Acushnet Holdings Corp. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Acushnet designs, manufactures and sells golf equipment and apparel, principally through Titleist and FootJoy. Results were materially affected by COVID-19-related closures and operating restrictions.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Net sales | $300.0m | $462.2m | $708.7m | $895.9m |
| Gross profit | $156.5m | $246.0m | $357.4m | $468.2m |
| Gross margin | 52.2% | 53.2% | 50.4% | 52.3% |
| Operating income | $11.7m | $61.1m | $33.2m | $113.4m |
| Net income attributable to Acushnet | $2.3m | $38.5m | $11.2m | $73.4m |
| Diluted EPS | $0.03 | $0.51 | $0.15 | $0.97 |
| Adjusted EBITDA and margin | $33.1m; 11.0% | $75.7m; 16.4% | $85.9m; 12.1% | $139.9m; 15.6% |
Q2 sales fell 35.1% reported (34.1% at constant currency); first-half sales fell 20.9% (19.8% at constant currency). Lower sales volumes across all reportable segments drove the declines. Korea was the notable exception, with Q2 sales up 9.1% reported and first-half sales up 6.2%.
Q2 segment operating results included losses of $2.4m for Titleist golf clubs and $1.9m for FootJoy golf wear. Titleist golf balls generated $10.0m and Titleist golf gear $4.7m. Reduced advertising, selling and other expenses partly offset the drop in sales. Gross margin also faced unfavorable factory overhead absorption during U.S. facility closures.
Cash, debt and liquidity
- Cash and restricted cash at June 30 was $111.0m, including $108.9m of unrestricted cash. Cash from operations was negative $0.8m for the first half, compared with $40.0m provided in the prior-year period; capital expenditures were $10.4m.
- Total reported debt was approximately $520.5m: $180.6m short-term debt, $17.5m current long-term debt and $322.4m long-term debt. The company drew $200m on its revolver on April 1 and repaid it on June 30. Revolver availability was $219.6m and local-facility availability was $59.3m at quarter-end.
- On July 3, after quarter-end, the company amended its credit agreement to ease leverage covenants through September 2021. The amendment also permits higher borrowing spreads and commitment fees during that period. The company reported compliance with covenants at June 30.
- First-half financing cash flow was $88.3m provided, principally reflecting net borrowings. The company paid $23.0m in common dividends and temporarily suspended share repurchases in April. It stated that available cash, operating cash flow and facility availability were expected to meet requirements for at least 12 months, subject to the pandemic’s duration and severity.
Material changes, outlook and risks
- Government shutdowns closed or curtailed many U.S. and European retail locations and the company’s manufacturing and distribution facilities from late March to mid-May. By late June, substantially all U.S. and European golf courses and retail locations had reopened. Management reported strong rounds and product demand in June and July, but cautioned that this might not continue.
- Management did not provide quantified full-year guidance. It reduced discretionary spending and planned capital expenditures, suspended buybacks and amended its credit agreement to strengthen liquidity. The company said the pandemic could continue to materially affect sales, operations, financial position and cash flows.
- First-half restructuring charges were $12.7m, including $11.2m for a voluntary bridge-to-retirement program. Q2 also included $3.9m of pension settlement costs. Adjusted EBITDA included $13.5m of pandemic-related costs for the first half, including shutdown-related employee costs, spoiled materials, remote-work and safety expenses; these are non-GAAP adjustments.
- Key risks include renewed closures or outbreaks, weaker discretionary spending and golf participation, supply-chain or manufacturing disruption, customer credit deterioration, foreign exchange and commodity-price movements, and the company’s leverage and ability to comply with debt covenants. Management continued to assess asset impairment, receivable collectability, inventory valuation and covenant compliance.
- The company is involved in lawsuits arising in the ordinary course of business. It said outcomes are uncertain and it could not estimate aggregate potential losses; no liability was recorded for those potential losses. Purchase obligations totaled $150.1m for the remainder of 2020.
Most important facts for investors to verify
- Whether the reported strength in golf rounds and demand persisted, and translated into sales, margins and operating cash flow.
- Revolver usage, cash generation, debt levels and covenant headroom under the amended agreement, including the impact of its higher potential borrowing costs.
- Receivables, inventory and customer credit quality as sales and operations recover; first-half operating cash flow was negative despite lower inventory.
- The sustainability of cost reductions and adjusted EBITDA, including the nature and recurrence of items excluded from that non-GAAP measure.
- Any further changes to dividends, share repurchases, capital spending or restructuring as pandemic conditions evolve.