Acushnet Holdings Corp. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. Acushnet designs, manufactures and distributes golf products under brands including Titleist and FootJoy. The quarter is subject to business seasonality, and results should not be viewed as a full-year forecast.
Financial performance
- Net sales: $441.8 million, up 1.9% year over year as reported; down 2.2% to $424.1 million on a constant-currency basis. Foreign exchange therefore materially affected reported growth.
- Profit and margins: Gross profit was $227.7 million versus $226.4 million; gross margin declined to 51.5% from 52.2%. Operating income fell to $62.3 million from $64.5 million. Net income attributable to Acushnet rose to $41.5 million from $38.1 million; diluted EPS was $0.55 versus $0.51.
- Adjusted EBITDA: $77.1 million versus $78.5 million; adjusted EBITDA margin was 17.4% versus 18.1%. These are non-GAAP measures.
- Cash flow: Operating cash outflow was $86.8 million, compared with $223.5 million a year earlier. Investing cash outflow was $8.4 million; financing cash inflow was $94.8 million. Cash and restricted cash ended the quarter at $48.4 million, up $0.6 million from year-end.
- Liquidity and debt: Unrestricted cash was $46.0 million. The company disclosed $575.9 million of variable-rate indebtedness. Revolver availability was $143.4 million after letters of credit; local facility availability was $54.2 million. The company reported compliance with its credit covenants.
- Other: Q1 capital expenditures were $5.9 million; the company planned approximately $28.1 million more for the remainder of 2018. A quarterly dividend of $0.13 per common share was declared.
Material changes versus Q1 2017
- On a constant-currency basis, sales declined, led by lower Titleist golf ball sales and FootJoy golf wear sales. Golf clubs grew, supported by new wedges and irons. Reported sales rose because of favorable currency translation.
- Titleist golf balls sales declined 6.9% as reported (9.8% constant currency), and segment operating income declined 33.9%. Management cited lower Pro V1 and Pro V1x volumes in the second year of their product cycle; U.S. sales were also affected by unfavorable weather and delayed course openings.
- Titleist golf clubs sales grew 14.7% as reported (10.4% constant currency), and segment operating income rose 43.4%, driven mainly by new product volumes and higher average selling prices.
- FootJoy golf wear sales declined 1.1% as reported (5.7% constant currency), with footwear volume and launch timing cited as factors. Gear sales rose 4.6% as reported but were nearly flat on a constant-currency basis.
- Interest expense increased to $4.4 million from $2.9 million, primarily due to higher average borrowings and interest rates. The effective tax rate fell to 26.1% from 36.2%, primarily reflecting the U.S. corporate tax-rate reduction under the Tax Act and changes in geographic earnings mix.
- Operating cash use was lower by $136.7 million, mainly because Q1 2017 included a $151.5 million payment for the equity appreciation right plan.
Outlook, risks and notable items
- The filing provides no specific revenue, earnings or EBITDA guidance. Management said cash from operations, cash on hand and available credit facilities were expected to cover liquidity needs for at least the next 12 months, subject to borrowing conditions and business risks.
- Management cited seasonality and working-capital fluctuations: receivables are generally highest around the end of Q1 and through Q2, while inventory is built ahead of peak-season demand.
- Key risks include golf participation and weather, product-launch timing and demand forecasting, competition, foreign-exchange movements, raw-material costs and supply disruptions, cybersecurity, litigation, and substantial leverage. A 1 percentage-point increase in rates was estimated to raise annual pretax interest expense by $5.2 million.
- The company uses foreign-exchange forwards, not for speculation. It expected to reclassify a net hedge loss of $5.3 million into cost of goods sold over the next 12 months. A hypothetical 10% weakening of the U.S. dollar against currencies covered by its contracts would increase the disclosed net settlement liability by $23.4 million, before considering offsets from underlying exposures.
- ASC 606 was adopted January 1, 2018 using the modified retrospective method. It increased Q1 sales by $3.9 million and cost of sales by $1.3 million; opening retained earnings was reduced by $1.6 million. Comparative 2017 figures were not restated. The company expected adoption of the new lease standard to have a material financial-statement impact.
- Purchase obligations totaled $134.1 million for the remainder of 2018. The company disclosed ordinary-course litigation but could not estimate aggregate potential losses and had not recorded a liability for them. No material changes to the previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether constant-currency sales trends and the golf-ball and footwear volume pressures persist, and how upcoming product launches affect demand and margins.
- How seasonal receivables and inventory convert to cash in subsequent quarters; Q1 operating cash flow was negative despite higher net income.
- Debt levels, variable interest-rate exposure, borrowing availability and covenant compliance, particularly as interest expense rises.
- The assumptions and subsequent adjustments, if any, to Tax Act provisional estimates and ASC 606 estimates; assess reported growth with the un-restated prior-period comparison in mind.
- Developments in pending litigation, purchase commitments, foreign-exchange hedges and the expected impact of lease-accounting adoption.