ACUSHNET HOLDINGS CORP. The following discussion contains management's discussion and analysis of our financial condition and results of operations and should be read together with our unaudited condensed consolidated financial statements and the notes thereto included elsewhere in this report. This discussion contains forward-looking statements that reflect our plans, estimates and beliefs and involve numerous risks and uncertainties, including but not limited to those described in "Part II, Item 1A. Risk Factors" and elsewhere in this Quarterly Report on Form 10-Q and in our other filings with theSecurities and Exchange Commission ("SEC"). Actual results may differ materially from those contained in any forward-looking statements. You should carefully read "Special Note Regarding Forward-Looking Statements" following the Table of Contents. Unless otherwise noted, the figures in the following discussion are unaudited.
Overview
We are the global leader in the design, development, manufacture and distribution of performance-driven golf products, which are widely recognized for their quality excellence. Today, we are the steward of two of the most revered brands in golf - Titleist, one of golf's leading performance equipment brands, and FootJoy, one of golf's leading performance wearable brands. Our target market is dedicated golfers, who are the cornerstone of the worldwide golf industry. These dedicated golfers are avid and skill-biased, prioritize performance and commit the time, effort and money to improve their game. We believe our focus on innovation and process excellence yields golf products that represent superior performance and consistent product quality, which are the key attributes sought after by dedicated golfers. Many of the game's professional players, who represent the most dedicated golfers, prefer our products, thereby validating our performance and quality promise, while also driving brand awareness. We seek to leverage a pyramid of influence product and promotion strategy, whereby our products are the most played by the world's best players, creating aspirational appeal for a broad range of golfers who want to emulate the performance of the game's best players.
We believe our differentiated focus on performance and quality excellence, enduring connections with dedicated golfers, and favorable and marketdifferentiating mix of consumable and durable products have been the key drivers of our solid financial performance.
Our net sales are diversified by both product category and mix, as well as geography. Our product categories include golf balls, golf clubs, wedges and putters, golf shoes, golf gloves, golf gear and golf outerwear and apparel. Our product portfolio contains a favorable mix of consumable products, which we consider to be golf balls and golf gloves, and more durable products, which we consider to be golf clubs, golf shoes, golf gear and golf outerwear and apparel. Our net sales are also diversified by geography with a substantial majority of our net sales generated in five countries:the United States ,Japan ,Korea , theUnited Kingdom andCanada . We have the following reportable segments: Titleist golf balls; Titleist golf clubs; Titleist golf gear; and FootJoy golf wear. Our financial results and operations continue to be impacted by the macroeconomic environment, including the ongoing COVID-19 pandemic. Global supply chain issues and the impact of inflation have resulted in constrained raw material, component and sourced product availability and increased raw material and other input costs, including higher freight expense. These increased costs negatively impacted cost of sales for the three months endedMarch 31, 2022 , resulting in a lower gross margin as compared to the three months endedMarch 31, 2021 . Inflation, particularly in the form of higher raw material costs combined with higher shipping costs, is expected to remain an issue for the remainder of 2022.
Key Performance Measures
We use various financial metrics to measure and evaluate our business, including, among others: (i) net sales on a constant currency basis, (ii) Adjusted EBITDA on a consolidated basis, (iii) Adjusted EBITDA margin on a consolidated basis and (iv) segment operating income (loss).
