Acushnet Holdings Corp. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited, compared with Q1 2016. Acushnet designs, manufactures and distributes golf products under Titleist and FootJoy, across golf balls, clubs, gear and golf wear.
Key financial results
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $433.6 million | $439.9 million | Down 1.4%; down 0.8% at constant currency |
| Gross profit / margin | $226.4 million / 52.2% | $225.9 million / 51.3% | Profit up $0.5 million; margin up 0.9 percentage points |
| Operating income | $64.3 million | $57.2 million | Up $7.1 million |
| Net income attributable to Acushnet | $38.1 million | $23.7 million | Up $14.4 million |
| Adjusted EBITDA | $78.5 million | $79.2 million | Down $0.8 million; margin 18.1% vs. 18.0% |
| Operating cash flow | $(223.5) million | $(94.0) million | Cash used increased $129.5 million |
| Capital expenditures | $3.7 million | $4.5 million | — |
Interest expense fell to $2.9 million from $13.8 million, chiefly reflecting the conversion of convertible notes, bond redemption and lower average borrowing costs. The effective tax rate was 36.2%, versus 40.0%.
Material changes and operating drivers
- Golf ball sales rose 2.9% to $134.2 million, supported by the launch and favorable mix of the new Pro V1 and Pro V1x. Segment operating income increased 36.0% to $21.1 million.
- Golf club sales fell 11.7% to $101.9 million as wedges, irons and Japan-specific clubs were in their second model year; segment operating income declined 42.0% to $11.4 million.
- Golf gear sales grew 7.2% to $42.4 million; FootJoy golf wear sales declined 1.7% to $142.2 million. Both segments reported higher operating income.
- U.S. sales declined 3.0%, with management citing reduced retail distribution following Sports Authority and Golfsmith bankruptcies. Korea sales rose 29.4%; Japan sales declined 9.5%.
- Gross margin improved mainly from the product mix shift toward premium golf balls. Reported SG&A declined, partly because Q1 2016 included a $7.5 million one-time executive bonus and IPO-related costs.
Financial position, liquidity and capital allocation
- At March 31, 2017, cash and restricted cash totaled $72.7 million, including $3.2 million restricted. Management reported $69.5 million of unrestricted cash; 96.2% was held at non-U.S. subsidiaries.
- Debt and capital lease obligations on the balance sheet totaled $630.5 million, including $151.4 million drawn on the revolving facility. The filing separately cites $633.7 million of indebtedness for its interest-rate sensitivity analysis; investors should reconcile the difference.
- Revolver availability was $114.1 million after letters of credit; local credit facilities had $45.2 million available. The company reported covenant compliance and expected to remain compliant.
- Operating cash outflow principally reflected the $151.4 million cash settlement of the equity appreciation rights (EAR) plan, funded with $100 million of delayed-draw term borrowing and additional revolver borrowings. The EAR liability was fully settled by quarter-end.
- Management expected 2017 capital expenditures of approximately $22.3 million for the remainder of the year, mainly maintenance, and stated that cash, operating flows and available facilities should meet liquidity needs for at least 12 months, subject to borrowing conditions.
- The board declared a $0.12-per-share dividend payable April 19, 2017, and declared another $0.12-per-share dividend on May 12, payable June 16. The first-quarter dividend declaration totaled $9.2 million.
Outlook, risks and unusual items
- The filing gives no specific full-year revenue or earnings guidance. Management emphasizes the seasonal nature of the business: receivables and inventory typically build around the first-quarter selling season and are affected by product launches.
- All reported indebtedness was at variable rates. A 1-percentage-point rate increase was estimated to raise annual pretax interest expense by $5.3 million. The company had no interest-rate hedges; foreign-exchange forward contracts had a $347.2 million notional amount.
- Key risks include golf participation, weather, product-cycle timing, retail/customer conditions, competition, foreign exchange, supply and shipping disruptions, commodity costs, cybersecurity, and substantial leverage. The company also described risk related to the controlling stockholder and pledged shares.
- Disclosure controls and procedures were deemed ineffective at quarter-end because previously identified material weaknesses in accounting staffing, documented processes, review controls and segregation of duties remained unremediated. Remediation was ongoing; management cautioned that weaknesses are not remediated until controls operate effectively and are tested.
- Acushnet continued an appeal in a dispute with former owner Beam involving approximately $16.6 million of VAT receivables. A 2016 court ruling awarded the company about $1.0 million plus prejudgment interest; the appeal had not been scheduled for oral argument. Other ordinary-course litigation was not quantified, and management said outcomes and aggregate losses could not be estimated.
- The company noted that the forthcoming lease accounting standard was expected to materially affect its balance sheet. Other new accounting standards discussed were not expected to have significant financial statement effects, except revenue-standard implementation was still under evaluation.
Investor verification points
- Reconcile the $630.5 million balance-sheet debt figure with the $633.7 million indebtedness figure used in market-risk disclosure, and review variable-rate exposure, maturities and covenant headroom.
- Assess whether the sharp operating cash outflow is primarily a one-time EAR settlement and monitor seasonal working-capital needs and subsequent cash generation.
- Track golf-club demand and product-cycle recovery against continued strength and margin contribution from the Pro V1/Pro V1x launches.
- Verify progress in remediating the material weaknesses and whether disclosure controls are later assessed as effective.
- Monitor the Beam VAT appeal, the use of foreign-held cash, and the company’s ability to fund dividends, capital spending and debt service from available liquidity.