined despite higher operating income, primarily because of higher tax expense. The quarter included an unfavorable, non-cash $5.1m tax adjustment related to the Tax Act transition tax; the nine-month adjustment was $3.6m. The company said its Tax Act estimates remained under analysis. Q3 effective tax rate was 57.9%, versus 24.7%; nine-month rates were 32.5% and 34.4%.
- Other expense included a $2.5m non-cash pension settlement expense associated with the former CEO’s retirement. Adjusted EBITDA adds this settlement expense back.
- The company amended its credit agreement in June to permit an additional $150m of specified dividends, other payments and share repurchases, subject to conditions. It was covenant-compliant at quarter-end. A $20m repurchase program had been authorized, but no shares had been repurchased through September 30.
- On October 1, 2018, after quarter-end, Acushnet completed the acquisition of an 80% interest in certain PG Professional Golf assets and liabilities for $14.4m.
- Key exposures include golf participation and weather, seasonality and product-launch timing, competition, customer and demand trends, foreign exchange, input costs and supply disruptions, variable-rate debt, and tax uncertainty. The company reported ordinary-course litigation but could not estimate its aggregate potential loss; no related liability was recorded. It reported no material change to the risk factors in its 2017 Form 10-K.
Investor verification priorities
- Review the drivers of constant-currency growth and whether new club and ball launches sustain sales as product cycles progress.
- Track FootJoy footwear volumes, segment profitability and expense trends, alongside Titleist gear performance.
- Assess the recurring tax rate separately from the discrete transition-tax adjustment and monitor final Tax Act estimates.
- Reconcile debt repayment, seasonal working-capital needs, cash location and facility availability; consider the effects of floating rates and currency hedges.
- Check subsequent disclosures on the PG Professional Golf acquisition, remaining capital spending, dividend capacity and any use of the repurchase authorization.