Since a significant percentage of our net sales are generated outside ofthe United States , we use net sales on a constant currency basis to evaluate the sales performance of our business in period over period comparisons and for forecasting our business going forward. Constant currency information allows us to estimate what our sales performance would have been without changes in foreign currency exchange rates. This information is calculated by taking the current period local currency sales and translating them intoU.S. dollars based upon the foreign currency exchange rates for the applicable comparable prior period. This constant currency information should not be considered in isolation or as a substitute for any measure derived in 24
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accordance with generally accepted accounting principles in
We primarily use Adjusted EBITDA on a consolidated basis to evaluate the effectiveness of our business strategies, assess our consolidated operating performance and make decisions regarding pricing of our products, go to market execution and costs to incur across our business. We present Adjusted EBITDA as a supplemental measure of our operating performance because it excludes the impact of certain items that we do not consider indicative of our ongoing operating performance. We define Adjusted EBITDA in a manner consistent with the term "Consolidated EBITDA" as it is defined in our credit agreement. Adjusted EBITDA represents net income (loss) attributable toAcushnet Holdings Corp. plus interest expense, net, income tax expense (benefit), depreciation and amortization and other items defined in the agreement, including: share-based compensation expense; restructuring and transformation costs; certain transaction fees; extraordinary, unusual or non-recurring losses or charges; indemnification expense (income); certain pension settlement costs; certain other non-cash (gains) losses, net and the net income relating to noncontrolling interests. Adjusted EBITDA is not a measurement of financial performance underU.S. GAAP. It should not be considered an alternative to net income (loss) attributable toAcushnet Holdings Corp. as a measure of our operating performance or any other measure of performance derived in accordance withU.S. GAAP. In addition, Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items, or affected by similar non-recurring items. Adjusted EBITDA has limitations as an analytical tool, and you should not consider such measure either in isolation or as a substitute for analyzing our results as reported underU.S. GAAP. Our definition and calculation of Adjusted EBITDA is not necessarily comparable to other similarly titled measures used by other companies due to different methods of calculation. For a reconciliation of Adjusted EBITDA to net income (loss) attributable toAcushnet Holdings Corp. , see "-Results of Operations" below. We also use Adjusted EBITDA margin on a consolidated basis, which measures our Adjusted EBITDA as a percentage of net sales, because our management uses it to evaluate the effectiveness of our business strategies, assess our consolidated operating performance and make decisions regarding pricing of our products, go to market execution and costs to incur across our business. We present Adjusted EBITDA margin as a supplemental measure of our operating performance because it excludes the impact of certain items that we do not consider indicative of our ongoing operating performance. Adjusted EBITDA margin is not a measurement of financial performance underU.S. GAAP. It should not be considered an alternative to any measure of performance derived in accordance withU.S. GAAP. In addition, Adjusted EBITDA margin should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items, or affected by similar non-recurring items. Adjusted EBITDA margin has limitations as an analytical tool, and you should not consider such measure either in isolation or as a substitute for analyzing our results as reported underU.S. GAAP. Our definition and calculation of Adjusted EBITDA margin is not necessarily comparable to other similarly titled measures used by other companies due to different methods of calculation. Lastly, we use segment operating income (loss) to evaluate and assess the performance of each of our reportable segments and to make budgeting decisions. Segment operating income (loss) includes directly attributable expenses and certain shared costs of corporate administration that are allocated to the reportable segments, but excludes interest expense, net; restructuring charges; the non-service cost component of net periodic benefit cost; transaction fees and other non-operating gains and losses as we do not allocate these to the reportable segments. 25
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Results of Operations
The following table sets forth, for the periods indicated, our results of
operations.
