Acushnet Holdings Corp. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Acushnet designs, manufactures and distributes golf products under the Titleist and FootJoy brands, across golf balls, clubs, gear and golf wear. Figures below are unaudited; dollar amounts are in millions unless stated otherwise.
Financial results and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $417.2 | $370.4 | $1,313.1 | $1,290.4 |
| Gross profit / margin | $217.3 / 52.1% | $188.9 / 51.0% | $685.5 / 52.2% | $667.4 / 51.7% |
| Operating income | $43.7 | $25.9 | $157.1 | $152.7 |
| Net income attributable to Acushnet | $29.8 | $7.1 | $103.2 | $88.5 |
| Diluted EPS | $0.39 | $0.09 | $1.36 | $1.18 |
| Adjusted EBITDA / margin | $55.8 / 13.4% | $38.3 / 10.4% | $195.6 / 14.9% | $194.8 / 15.1% |
- Q3 sales rose 12.6% reported and 13.8% at constant currency; nine-month sales increased 1.8% reported and 3.9% at constant currency. Constant-currency measures are non-GAAP supplemental measures.
- Operating cash flow for the first nine months was $94.9, versus $130.1 in 2018. Capital expenditures were $18.2, giving approximate cash flow after capital expenditures of $76.8, compared with $109.4 a year earlier. Cash and restricted cash rose to $54.2 from $31.0 at year-end 2018; unrestricted cash was $52.1 at September 30.
- Total debt was approximately $416.0: $59.5 short-term debt, $35.6 current long-term debt and $320.9 long-term debt. The company reported $216.6 of availability on its revolver and $65.4 under local credit facilities, and was in compliance with its credit agreement covenants.
- Current assets were $765.1 and current liabilities $393.3. The balance sheet also included $44.4 of operating lease liabilities following adoption of the new lease standard.
Changes versus comparable periods
- Q3 growth was led by Titleist golf clubs: sales increased $27.8, primarily on higher volumes from new irons, hybrids and putters. Golf gear and FootJoy wear also grew; golf-ball sales were slightly lower reported, but modestly higher at constant currency.
- Q3 gross margin improved to 52.1%, principally from higher golf-club margins. Club segment operating income increased to $20.1 from $2.9. Golf-ball segment operating income declined to $17.8 from $20.9, reflecting lower volume and average selling prices.
- Nine-month sales growth was led by golf balls and gear; golf-club sales declined 2.6% reported. Nine-month Adjusted EBITDA was nearly flat, and its margin declined to 14.9% from 15.1%.
- Q3 attributable net income benefited from higher operating income and a lower effective tax rate (20.5% versus 57.9%). The prior-year quarter included a $2.5 non-cash pension settlement expense for the former CEO. Nine-month effective tax rates were 25.7% versus 32.5%.
- Cash from operations declined year over year, while investing cash outflow rose to $46.3 from $23.0, mainly due to acquisitions. The company acquired KJUS, a premium ski and golf sportswear business, in July for $28.7 net of cash acquired.
Outlook, risks and unusual items
- No specific full-year sales, earnings or Adjusted EBITDA guidance is provided in the supplied filing text. Management expected cash from operations, cash on hand and available credit to meet liquidity needs for at least the next 12 months, subject to customary borrowing conditions.
- Management planned approximately $13.8 of capital expenditures for the remainder of 2019. It cited seasonal working-capital swings and the timing of product launches as factors affecting liquidity.
- Key disclosed risks include golf participation, weather and consumer spending; competition and product-launch execution; supplier, manufacturing and shipping disruptions; foreign-exchange, interest-rate and commodity-price exposure; cybersecurity; litigation; and substantial leverage. A hypothetical one-percentage-point increase in rates was estimated to raise annual pretax interest expense by $2.5 after hedging.
- The company uses foreign-exchange forwards and interest-rate swaps for hedging, not speculation. It expected to reclassify over the next 12 months a $5.2 net gain from foreign-exchange hedges and a $1.4 net loss from interest-rate hedges into earnings.
- Pending ordinary-course litigation had no recorded liability; management said the outcome and aggregate exposure could not be estimated. Purchase obligations totaled approximately $202.4 across the periods disclosed. The filing reported no material off-balance-sheet arrangements.
- Magnus, wholly owned by Fila Korea, held approximately 52.3% of outstanding shares and could control or strongly influence key corporate decisions. The pledge on its Acushnet shares securing a prior loan was released following refinancing. The company’s $50.0 million repurchase authorization included an agreement to buy an equal amount of shares from Magnus after $24.9 million of open-market purchases.
Important facts for investors to verify
- Whether Q3 golf-club launch-driven growth and improved gross margins are sustainable, and how golf-ball segment profitability develops.
- How working-capital seasonality, lower year-to-date operating cash flow, acquisition spending and shareholder returns affect cash generation and debt.
- The KJUS acquisition’s subsequent contribution, integration costs and recorded noncontrolling interest; the filing does not provide a clear standalone sales or earnings contribution.
- The current status and potential exposure of litigation, purchase commitments, foreign-exchange and interest-rate hedges, and covenant headroom.
- The implications of controlling-shareholder influence and the repurchase arrangement with Magnus for governance, share ownership and capital allocation.