Acushnet Holdings Corp. — Q2 2017 Form 10-Q
Reporting period: Unaudited quarter and six months ended June 30, 2017; comparisons are with the corresponding 2016 periods. Acushnet designs, manufactures and distributes golf products under brands including Titleist and FootJoy.
Financial results
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Net sales | $428.0 | $463.3 | $861.6 | $903.2 |
| Gross profit / margin | $222.9 / 52.1% | $238.0 / 51.4% | $449.3 / 52.1% | $463.8 / 51.4% |
| Operating income | $57.4 | $66.4 | $121.7 | $123.6 |
| Net income attributable to Acushnet | $33.0 | $27.1 | $71.1 | $50.7 |
| Adjusted EBITDA / margin | $71.8 / 16.8% | $83.0 / 17.9% | $150.3 / 17.4% | $162.3 / 18.0% |
| Net income per common share, basic | $0.44 | $0.62 | $0.96 | $1.14 |
- Q2 sales fell 7.6% year over year, or 6.6% on a constant-currency basis. First-half sales declined 4.6%, or 3.8% on a constant-currency basis.
- Despite lower sales, gross margin improved by 0.7 percentage points in both comparison periods. Management cited higher club selling prices and favorable product mix, including the Pro V1/Pro V1x golf-ball mix.
- Net income attributable to Acushnet rose 22% in Q2 and 40% in the first half, primarily because of lower interest and other expense. In contrast, Adjusted EBITDA declined about 13% in Q2 and 7% in the first half, with margins also lower.
- Q2 basic and diluted EPS comparisons with 2016 are affected by the 2016 preferred-stock and convertible-note capital structure and the November 2016 IPO conversions; the per-share figures are not directly comparable without considering those changes.
Segments and drivers
- Titleist golf clubs: The largest source of sales pressure. Q2 sales fell 21% and first-half sales fell 17% year over year, mainly from lower volumes in products in the second year of their two-year product cycle. First-half segment operating income declined 55% to $16.0 million.
- Titleist golf balls: Q2 sales declined 7%; first-half sales declined 2%. First-half segment operating income was nearly flat at $52.1 million.
- Titleist golf gear: Sales increased 6% in Q2 and 6% in the first half; first-half segment operating income increased 20% to $17.6 million.
- FootJoy golf wear: Sales declined 6% in Q2 and 4% in the first half. First-half segment operating income increased 3% to $26.6 million, supported by lower expenses and favorable mix.
Management attributed weakness in U.S. sales to reduced retail store counts following 2016 channel disruptions and unfavorable weather, which affected rounds of play and club fitting and trial activity. Competitive golf-ball promotions and product-cycle timing also weighed on sales.
Cash flow, debt and liquidity
- First-half operating cash flow was negative $89.9 million, versus positive $55.5 million a year earlier. Management attributed the deterioration chiefly to the $151.5 million cash settlement of the equity appreciation rights (EAR) plan.
- Investing cash outflow was $8.8 million, primarily capital expenditures. Financing cash inflow was $98.6 million, including a $100 million delayed-draw term loan and increased revolver borrowings, substantially used to fund the EAR payout. The company also paid $17.9 million of common dividends.
- At June 30, cash and restricted cash totaled $80.9 million, including $3.2 million restricted; unrestricted cash was $77.7 million. Nearly all unrestricted cash was held at non-U.S. subsidiaries.
- Total debt and capital lease obligations were $530.9 million net of debt issuance costs (approximately $534.2 million before those costs); $99.4 million was classified as short-term debt and current maturities. All outstanding borrowings were variable-rate. A 1 percentage-point rate increase was estimated to raise annual pretax interest expense by $5.6 million.
- Available borrowing capacity was $187.6 million under the revolving facility and $63.1 million under local credit facilities. The company said cash, operating cash flow and available facilities should meet liquidity needs for at least 12 months, subject to borrowing conditions.
- Capital expenditures were $8.8 million in the first half; management expected approximately $17.2 million for the remainder of 2017, mainly for maintenance.
Outlook, risks and unusual items
- The filing provides no specific revenue, earnings or margin guidance. Management cautioned that first-half results are not necessarily indicative of full-year results and highlighted the seasonal nature of receivables, inventory and demand.
- Key business risks include golf participation and weather, product-cycle timing and demand forecasting, retail/customer conditions, competition, raw-material costs, foreign exchange, supply-chain and manufacturing disruptions, and substantial leverage.
- The company had paid the EAR liability in full during Q1 2017. This large cash use was principally financed with new term-loan and revolving borrowings.
- A dispute with former owner Beam concerns approximately $16.6 million of VAT receivables. The trial court awarded Acushnet approximately $1.0 million plus prejudgment interest in 2016; Acushnet appealed, with oral argument expected in September 2017. Other ordinary-course litigation remained pending; the company said it could not estimate aggregate potential losses and had not recorded a liability for those matters.
- Management and the CEO and CFO concluded disclosure controls were not effective at June 30 because previously reported material weaknesses in financial reporting controls had not been remediated. Weaknesses included accounting staffing and technical expertise, documented processes and controls across several accounting areas, and segregation of duties. Remediation was ongoing.
- After quarter-end, the credit agreement was amended to increase certain letter-of-credit and Canadian and UK borrowing sublimits. The board also declared a $0.12-per-share dividend payable in September 2017.
Important facts for investors to verify
- Whether club-product demand and sales recover as product cycles advance, and whether the reported retail and weather impacts persist.
- Whether gross-margin gains can offset continued sales declines, especially in golf clubs, and how segment profitability develops.
- Cash conversion and working-capital trends after the seasonal build and the EAR payout; confirm ongoing access to stated credit capacity and compliance with debt covenants.
- Exposure to floating rates, foreign exchange and raw-material costs, including the effect of hedges and the potential cash needs associated with debt service.
- Progress and testing of internal-control remediation, and the outcome and potential financial effect of the Beam VAT appeal and other litigation.