Three months ended
March 31,
(in thousands) 2022 2021
Net sales $ 606,087 $ 580,885
Cost of goods sold 289,088 270,146
Gross profit 316,999 310,739
Operating expenses:
Selling, general and administrative 195,691 176,369
Research and development 13,976 12,329
Intangible amortization 1,963 1,972
Income from operations 105,369 120,069
Interest expense, net 1,277 3,616
Other expense, net 1,326 1,992
Income before income taxes 102,766 114,461
Income tax expense 20,919 27,834
Net income 81,847 86,627
Less: Net income attributable to noncontrolling interests (802) (1,669)
Net income attributable to Acushnet Holdings Corp. $ 81,045 $ 84,958
Adjusted EBITDA:
Net income attributable to Acushnet Holdings Corp. $ 81,045 $ 84,958
Interest expense, net 1,277 3,616
Income tax expense 20,919 27,834
Depreciation and amortization 10,367 10,363
Share-based compensation 5,353 5,533
Other extraordinary, unusual or non-recurring items, net (1) 235 1,311
Net income attributable to noncontrolling interests 802 1,669
Adjusted EBITDA $ 119,998 $ 135,284
Adjusted EBITDA margin 19.8 % 23.3 %
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(1)The three months endedMarch 31, 2022 and 2021 include other immaterial, unusual or non-recurring items, net. The three months endedMarch 31, 2021 also includes pension settlement costs of$1.4 million related to lump-sum distributions to participants in our defined benefit plans as a result of the voluntary retirement program as part of management's approved restructuring program. 26
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Three Months Ended
Net sales by reportable segment is summarized as follows:
Three months ended Constant Currency
March 31, Increase/(Decrease) Increase/(Decrease)
(in millions) 2022 2021 $ change % change $ change % change
Titleist golf balls $ 163.8 $ 173.6 $ (9.8) (5.6) % $ (6.1) (3.5) %
Titleist golf clubs 160.8 155.8 5.0 3.2 % 9.5 6.1 %
Titleist golf gear 44.1 53.1 (9.0) (16.9) % (7.5) (14.1) %
FootJoy golf wear 197.6 159.4 38.2 24.0 % 45.0 28.2 %
Net sales information by region is summarized as follows:
Three months ended Constant Currency
March 31, Increase/(Decrease) Increase/(Decrease)
(in millions) 2022 2021 $ change % change $ change % change
United States $ 295.1 $ 308.6 $ (13.5) (4.4) % $ (13.5) (4.4) %
EMEA 112.4 80.6 31.8 39.5 % 38.3 47.5 %
Japan 45.8 56.4 (10.6) (18.8) % (6.4) (11.3) %
Korea 85.7 79.1 6.6 8.3 % 13.6 17.2 %
Rest of world 67.1 56.2 10.9 19.4 % 12.3 21.9 %
Total net sales $ 606.1 $ 580.9 $ 25.2 4.3 % $ 44.3 7.6 %
Segment operating income by reportable segment is summarized as follows:
Three months ended
(in millions) March 31, Increase/(Decrease)
Segment operating income 2022 2021 $ change % change
Titleist golf balls $ 33.4 $ 34.3 $ (0.9) (2.6) %
Titleist golf clubs 32.2 41.8 (9.6) (23.0) %
Titleist golf gear 2.2 9.7 (7.5) (77.3) %
FootJoy golf wear 31.3 28.1 3.2 11.4 %
Net Sales
Net sales increased $25.2 million , or 4.3%, to $606.1 million for the three
months ended March 31, 2022 compared to $580.9 million for the three months
ended March 31, 2021 . On a constant currency basis, net sales increased $44.3
million , or 7.6%, to $625.2 million . The increase in net sales on a constant
currency basis resulted from an increase of $45.0 million in FootJoy golf wear
and an increase of $9.5 million in Titleist golf clubs. The increase in FootJoy
net sales was driven by higher sales volumes in EMEA primarily due to the
adverse impact of government-ordered shutdowns in this region in the first
quarter of 2021. The increase in Titleist golf club sales was driven by higher
sales volumes of our newly introduced SM9 wedges and T-Series irons. These
increases were partially offset by decreases of $7.5 million in Titleist golf
gear largely due to supply chain and fulfillment constraints and $6.1 million in
Titleist golf balls primarily as a result of limited availability of certain raw
materials. Sales volume growth of products that are not allocated to one of our
four reportable segments also contributed to the increase in net sales.
The decrease in net sales in the United States was primarily as a result of a
decrease of $10.6 million in Titleist golf balls, primarily due to limited
availability of certain raw materials and a decrease of $4.6 million in Titleist
golf gear, largely due to supply chain and fulfillment constraints.
Net sales in regions outside the United States increased $38.7 million , or
14.2%, to $311.0 million for the three months ended March 31, 2022 compared to
$272.3 million for the three months ended March 31, 2021 . On a constant currency
basis, net sales in such regions increased $57.8 million , or 21.2%, to $330.1
million . In EMEA, net sales increased across all reportable segments, primarily
due to the adverse impact of government-ordered shutdowns in this region in the
first quarter of 2021. In Korea , net sales increased in all reportable segments
except Titleist golf gear which was impacted by supply chain
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constraints. InJapan , net sales decreased in all reportable segments except FootJoy golf wear due to supply chain and fulfillment constraints. In Rest of World, net sales increased across all reportable segments.
