Acushnet Holdings Corp. — Q1 2019 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2019, compared with Q1 2018. Acushnet sells golf products under the Titleist and FootJoy brands; its reportable segments are golf balls, golf clubs, golf gear and golf wear. The business is seasonal, and management cautions that first-quarter results are not necessarily indicative of full-year performance.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net sales | $433.7 million | $441.8 million |
| Gross profit / gross margin | $222.2 million / 51.2% | $227.7 million / 51.5% |
| Operating income | $52.2 million | $62.3 million |
| Net income attributable to Acushnet | $34.9 million | $41.5 million |
| Diluted EPS | $0.46 | $0.55 |
| Adjusted EBITDA / margin | $64.2 million / 14.8% | $77.1 million / 17.4% |
| Cash used in operating activities | $90.1 million | $86.8 million |
Reported sales declined 1.8%; on a constant-currency basis, sales increased 0.7% to $445.1 million. Gross margin slipped 0.3 percentage points. Lower operating income was the main driver of reduced net income and Adjusted EBITDA. The effective tax rate fell to 25.4% from 26.1%, primarily due to a discrete share-based compensation tax benefit, partly offset by other tax factors.
Material changes and operating drivers
- Golf balls: Sales rose 13.4% reported (16.0% constant currency) to $141.7 million, principally due to the new Pro V1 and Pro V1x models. Segment operating income increased to $19.7 million from $14.0 million.
- Golf clubs: Sales fell 21.9% reported (20.1% constant currency) to $91.3 million. Segment operating results shifted to a $0.4 million loss from $16.4 million income, reflecting lower volumes in irons, wedges and putters, unfavorable manufacturing overhead absorption, and the timing of the Phantom X putter launch in Q2.
- Golf gear: Sales increased 1.9% reported to $45.2 million; segment operating income rose to $9.2 million.
- FootJoy golf wear: Sales were essentially flat at $141.0 million reported, but increased 3.2% on a constant-currency basis; segment operating income was $20.1 million versus $20.3 million.
- U.S. sales increased 5.1% to $230.4 million. International sales declined 8.6% reported and 3.5% constant currency, with weakness in Japan, Korea and golf clubs contributing.
SG&A increased $4.0 million to $155.4 million, including higher selling, advertising and promotion costs and professional tour expenses; a $2.6 million favorable currency impact partly offset the increase. The new ball launch also contributed to higher promotional spending.
Cash, debt and liquidity
- Cash and restricted cash were $44.9 million at March 31, 2019, including $2.0 million restricted; unrestricted cash was $42.9 million. The company said 95.7% of unrestricted cash was held at non-U.S. subsidiaries.
- Balance-sheet debt and capital lease obligations totaled approximately $515.5 million, including $141.6 million short-term debt, $35.6 million current long-term debt and $338.3 million long-term debt and capital leases. The short-term balance included $129.0 million drawn on the revolving facility and $12.6 million on local facilities.
- Available borrowing capacity was $135.3 million under the revolving facility and $51.3 million under local facilities. The company was in compliance with credit agreement covenants.
- Operating cash outflow was $90.1 million, largely reflecting working-capital movements, including a $146.9 million increase in accounts receivable cash use. Investing cash outflow was $5.5 million; financing cash inflow was $109.1 million, primarily from borrowings. Cash increased $13.9 million during the quarter.
- The company declared a quarterly dividend of $0.14 per share, totaling $10.8 million. No repurchases were made under its $50 million authorization.
Outlook, risks and unusual items
Management provided no full-year revenue or earnings guidance in the supplied filing text. It planned approximately $30.5 million of capital expenditures during the remainder of 2019, mainly for manufacturing and distribution, go-to-market activities and information technology. Management believed operating cash flow, cash on hand and available facilities would meet liquidity needs for at least 12 months, subject to borrowing conditions.
Effective January 1, 2019, the company adopted the lease accounting standard and recorded $48.1 million of operating lease right-of-use assets and corresponding liabilities. The adoption did not affect reported operating results. The company identified seasonality, weather and golf participation, product-launch timing, demand forecasting, competition, supply and raw-material costs, foreign exchange, cybersecurity, leverage and covenant restrictions among its risks. A 1-percentage-point increase in rates on unhedged variable-rate borrowings was estimated to increase annual pretax interest expense by $3.3 million. A hypothetical 10% U.S. dollar weakening would reduce the foreign-exchange forward contracts’ $6.2 million net settlement asset by $25.1 million, before considering offsets from underlying exposures. Pending ordinary-course lawsuits could be decided unfavorably; the company said it could not estimate aggregate potential losses and had recorded no related liability.
Important facts for investors to verify
- Whether the golf-club sales and margin decline reverses following the Q2 Phantom X launch and subsequent product cycles.
- Whether golf-ball launch momentum and FootJoy constant-currency growth persist after launch-related promotional costs.
- How seasonal receivables and inventory convert to cash, and whether operating cash flow improves later in the year.
- Debt balances, borrowing availability, covenant compliance, interest-rate exposure and the capacity to sustain dividends and planned capital spending.
- The realization and timing of the tax benefit, foreign-exchange hedge results, and any developments in litigation or other contingencies.