Acushnet Holdings Corp. — Q1 2020 Form 10-Q
Business context and reporting period. The filing covers the unaudited three months ended March 31, 2020, compared with Q1 2019. Acushnet sells golf products under brands including Titleist and FootJoy. COVID-19 disruptions intensified during March, affecting demand, retail channels, golf courses, tour events, and company operations.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $408.7 million | $433.7 million | Down 5.8%; down 4.6% at constant currency |
| Gross profit / margin | $201.0 million / 49.2% | $222.2 million / 51.2% | Profit down $21.2 million; margin down 2.0 percentage points |
| Operating income | $21.4 million | $52.2 million | Down $30.8 million |
| Net income attributable to Acushnet | $8.9 million; $0.12 per diluted share | $34.9 million; $0.46 per diluted share | Down $26.0 million |
| Adjusted EBITDA / margin | $52.8 million / 12.9% | $64.2 million / 14.8% | Down $11.4 million; margin down 1.9 percentage points |
| Cash used in operating activities | $72.5 million | $90.1 million | Cash use improved by $17.6 million |
Gross profit and earnings were pressured by lower sales volumes, COVID-related manufacturing disruption and unfavorable factory overhead absorption. Q1 restructuring charges were $11.6 million, primarily for a voluntary retirement program. The company reported an effective tax rate of 46.0%, versus 25.4% in Q1 2019.
Balance sheet, debt and liquidity
- At March 31, cash and restricted cash totaled $55.9 million, including $53.9 million of unrestricted cash. Cash at year-end 2019 was $34.2 million.
- Total debt was approximately $519.0 million at March 31, compared with approximately $402.3 million at December 31, 2019. The increase largely reflected revolving-credit borrowings.
- At March 31, revolver availability was $225.3 million after letters of credit; local credit facilities had $52.8 million available. On April 1, the company drew a further $200.0 million, leaving approximately $22.4 million available on the revolver after letters of credit.
- The company said it was compliant with credit covenants at March 31. Management believed cash, expected operating cash flows and available facilities would meet requirements for at least 12 months, subject to the duration and severity of the pandemic.
- Investing cash outflow was $5.7 million, primarily capital expenditures. Financing cash inflow was $101.9 million, including net short-term borrowings; dividends paid were $11.5 million.
Material changes and segment trends
- Titleist golf balls sales fell 18.0% to $116.2 million; segment operating income fell 83.8% to $3.2 million. The decline reflected pandemic-related demand weakness and lower volumes for models in their second year, as well as factory disruption.
- FootJoy golf wear sales declined 7.5% to $130.4 million and segment operating income fell 28.9% to $14.3 million, reflecting lower volumes and manufacturing costs.
- Titleist golf clubs sales rose 2.1% to $93.2 million and segment operating income improved to $4.5 million from a $0.4 million loss, supported by new wedges and putters.
- Titleist golf gear sales declined 3.8% to $43.5 million; segment operating income declined 3.3% to $8.9 million.
- U.S. sales fell 8.4% to $211.0 million. EMEA sales rose 5.1% to $74.7 million, partly reflecting the 2019 KJUS acquisition; Japan sales fell 7.6%, while Korea sales rose 2.9%.
Outlook, risks and unusual items
- Management provided no quantified full-year guidance and said it could not reasonably estimate the pandemic’s future impact. It expected material effects on operations, results, financial position and cash flows.
- In response, the company furloughed employees, reduced senior management compensation and discretionary spending, cut planned capital expenditures, suspended share repurchases, temporarily suspended director cash retainers, and drew $200.0 million on its revolver on April 1.
- The company declared a Q2 dividend of $0.155 per share, payable June 19, 2020. It had repurchased $7.0 million of shares in Q1 before announcing suspension of repurchases in April.
- COVID-related risks include reduced golf participation and consumer spending, closed retail and course channels, manufacturing or supplier interruptions, customer and supplier financial distress, and volatility in currencies, interest rates and commodity costs.
- Other notable items: $11.6 million in restructuring charges; certain foreign-exchange cash-flow hedges were de-designated as ineffective; and foreign-currency translation contributed to a $17.6 million other comprehensive loss. Pending ordinary-course litigation was not quantified, and the company recorded no liability for potential litigation losses.
Investor verification priorities
- Track post-quarter sales, operating capacity and golf participation as pandemic restrictions and reopening conditions change.
- Verify liquidity and covenant headroom after the April revolver draw, alongside working-capital needs and cash generation.
- Assess whether margin and earnings pressure in golf balls and FootJoy persists, including factory utilization and overhead absorption.
- Monitor restructuring execution, the share-repurchase suspension, and the company’s ability to sustain dividends under weaker conditions.
- Review the assumptions behind receivable collectability, inventory valuation, goodwill and intangible impairment, and hedge effectiveness as conditions evolve.