Gross Profit
Gross profit increased$6.3 million to$317.0 million for the three months endedMarch 31, 2022 compared to$310.7 million for the three months endedMarch 31, 2021 . Gross margin decreased to 52.3% for the three months endedMarch 31, 2022 compared to 53.5% for the three months endedMarch 31, 2021 . The increase in gross profit primarily resulted from an increase of$11.8 million in FootJoy golf wear primarily due to the sales volume increases discussed previously. This increase was partially offset by a decrease of$6.4 million in Titleist golf gear primarily due to lower net sales as discussed previously, a decrease of$3.2 million in Titleist golf clubs primarily due to higher component costs and higher inbound freight costs across all reportable segments. The decrease in gross margin was primarily driven by lower gross margins in FootJoy golf wear, Titleist golf clubs and Titleist golf gear and was partially offset by higher gross margins in Titleist golf balls. The decrease in Titleist golf clubs was primarily due to higher component costs. Higher gross margins in Titleist golf balls were primarily due to favorable manufacturing costs. Higher inbound freight costs unfavorably impacted gross margin across all reportable segments.
Selling, General and Administrative Expenses
SG&A expenses increased$19.3 million to$195.7 million for the three months endedMarch 31, 2022 compared to$176.4 million for the three months endedMarch 31, 2021 . This increase was primarily due to an increase of$11.0 million in selling expense due to higher sales volumes as discussed previously including higher retail commission expense inKorea and higher distribution expenses, an increase of$5.4 million in administrative expense primarily due to information technology related consulting expenses, and an increase of$2.1 million in advertising and promotional expenses, primarily in Titleist golf clubs. Overall, SG&A included a$4.0 million favorable impact of changes in foreign currency exchange rates across all expense categories and reportable segments.
Research and Development
R&D expenses increased$1.7 million to$14.0 million for the three months endedMarch 31, 2022 compared to$12.3 million for the three months endedMarch 31, 2021 , primarily related to an increase in employee-related costs.
Interest Expense, net
Interest expense, net decreased$2.3 million to$1.3 million for the three months endedMarch 31, 2022 compared to$3.6 million for the three months endedMarch 31, 2021 . This decrease was primarily due to a decrease in losses from interest rate swaps, lower interest rates and a decrease in the amortization for debt issuance costs. Income Tax Expense Income tax expense decreased$6.9 million to$20.9 million for the three months endedMarch 31, 2022 compared to$27.8 million for the three months endedMarch 31, 2021 . Our effective income tax rate ("ETR") was 20.4% for the three months endedMarch 31, 2022 compared to 24.3% for the three months endedMarch 31, 2021 . The decrease in the ETR was primarily driven by changes in our jurisdictional mix of earnings.
