Acushnet Holdings Corp. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Financial statements are unaudited. Acushnet designs, manufactures and distributes golf products under the Titleist and FootJoy brands.
Financial results
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $332.4m | $319.9m | $1,235.3m | $1,182.7m |
| Gross profit / margin | $162.0m / 48.7% | $157.3m / 49.2% | $621.2m / 50.3% | $610.3m / 51.6% |
| Operating income | $8.6m | $0.05m | $134.3m | $114.0m |
| Net income (loss) attributable to Acushnet | $(6.2)m | $(14.0)m | $45.9m | $19.5m |
| Adjusted EBITDA and margin | $27.0m / 8.1% | $24.8m / 7.7% | $191.4m / 15.5% | $185.2m / 15.7% |
| Net interest expense | $15.7m | $17.6m | $44.1m | $48.1m |
For the nine months, operating cash flow was $122.0m (up from $109.8m); investing cash use was $11.8m, chiefly capital expenditures; and financing cash use was $81.5m. Cash increased $31.3m to $85.7m. Capital expenditures were $13.5m for the period.
At September 30, actual total debt and capital leases were $748.3m, including $27.6m classified as short-term and $720.7m long-term. Cash was $85.7m, of which 97.4% was held at non-U.S. subsidiaries. The company reported $255.1m available under its revolving facility and $66.2m under local credit facilities.
Changes and business drivers
- Q3 sales rose 3.9% reported and 2.2% at constant currency. Growth in golf clubs and FootJoy wear was partly offset by lower golf-ball sales. U.S. sales were slightly lower; management cited soft conditions and disruption at a large retail account.
- Nine-month sales rose 4.4% reported and 4.7% at constant currency. Clubs, golf gear and FootJoy wear grew; golf-ball sales declined 3.6%.
- Gross margin declined in both comparisons, which management primarily attributed to lower gains on foreign-exchange contracts. Nine-month golf-ball segment operating income fell 11.4%, and FootJoy golf wear segment operating income fell 18.9%; golf clubs and gear segment income increased.
- Q3 attributable net loss narrowed year over year. Nine-month attributable net income more than doubled, aided by higher operating income and lower interest and other expense. Adjusted EBITDA increased, but its nine-month margin edged down.
- In July, a new $375m term loan and revolving facilities refinanced secured floating-rate notes and former working-capital facilities. The new credit agreement matures in 2021; borrowings carry variable rates and are subject to leverage and interest-coverage covenants.
Outlook, risks and unusual items
- Management said operating cash flow, cash on hand and available credit were expected to meet liquidity needs for at least 12 months, subject to borrowing conditions. It expected about $10m of capital expenditures in the remainder of 2016, mostly for maintenance.
- Management expected EAR Plan payments of about $2.3m in the remainder of 2016 and $144.2m in Q1 2017, with the latter expected to be funded partly through the delayed-draw term loan. The filing notes the delayed-draw facility expires July 2017 if unused.
- The company completed a November 2016 IPO after quarter-end. All 22.2m shares sold were sold by existing stockholders; Acushnet received no proceeds and incurred $9.3m of offering expenses. Convertible notes and Series A preferred stock converted into common shares, and Fila Korea’s subsidiary Magnus held a controlling 53.1% interest after related transactions.
- In Q3, a $7.5m one-time CEO bonus, IPO-related transaction costs, increased bad-debt expense tied mainly to a large golf retailer, and new share-based compensation affected expenses. The company also recorded income from a court judgment in its VAT dispute with former owner Beam; it appealed the ruling. The filing says outcomes of other litigation cannot be predicted and losses cannot be reliably estimated.
- Foreign-exchange hedges had a $353.6m notional amount; the filing reported a $19.7m net settlement liability. A 1% rise in rates on variable-rate debt was estimated to add $4.6m to annual pretax interest expense. Key risks include golf participation and weather, retailer/customer credit and channel disruption, seasonality, foreign exchange, product demand, supply and raw-material costs, competition, leverage and covenant restrictions.
- Management concluded disclosure controls were ineffective at September 30 because previously identified material weaknesses in financial reporting had not been remediated. Weaknesses involved staffing and technical accounting expertise, documented procedures for certain complex accounts, and segregation of journal-entry duties; remediation was ongoing.
Investor verification priorities
- Track whether retail-channel disruption, customer credit exposure and golf-ball demand recover, and whether bad-debt expense remains elevated.
- Verify the timing, funding and final amount of the $144.2m expected EAR Plan payment, including use of the delayed-draw facility.
- Review debt, variable-rate exposure, covenant headroom and access to cash held outside the United States.
- Assess whether gross-margin pressure and foreign-exchange hedge effects persist, and compare GAAP results with the company’s non-GAAP Adjusted EBITDA.
- Monitor remediation and testing of material weaknesses, and developments in the Beam VAT appeal and other litigation.
- Confirm post-IPO share count, dilution from conversions and awards, controlling-stockholder ownership, and that the IPO provided no cash proceeds to Acushnet.