Acushnet Holdings Corp. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2017. Acushnet designs, manufactures and distributes golf products under the Titleist and FootJoy brands. Figures below are in U.S. dollars; financial statements are unaudited.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $347.3m | $339.3m | $1,208.9m | $1,242.5m |
| Gross profit / margin | $173.0m / 49.8% | $166.9m / 49.2% | $622.3m / 51.5% | $630.7m / 50.8% |
| Operating income | $18.3m | $9.6m | $139.9m | $133.2m |
| Net income attributable to Acushnet | $9.3m | Loss of $5.5m | $80.4m | $45.2m |
| Diluted earnings per share | $0.12 | Loss of $0.38 | $1.08 | $0.67 |
| Adjusted EBITDA / margin | $32.2m / 9.3% | $28.0m / 8.3% | $182.5m / 15.1% | $190.3m / 15.3% |
Cash flow and liquidity: Nine-month operating cash flow was negative $17.9m, versus positive $122.0m a year earlier; management attributed the deterioration mainly to the $151.5m cash settlement of the equity appreciation rights (EAR) plan. Investing cash outflow was $12.8m, including capital expenditures. Financing cash inflow was $20.4m. Cash and restricted cash was $73.2m at September 30, including $3.4m restricted; unrestricted cash was $69.8m, of which 96.4% was held by non-U.S. subsidiaries. Revolver availability was $251.3m after letters of credit, with $63.5m available under local credit facilities. Management believed available cash, operating cash flow and borrowing capacity would meet liquidity needs for at least 12 months, subject to borrowing conditions.
Debt and balance sheet: Debt and capital lease obligations totaled $463.8m, net of $3.1m debt issuance costs; the filing reports $466.8m of outstanding indebtedness excluding those costs. Total liabilities were $862.9m and shareholders’ equity was $842.7m. The company was in compliance with its credit agreement covenants at quarter-end. A 1 percentage-point increase in variable rates was estimated to increase annual pretax interest expense by $5.4m.
Dividends: The company declared $0.12 per share for each of the first three 2017 quarters, or $0.36 per share for the nine months. A further $0.12 dividend was declared after quarter-end, payable December 15, 2017.
Changes and operating drivers
- Q3 sales rose 2.3% reported and 2.9% at constant currency. Higher club sales, driven by new irons and hybrids, and FootJoy wear growth outweighed lower golf-ball sales. U.S. sales increased 4.6%; Japan declined 13.7% reported.
- Q3 operating income and gross margin improved; lower interest expense was a major factor in the year-over-year shift from a net loss to profit. Net interest expense fell to $4.0m from $15.7m, mainly reflecting the post-IPO conversion of convertible notes, prior bond redemption and lower average rates.
- Nine-month sales fell 2.7% reported and 2.0% at constant currency. Titleist clubs were down 10.0% reported and golf balls down 2.7%; gear increased 5.0%. U.S. sales declined 3.0%, while Korea increased 14.5% reported.
- Nine-month gross profit declined despite a higher gross margin. Adjusted EBITDA fell 4.1% and margin declined to 15.1%. Titleist club segment operating income fell 54.4%, and golf-ball segment operating income fell 8.4%; gear and FootJoy wear segment operating income increased.
- Management cited unfavorable weather, reduced U.S. retail store counts following 2016 channel disruptions, competitive golf-ball promotions, and product-cycle timing as pressures on sales. Nine-month club and performance-ball comparisons were affected by products in their second model year.
Outlook, risks and unusual items
- The filing provides no specific revenue, earnings or margin guidance. Management expected approximately $8.2m of additional capital expenditures for the remainder of 2017, primarily maintenance, and stated that results are seasonal and interim performance is not necessarily indicative of full-year results.
- Magnus, Acushnet’s controlling shareholder subsidiary, borrowed approximately $346.0m in term loans and had an $8.7m revolving loan, secured by its 52.8% stake in Acushnet. If its loan-to-value ratio exceeds 75% and is not cured, or other default conditions occur, lenders may accelerate the loans and foreclose on pledged shares. A transfer could affect control and potentially trigger a default under Acushnet’s credit agreement.
- Disclosure controls and procedures were not effective at quarter-end because previously identified material weaknesses in internal control over financial reporting had not been remediated. Weaknesses involved accounting staffing and expertise, documented processes and controls across several accounting areas, and segregation of duties. Remediation efforts were ongoing.
- A dispute with former owner Beam over approximately $16.6m of VAT receivables remained under appeal; oral arguments occurred in September 2017. Acushnet reported an $8.5m estimated receivable for separate Beam tax indemnifications. Other ordinary-course litigation was not expected by management to have a material adverse effect, though outcomes could not be predicted.
- Foreign exchange, variable-rate debt, commodity costs, golf participation and weather, product launches, competition, customer and retail-channel health, and cybersecurity were among the disclosed business risks. The company used foreign-exchange forwards but did not hedge interest-rate exposure.
- The EAR plan was settled in full for $151.5m during Q1, funded substantially through a $100m delayed-draw term loan and revolver borrowings. The filing also notes a planned CEO succession effective January 1, 2018, with a $3.0m equity grant to the incoming CEO.
Important facts for investors to verify
- Whether golf-ball and golf-club sales and segment profitability stabilize after the reported product-cycle, weather and retail-channel pressures.
- How operating cash flow develops after the one-time EAR settlement, and the company’s capacity to service variable-rate debt while paying dividends.
- Magnus’s loan-to-value compliance, refinancing or repayment plans, and any potential share sale, foreclosure or change-of-control consequences.
- Progress and testing results for remediation of the disclosed material weaknesses in internal control.
- Developments in the Beam VAT appeal and any change in the recoverability of related indemnification or receivable amounts.