Segment Results
Titleist Golf Balls Segment
Net sales in our Titleist golf balls segment decreased$9.8 million , or 5.6%, to$163.8 million for the three months endedMarch 31, 2022 compared to$173.6 million for the three months endedMarch 31, 2021 . On a constant currency basis, net sales in our Titleist golf balls segment decreased$6.1 million , or 3.5%, to$167.5 million . This decrease was due to lower sales volumes across all models as a result of limited availability of certain raw materials. Operating income in our Titleist golf balls segment decreased$0.9 million , or 2.6%, to$33.4 million for the three months endedMarch 31, 2022 compared to$34.3 million for the three months endedMarch 31, 2021 . Higher gross profit of$1.5 million was offset by higher operating expenses, resulting in a decrease in operating income. The higher gross profit was driven by an improvement in manufacturing costs, as prior year production was more unfavorably impacted by raw material availability, and higher average selling prices and was partially offset by higher inbound freight costs. Operating expenses increased primarily as a result of an increase of$1.8 million in administrative expenses, as discussed previously. 28
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Titleist Golf Clubs Segment
Net sales in our Titleist golf clubs segment increased$5.0 million , or 3.2%, to$160.8 million for the three months endedMarch 31, 2022 compared to$155.8 million for the three months endedMarch 31, 2021 . On a constant currency basis, net sales in our Titleist golf clubs segment increased$9.5 million , or 6.1%, to$165.3 million . This increase was largely due to higher sales volumes of our newly introduced SM9 wedges launched in the first quarter of 2022 and T-Series irons launched in the fourth quarter of 2021. This increase was partially offset by lower sales volumes of drivers, hybrids and fairways which were all in their second model year and were also impacted by component shortages and delays. Operating income in our Titleist golf clubs segment decreased$9.6 million to$32.2 million for the three months endedMarch 31, 2022 compared to$41.8 million for the three months endedMarch 31, 2021 . The decrease in operating income resulted from lower gross profit of$3.2 million and higher operating expenses. The decrease in gross profit was due to higher inbound freight and component costs. Higher operating expenses were primarily as a result of an increase of$2.4 million in selling expense primarily due to higher distribution expenses and an increase of$1.9 million in advertising and promotional expense.
Titleist Golf Gear Segment
Net sales in our Titleist golf gear segment decreased$9.0 million , or 16.9%, to$44.1 million for the three months endedMarch 31, 2022 compared to$53.1 million for the three months endedMarch 31, 2021 . On a constant currency basis, net sales in our Titleist golf gear segment decreased$7.5 million , or 14.1%, to$45.6 million . This decrease was primarily due to sales volume decreases in golf bags and headwear product categories due to supply chain and fulfillment constraints, partially offset by higher average selling prices across all product categories. Operating income in our Titleist golf gear segment decreased$7.5 million , or 77.3%, to$2.2 million for the three months endedMarch 31, 2022 compared to$9.7 million for the three months endedMarch 31, 2021 . The decrease in operating income was primarily as a result of lower gross profit of$6.4 million due to the sales volume decrease discussed previously and increased inbound freight costs.
FootJoy Golf Wear Segment
Net sales in our FootJoy golf wear segment increased$38.2 million , or 24.0%, to$197.6 million for the three months endedMarch 31, 2022 compared to$159.4 million for the three months endedMarch 31, 2021 . On a constant currency basis, net sales in our FootJoy golf wear segment increased$45.0 million , or 28.2%, to$204.4 million . This increase was primarily due to increased sales volumes and higher average selling prices across all product categories primarily driven by EMEA. Operating income in our FootJoy golf wear segment increased$3.2 million , or 11.4%, to$31.3 million for the three months endedMarch 31, 2022 compared to$28.1 million for the three months endedMarch 31, 2021 . The increase in operating income resulted from higher gross profit of$11.8 million primarily as a result of the sales volume increase and higher average selling prices discussed previously, partially offset by increased inbound freight costs and higher operating expenses. Operating expenses increased primarily as a result of an increase of$6.5 million in selling expense due to higher sales volumes as discussed previously including higher retail commission expense inKorea and higher distribution expenses, as well as an increase of$1.6 million in administrative expense, as discussed previously.
Liquidity and Capital Resources
Our primary cash needs relate to working capital, capital expenditures, servicing our debt, paying dividends, pension contributions and repurchasing shares of our common stock. We expect to rely on cash flows from operations and borrowings under our revolving credit facility and local credit facilities as our primary sources of liquidity. Our liquidity is impacted by our level of working capital, which is cyclical as a result of the general seasonality of our business. Our accounts receivable balance is generally at its highest starting at the end of the first quarter and continuing through the second quarter, and declines during the third and fourth quarters as a result of both an increase in cash collections and lower sales. Our inventory balance also fluctuates as a result of the seasonality of our business. Generally, our buildup of inventory starts during the fourth quarter and continues through the first quarter and into the beginning of the second quarter in order to meet demand for our initial sell-in during the first quarter and reorders in the second quarter. Both accounts receivable and inventory balances are impacted by the timing of new product launches.
