Acushnet Holdings Corp. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This is an annual filing, not a standalone fourth-quarter report; unaudited quarterly results are included. Acushnet designs, manufactures and distributes golf products under brands including Titleist and FootJoy. It completed its transition to a publicly traded company in 2016.
Financial results and liquidity
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Net sales | $1,572.3 million | $1,503.0 million |
| Gross profit / margin | $798.7 million / 50.8% | $775.8 million / 51.6% |
| Operating income / margin | $140.8 million / 9.0% | $117.6 million / 7.8% |
| Net income (loss) attributable to Acushnet | $45.0 million | $(1.0) million |
| Diluted earnings (loss) per common share | $0.62 | $(0.74) |
| Adjusted EBITDA / margin | $228.4 million / 14.5% | $214.7 million / 14.3% |
| Cash from operating activities | $105.2 million | $91.8 million |
| Capital expenditures / free cash flow | $19.2 million / $86.0 million | $23.2 million / $68.6 million |
Sales rose 4.6% reported and 4.5% at constant currency. Gross profit increased, but gross margin declined 0.8 percentage points. Reported net income improved substantially; the comparison also reflects lower noncash warrant losses and lower interest expense. Adjusted EBITDA is a non-GAAP measure and should not be treated as a substitute for GAAP results.
As of year-end, cash was $76.1 million, including $13.0 million attributable to the consolidated FootJoy shoe joint venture. Book debt and capital lease obligations totaled approximately $409.6 million; the risk disclosure separately cites $412.8 million of indebtedness. The company reported $224.9 million available under its revolving credit facility after letters of credit and $60.2 million under local facilities. Most unrestricted cash was held outside the United States. The company reported that it expected cash, operating cash flow and available borrowing capacity to meet liquidity needs for at least 12 months, subject to borrowing conditions.
The $151.5 million year-end Equity Appreciation Rights liability was paid in cash in the first quarter of 2017, funded partly by borrowing under the delayed-draw term loan and revolving facility. This subsequent payment increased financing needs after the balance-sheet date.
Business mix and material changes
- FY 2016 sales by reportable segment: Titleist golf balls $513.9 million, down 4.0%; Titleist golf clubs $431.0 million, up 11.0%; Titleist golf gear $136.2 million, up 5.3%; and FootJoy golf wear $433.1 million, up 3.4%.
- Titleist clubs benefited from new-product launches and higher average selling prices. Golf-ball sales and segment operating income fell, reflecting U.S. retail disruption, lower volume for second-year Pro V1 models, and weaker manufacturing overhead absorption. FootJoy sales grew, but segment operating income declined 27.2% amid lower footwear production absorption and spending on e-commerce and women’s apparel initiatives.
- Geographically, U.S. sales were nearly flat at $804.5 million; sales increased in Japan, Korea and EMEA. Foreign currency movements remain significant to reported results and margins.
- Golfsmith’s 2016 bankruptcy and store closures, together with The Sports Authority disruption, reduced U.S. retail sell-in. Acushnet said Golfsmith-related disruption also was expected to affect 2017 sales. Its $7.2 million receivable associated with Golfsmith was written off or fully reserved.
- Fourth-quarter 2016 net sales were $329.8 million versus $320.2 million a year earlier. Acushnet-attributable net loss was $0.2 million versus a $20.4 million loss in fourth-quarter 2015. Results remain seasonal, with most sales and profitability generally in the first half.
Outlook, risks and unusual items
- No quantified full-year 2017 revenue or earnings guidance is provided in the supplied filing text. Management expected 2017 capital expenditures of approximately $26 million, mostly for maintenance, and anticipated additional corporate costs from operating as a public company.
- Management highlighted planned product and channel initiatives, including 2017 Pro V1 and Pro V1x launches, expansion of FootJoy e-commerce and women’s apparel, and longer-term international growth opportunities.
- Leverage is material and substantially all borrowings are variable-rate. The credit agreement includes leverage and interest-coverage maintenance tests, restrictions on dividends and other actions, and a 2021 maturity for the term and revolving facilities. A 1 percentage-point rate increase was estimated to add $4.6 million to annual pretax interest expense.
- The company disclosed material weaknesses in internal control over financial reporting, including inadequate accounting staffing and technical expertise, insufficiently documented controls and ineffective segregation of duties. Disclosure controls were deemed ineffective at year-end. Management described remediation efforts; several audit adjustments were made, though the company said the errors were not material to the financial statements.
- Other notable items include $16.8 million of 2016 transaction fees, a $7.5 million one-time CEO bonus, and $14.5 million of share-based compensation expense. The effective tax rate was 44.5%, versus 87.1% in 2015, with warrant-related noncash items affecting comparability.
- Key risks include golf participation, weather and discretionary spending; product launch execution and competition; supply-chain concentration; foreign exchange exposure; customer and retail concentration; and pension obligations. Fila Korea’s affiliate Magnus controlled approximately 53% of the shares, and its pledged Acushnet shares secured a separate loan that could create sale, foreclosure or change-of-control risk.
- The filing describes an appeal in a tax-receivables dispute with former owner Beam; Acushnet recorded a court judgment of approximately $1.5 million including interest and appealed. It also reported ongoing environmental investigation and remediation at several sites, while stating expected costs were not expected to materially adversely affect the business. Other ordinary-course litigation was not quantified as a material contingency.
Important facts for investors to verify
- Reconcile reported debt of $409.6 million with the separate $412.8 million indebtedness disclosure, and assess borrowing and covenant headroom after the 2017 EAR payout.
- Track remediation and testing of the disclosed internal-control material weaknesses, including the status of auditor attestation requirements.
- Assess whether post-bankruptcy retail-channel changes and Golfsmith-related losses persist in 2017, and whether growth in clubs and FootJoy offsets weaker golf-ball performance.
- Review the assumptions behind Adjusted EBITDA, including excluded transaction, compensation and other items, alongside GAAP operating results and cash flow.
- Monitor variable-rate debt, foreign-exchange hedges, pension funding, dividend constraints and the potential effect of Magnus-related share pledges or sales.