Acushnet Holdings Corp. — 2017 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2017. The filing is an annual report, not a standalone fourth-quarter filing. Acushnet designs, manufactures and distributes golf products under brands including Titleist and FootJoy, with four reportable segments: golf balls, golf clubs, golf gear and golf wear.
Financial performance and liquidity
| Metric | 2017 | 2016 |
|---|---|---|
| Net sales | $1,560.3 million | $1,572.3 million |
| Gross profit / margin | $800.8 million / 51.3% | $798.7 million / 50.8% |
| Operating income / margin | $166.3 million / 10.7% | $140.8 million / 9.0% |
| Net income attributable to Acushnet | $92.1 million | $45.0 million |
| Diluted earnings per share | $1.23 | $0.62 |
| Adjusted EBITDA / margin | $223.4 million / 14.3% | $228.4 million / 14.5% |
| Cash from operating activities | $(27.0) million | $104.3 million |
| Capital expenditures | $18.8 million | $19.2 million |
| Unrestricted cash at year-end | $45.4 million | $76.1 million |
- Sales declined 0.8% reported and 0.2% at constant currency. Gross profit rose slightly and gross margin improved, while operating income and attributable net income increased substantially.
- The gap between higher net income and lower operating cash flow chiefly reflects the $151.5 million cash settlement of the Equity Appreciation Rights (EAR) Plan in the first quarter, funded through borrowing. The EAR liability was fully settled in 2017.
- Interest expense fell to $15.7 million from $49.9 million, mainly reflecting the prior conversion of convertible notes and lower average borrowings and rates. Income tax expense rose to $55.1 million; the effective tax rate was 36.3%, compared with 44.5%.
- Year-end debt was approximately $466.9 million excluding unamortized issuance costs; the balance-sheet carrying amount, including capital leases and net of debt issuance costs, was $464.1 million. Available capacity was $254.8 million under the revolving facility and $53.8 million under local credit facilities. The company reported compliance with credit covenants.
- Current assets were $687.1 million and current liabilities $306.8 million. Inventory increased to $364.0 million from $323.3 million.
- Cash dividends declared were $0.48 per share; cash dividends paid were $35.7 million. The board declared a further $0.13-per-share dividend in early 2018, subject to the stated terms.
Material changes versus prior periods
- Segment sales: Titleist golf balls $512.0 million, down 0.4%; Titleist golf clubs $398.0 million, down 7.7%; Titleist golf gear $142.9 million, up 4.9%; FootJoy golf wear $437.5 million, up 1.0%.
- Golf-club segment operating income fell 38.6% to $31.0 million, largely on lower driver, fairway and second-year wedge sales. By contrast, golf gear operating income rose 36.8% to $16.6 million and FootJoy golf wear operating income rose 39.0% to $26.4 million. Golf-ball operating income was nearly flat at $76.9 million.
- U.S. sales fell 1.8%; Korea sales rose 13.9%, while Japan sales fell 8.1%. Management cited reduced retail store count following channel disruption, unfavorable U.S. weather, and weaker club fitting and trial activity. At constant currency, EMEA sales increased 1.0%, Japan declined 4.6%, and Korea increased 11.3%.
- SG&A declined $21.0 million, including the absence of 2016 IPO-related costs and a one-time executive bonus, lower bad-debt expense and no recurring EAR expense. Adjusted EBITDA nevertheless declined $5.0 million and its margin slipped 0.2 percentage points.
- For the fourth quarter, sales were $351.4 million versus $329.8 million in fourth-quarter 2016; operating income was $26.4 million versus $7.6 million, and attributable net income was $11.7 million versus a loss of $0.2 million.
Outlook, commentary and risks
- Management gave no quantified revenue or earnings guidance in the supplied filing text. It expected 2018 capital expenditures of approximately $34 million, mainly maintenance, with additional investment in innovation and technology. Management believed cash, operating cash flow and available facilities would meet liquidity needs for at least 12 months, subject to borrowing conditions and business risks.
- Management’s strategy emphasizes product innovation, premium performance and quality, growth in golf gear and wear, e-commerce, custom products and selective international expansion. The company reported approximately $48.1 million of R&D spending and about 180 R&D personnel in 2017.
- Results are seasonal, with most sales and profitability generally in the first half of the year. Golf rounds, weather, consumer discretionary spending, product-launch timing and retail sell-through can materially affect results. Management also highlighted competition, supplier and manufacturing concentration, raw-material costs, foreign-exchange exposure and customer/channel disruption.
- Approximately 49% of sales were denominated in foreign currencies, while many non-U.S. subsidiaries’ costs of goods sold are U.S.-dollar denominated. The company uses currency forwards but hedging may not eliminate exposure. Most borrowings are variable-rate; a 1% rate increase was estimated to raise annual pretax interest expense by $5.3 million at year-end 2017.
- The 2017 Tax Act produced a provisional $14 million tax expense, including deferred-tax remeasurement and transition tax, partly offset by release of a prior deferred-tax liability. The transition tax was expected to have no cash-tax impact because of available tax attributes; calculations remained subject to refinement.
- Magnus, the controlling shareholder’s subsidiary, borrowed approximately $373.7 million plus a revolving facility, secured by its 52.6% Acushnet stake. A loan-to-value breach or payment default could lead to acceleration or foreclosure and a substantial share sale, potentially affecting control, the share price and Acushnet’s credit agreement. These are Magnus obligations, not Acushnet debt.
- The company disclosed ongoing environmental investigations and expected future costs related to site closure activities. Other litigation was not quantifiable; management stated it did not expect the pending matters to materially adversely affect the financial statements. The 2016-disclosed material weaknesses in internal control were reported remediated, and management and the auditor concluded controls were effective at year-end 2017.
Most important facts for investors to verify
- Whether golf-club sales and segment profitability recover after the 2017 decline, and whether new product launches translate into sustained retail sell-through.
- Whether the improvement in GAAP earnings is supported by operating cash flow after the one-time EAR settlement, particularly as inventory and seasonal working-capital needs fluctuate.
- Debt balances, variable-rate exposure, covenant headroom, and the amount and accessibility of cash held outside the United States.
- Final tax effects of the 2017 Tax Act and subsequent updates to provisional tax accounting, including realizability of tax attributes.
- Developments in Magnus’s loan-to-value covenant and any potential share foreclosure or transfer, as well as the status and cost of environmental matters.