As of
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cash equivalents was held at our non-U.S. subsidiaries, including our FootJoy golf shoe variable interest entity. We manage our worldwide cash requirements by monitoring the funds available among our subsidiaries and determining the extent to which we can access those funds on a cost effective basis. We are not aware of any restrictions on repatriation of these funds and, subject to foreign withholding taxes, those funds could be repatriated, if necessary. We have repatriated, and intend to repatriate, funds tothe United States from time to time to satisfy domestic liquidity needs arising in the ordinary course of business, including liquidity needs related to debt service requirements. As noted previously, the COVID-19 pandemic could impact our results of operations in ways we cannot currently predict. Nonetheless, we believe that cash expected to be provided by operating activities, together with our cash on hand and the availability of borrowings under our revolving credit facility and our local credit facilities (subject to customary borrowing conditions) will be sufficient to meet our liquidity requirements for at least the next 12 months. Our ability to generate sufficient cash flows from operations is, however, subject to many risks and uncertainties, including future economic trends and conditions (such as the COVID-19 pandemic), demand for our products, availability and cost of our raw materials and components, foreign currency exchange rates and other risks and uncertainties applicable to our business, as described in our Annual Report on Form 10-K for the year endedDecember 31, 2021 .
Debt and Financing Arrangements
As ofMarch 31, 2022 , we had$306.7 million of availability under our revolving credit facility after giving effect to$12.3 million of outstanding letters of credit. Additionally, we had$38.2 million available under our local credit facilities. Our credit agreement contains customary affirmative and restrictive covenants, including, among others, financial covenants based on our leverage and interest coverage ratios. The credit agreement also includes customary events of default, the occurrence of which, following any applicable cure period, would permit the lenders to, among other things, declare the principal, accrued interest and other obligations to be immediately due and payable. As ofMarch 31, 2022 , we were in compliance with all covenants under the credit agreement. See "Notes to Consolidated Financial Statements-Note-10-Debt and Financing Arrangements" in our Annual Report on Form 10-K for the year endedDecember 31, 2021 for a description of our credit facilities and related credit agreement. Additionally, see "Risk Factors - Risks Related to Our Indebtedness" as described in our Annual Report on Form 10-K for the year endedDecember 31, 2021 for further discussion surrounding the risks and uncertainties related to our credit facilities. Capital Expenditures We made$11.7 million of capital expenditures during the three months endedMarch 31, 2022 . Capital expenditures for the full year are expected to be approximately$60 million , although the actual amount may vary depending upon a variety of factors, including the timing of certain capital project implementations and receipt of capital purchases due to supply chain challenges. Capital expenditures generally relate to investments to support the manufacturing and distribution of products, our go-to-market activities and continued investments in information technology to support our global strategic initiatives.
Dividends and Share Repurchase Program
As ofMarch 31, 2022 , our Board of Directors has authorized us to repurchase up to an aggregate of$200.0 million of our issued and outstanding common stock. During the three months endedMarch 31, 2022 , we repurchased 1,163,799 shares of common stock at an average price of$50.79 for an aggregate of$59.1 million . Included in this amount were 699,819 shares of common stock repurchased from Magnus for an aggregate of$37.5 million onJanuary 24, 2022 , in satisfaction of our obligations pursuant to our previously disclosed Magnus share repurchase agreement. As ofMarch 31, 2022 , we had$39.1 million remaining under the current share repurchase authorization. OnApril 28, 2022 , the Board of Directors authorized us to repurchase up to an additional$150.0 million of our issued and outstanding common stock, bringing the total authorization up to$350.0 million . See "Notes to Unaudited Condensed Consolidated Financial Statements-Note-10-Common Stock," Item 1 of Part I included elsewhere in this report for a description of our share repurchase program and Magnus share repurchase agreements. During the three months endedMarch 31, 2022 , we paid dividends on our common stock of$14.0 million to our shareholders. During the second quarter of 2022, our Board of Directors declared a dividend of$0.180 per share of common stock to shareholders of record as ofJune 3, 2022 and payable onJune 17, 2022 . 30
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