Acushnet Holdings Corp. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports unaudited fourth-quarter results. Acushnet designs, manufactures and distributes golf products, principally under the Titleist and FootJoy brands.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Net sales | $1,633.7 million | $1,560.3 million | +4.7% reported; +3.1% constant currency |
| Gross profit / margin | $842.4 million / 51.6% | $801.9 million / 51.4% | Margin +0.2 percentage points |
| Income from operations | $172.3 million | $169.8 million | +1.5% |
| Net income attributable to Acushnet | $99.9 million | $98.7 million | +1.2% |
| Diluted earnings per share | $1.32 | $1.32 | Unchanged |
| Adjusted EBITDA and margin | $230.8 million / 14.1% | $223.4 million / 14.3% | EBITDA +3.3%; margin -0.2 points |
| Operating cash flow | $163.7 million | $(27.0) million | Improved by $190.7 million |
| Capital expenditures | $32.8 million | $18.8 million | Increased $14.0 million |
Gross margin was calculated from reported gross profit and net sales. Adjusted EBITDA and its margin are non-GAAP measures. The operating cash-flow improvement largely reflects the $151.5 million payment to settle the equity appreciation rights plan in 2017. Acushnet reported $29.0 million of unrestricted cash at year-end; total cash and restricted cash on the balance sheet was $31.0 million.
Debt and liquidity: Year-end debt obligations were $384.8 million in principal, with a $382.6 million carrying amount net of discounts and including current debt. Available borrowing capacity was $263.6 million under the revolving facility and $62.6 million under local credit facilities. The company was in compliance with credit covenants and said cash, operating cash flow and available facilities should meet liquidity needs for at least 12 months, subject to borrowing conditions. It paid $39.1 million in common dividends during 2018.
Business and material changes
Titleist golf clubs drove much of the year’s growth: segment sales rose 11.9% to $445.3 million and operating income rose 40.7% to $45.2 million, supported by TS drivers and fairways and new wedges. Titleist golf balls sales increased 2.3% to $524.0 million. Titleist golf gear sales rose 2.2% to $146.1 million, while segment operating income declined 8.2% to $15.4 million. FootJoy golf wear sales increased 0.5% as reported to $439.7 million, but declined 1.4% on a constant-currency basis; segment operating income fell 33.5% to $18.0 million, mainly because of higher operating expenses and lower footwear volume.
U.S. sales increased 4.6% to $826.1 million. Sales outside the U.S. increased 4.8% as reported to $807.6 million, but only 1.6% on a constant-currency basis. Japan declined 1.1% reported, while Korea increased 10.4% reported. Foreign-currency movements added materially to reported growth outside the U.S.
Fourth-quarter sales were $343.4 million, down 2.3% from $351.4 million in Q4 2017. Operating income declined to $19.6 million from $28.3 million, and net income attributable to Acushnet declined to $11.4 million from $18.2 million. The filing describes the business as seasonal, with most sales and profitability generally occurring in the first half.
Outlook, commentary and risks
- Management forecast approximately $36 million of 2019 capital expenditures, principally for manufacturing, distribution, go-to-market activities and information technology. The filing provides no specific 2019 revenue or earnings guidance.
- Management cited product innovation, premium brand positioning and global expansion as growth priorities. New Pro V1 and Pro V1x golf balls and FootJoy footwear models were planned for 2019.
- Acushnet recorded $10.3 million of additional tax expense in Q4 2018 while completing its accounting for the 2017 Tax Act. It also revised 2017 results for a deferred-tax error: net income increased by $6.6 million and diluted EPS by $0.08 for Q4 2017; the company said the revision was not material to the 2017 financial statements.
- Investing cash outflow included $16.9 million for acquisitions, including an 80% interest in PG Professional Golf. The filing reports no material goodwill or indefinite-lived intangible impairment in 2018.
- Key risks include dependence on golf participation, weather and discretionary consumer spending; product-launch and inventory forecasting; strong competition; foreign-exchange exposure; and reliance on suppliers and manufacturing locations, including substantially all FootJoy shoes made through a China joint venture and most golf gloves made in Thailand.
- Debt is primarily variable-rate, although $185.0 million was hedged with interest-rate swaps at year-end. The filing warns that leverage, covenant restrictions and refinancing needs could constrain financial flexibility.
- Fila Korea, through Magnus, controlled 52.6% of the common stock. Magnus pledged those shares for its own loans, with a loan-to-value covenant; a default and foreclosure could affect ownership, control and Acushnet’s credit agreements. Environmental investigations and ordinary-course lawsuits are disclosed, but the filing does not provide a clear estimate of possible aggregate litigation losses.
Important facts for investors to verify
- Whether Titleist club growth and FootJoy profitability trends persisted after 2018, and whether constant-currency sales growth translated into durable earnings growth.
- The source and sustainability of the strong 2018 operating cash flow, considering the prior-year EAR-plan cash payment, working-capital movements, acquisition spending and debt repayments.
- Debt maturities, interest-rate exposure, covenant headroom and the implications of the 2021 maturity of the senior secured facilities.
- The effects of the 2017 Tax Act, the Q4 tax charge, deferred-tax asset realizability and any remaining tax uncertainty.
- Potential consequences of Magnus’s pledged controlling stake and any changes to dividend or repurchase plans. The board authorized a total $50 million repurchase program, but no shares were repurchased under it in 2018.