Acushnet Holdings Corp. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Acushnet designs and sells golf equipment and apparel, including Titleist and FootJoy products. Results are unaudited; the company cautions that interim results are not necessarily indicative of full-year performance.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $462.2 million | $478.1 million | $895.9 million | $919.9 million |
| Gross profit / margin | $246.0 million / 53.2% | $250.8 million / 52.5% | $468.2 million / 52.3% | $478.5 million / 52.0% |
| Operating income | $61.1 million | $64.6 million | $113.4 million | $126.9 million |
| Net income attributable to Acushnet | $38.5 million; $0.51 per diluted share | $39.9 million; $0.53 | $73.4 million; $0.97 | $81.4 million; $1.09 |
| Adjusted EBITDA / margin | $75.7 million / 16.4% | $79.4 million / 16.6% | $139.9 million / 15.6% | $156.4 million / 17.0% |
For the six months, operating cash flow was $40.0 million, down from $64.6 million; capital expenditures were $10.6 million. Cash and restricted cash totaled $43.0 million at June 30. Total debt was approximately $407.4 million, comprising short-term debt and current and long-term debt; unrestricted cash was $40.9 million. Revolver availability was $226.7 million after letters of credit, and local facility availability was $60.8 million. The company reported compliance with credit covenants.
Changes and management commentary
- Q2 sales declined 3.3% reported and 0.8% at constant currency; six-month sales declined 2.6% reported and 0.1% at constant currency.
- Titleist golf clubs were the principal weakness: six-month sales fell 15.5% and segment operating income fell 75.8%, mainly from lower iron and wedge volumes and weaker manufacturing overhead absorption.
- Golf balls helped offset club weakness. Six-month sales rose 6.0%, supported by the latest Pro V1 and Pro V1x launch and the PG Golf acquisition.
- Six-month gross margin improved to 52.3%, but operating income, net income and adjusted EBITDA declined. Management attributed the EBITDA decline primarily to lower operating income.
- Working capital is seasonal. Management expects operating cash, cash on hand and available credit to cover liquidity needs for at least the next 12 months, subject to customary borrowing conditions. Planned remaining-2019 capital expenditures were approximately $25.4 million.
Outlook, risks and unusual items
- The filing provides no specific revenue, earnings or full-year guidance. Management’s liquidity outlook is subject to demand, economic conditions, currency rates and other business risks.
- Risks include golf participation and weather, product demand and launch timing, competition, suppliers and input costs, foreign exchange, customer and retailer health, cybersecurity, litigation, and substantial leverage.
- In Q2 the company recorded $1.9 million of acquisition-related transaction fees. A $1.8 million pension settlement expense was recorded in the six-month period.
- On July 3, 2019, a majority-owned subsidiary completed the acquisition of KJUS for $28.7 million, net of estimated cash acquired.
- The company repurchased 253,385 shares in Q2 for $6.2 million and recorded a matching $6.2 million liability for an equal share purchase from affiliate Magnus under the repurchase agreement. The Board declared a $0.14-per-share dividend in the third quarter.
- Pending ordinary-course lawsuits could be decided unfavorably; the company said it could not estimate aggregate potential losses and had not recorded a liability. No material changes to the risk factors in the 2018 Form 10-K were reported.
Important facts for investors to verify
- Whether golf-club sales and profitability recover after the steep six-month decline, and how product-cycle timing affects demand.
- Whether golf-ball growth and improved gross margin can offset weakness in clubs and FootJoy footwear.
- Cash conversion and seasonal working-capital needs, given lower operating cash flow year over year.
- Debt, borrowing availability, covenant headroom and the effects of variable rates; a one-percentage-point rate increase was estimated to add $2.5 million to annual pretax interest expense.
- The cash and capital implications of the KJUS acquisition and the linked Magnus share repurchase arrangement.
- Potential litigation exposure and the effect of currency movements, including the company’s use of foreign-exchange and interest-rate hedges.