Acushnet Holdings Corp.: Form 10-Q for the period ended Sep 30, 2023

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 the Securities 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 market‑differentiating 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, the United Kingdom and Canada. We have the following reportable segments: Titleist golf balls; Titleist golf clubs; Titleist golf gear; and FootJoy golf wear.

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 of the 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 net sales and translating them into U.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 accordance with generally accepted accounting principles in the United States (“U.S. GAAP”). Our presentation of constant currency information may not be consistent with the manner in which similar measures are derived or used by other companies.

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 to Acushnet 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 (loss) relating to noncontrolling interests. Adjusted EBITDA is not a measurement of financial performance under U.S. GAAP. It should not be considered an alternative to net income (loss) attributable to Acushnet Holdings Corp. as a measure of our operating performance or any other measure of performance derived in accordance with U.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 under U.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 attributable to Acushnet 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 under U.S. GAAP. It should not be considered an alternative to any measure of performance derived in accordance with U.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 under U.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.

Results of Operations

The following table sets forth, for the periods indicated, our results of operations.

(in thousands)

(1) For the three and nine months ended September 30, 2023, includes costs associated with the optimization of our distribution and custom fulfillment capabilities.

Three Months Ended September 30, 2023 Compared to the Three Months Ended September 30, 2022

Net sales by reportable segment is summarized as follows:

(in millions)

Net sales information by region is summarized as follows:

(in millions)

(1) Europe, the Middle East and Africa ("EMEA")

Segment operating income (loss) by reportable segment is summarized as follows:

(in millions)

For the three months ended September 30, 2023, net sales increased 6.3%, or 6.0% on a constant currency basis, as compared to the three months ended September 30, 2022. This increase was driven primarily by higher sales volumes in Titleist golf clubs and higher average selling prices in Titleist golf balls and FootJoy golf wear, mainly apparel, partially offset by lower sales volumes in Titleist golf gear.

The increase in net sales in the United States was primarily driven by increases of $13.3 million in Titleist golf clubs, $9.7 million in Titleist golf balls and $8.4 million in FootJoy golf wear, partially offset by a decrease of $6.9 million in Titleist golf gear. The increase in Titleist golf clubs was driven by higher sales volumes associated with the launches of our T-Series irons, TSR hybrids and Scotty Cameron Super Select putters, partially offset by lower sales volumes of drivers, fairways and wedges. The increase in Titleist golf balls was primarily driven by higher average selling prices of our latest generation Pro V1 and Pro V1x golf balls. The increase in FootJoy golf wear was primarily a result of higher average selling prices of apparel and footwear. The decrease in Titleist golf gear primarily resulted from lower sales volumes of headwear and golf bags due to strong sales volume in the third quarter of 2022 as supply chain and fulfillment constraints recovered from the first quarter of 2022.

Net sales in regions outside the United States increased 4.5%, or 3.8% on a constant currency basis. In Japan and Rest of World, the increase in net sales was primarily due to higher sales volumes in Titleist golf clubs. In EMEA, the increase in net sales was primarily due to higher sales volumes of products that are not allocated to one of our four reportable segments and higher sales volumes in Titleist golf clubs. This increase in EMEA was partially offset by lower net sales in FootJoy golf wear and Titleist golf gear, mainly in footwear and golf bags, respectively. In Korea, the decrease in net sales was primarily due to lower sales volumes of Titleist golf gear, products that are not allocated to one of our four reportable segments and FootJoy golf wear, partially offset by net sales increases in Titleist golf clubs and Titleist golf balls.

Gross Profit

Gross profit increased $13.5 million for the three months ended September 30, 2023 compared to the three months ended September 30, 2022. Gross margin decreased to 52.0% for the three months ended September 30, 2023 compared to 52.8% for the three months ended September 30, 2022. The increase in gross profit primarily resulted from an increase of $16.8 million in Titleist golf clubs primarily due to higher sales volumes and lower royalty expense, an increase of $8.7 million in Titleist golf balls primarily due to higher average selling prices and lower inbound freight across all reportable segments. The increase in gross profit was partially offset by a decrease of $5.2 million in Titleist golf gear due to the lower sales volumes discussed previously and a decrease of $4.9 million in FootJoy golf wear primarily due to unfavorable manufacturing overhead absorption and increased promotional activity in footwear. The decrease in gross margin was primarily due to the FootJoy golf wear factors discussed above, offset primarily by lower inbound freight costs across all reportable segments.

Selling, General and Administrative Expenses

SG&A expenses increased $7.8 million for the three months ended September 30, 2023 compared to the three months ended September 30, 2022. This increase was primarily a result of an increase of $5.9 million in advertising and promotional expenses, $3.0 million in selling expense and $2.8 million of costs related to the optimization of our distribution and custom fulfillment capabilities, partially offset by a decrease of $2.6 million in administrative expense. The increase in advertising and promotional expenses was primarily in Titleist golf clubs and Titleist golf balls. The increase in selling expense was primarily due to employee-related expenses, partially offset by lower retail commission expense in Korea. The decrease in administrative expense was primarily due to lower information technology-related expenses, partially offset by an increase in employee-related expenses. Additionally, SG&A includes a decrease of $5.3 million in foreign currency transaction losses.

Research and Development

R&D expenses increased $1.6 million for the three months ended September 30, 2023 compared to the three months ended September 30, 2022, primarily as a result of an increase in employee-related expenses.

Intangible Amortization

Intangible amortization expense increased $1.6 million for the three months ended September 30, 2023 compared to the three months ended September 30, 2022, primarily as a result of the acquisition of trademarks related to our Titleist golf clubs and Titleist golf gear businesses in the fourth quarter of 2022 and the first quarter of 2023, respectively.

Interest Expense, net

Interest expense, net increased $4.9 million for the three months ended September 30, 2023 compared to the three months ended September 30, 2022 primarily due to an increase in borrowings and interest rates.

Other Expense, net

Other expense, net decreased $1.5 million for the three months ended September 30, 2023 compared to the three months ended September 30, 2022 primarily due to a decrease in the non-service cost component of net periodic benefit expense.

Income Tax Expense

Income tax expense decreased $4.5 million for the three months ended September 30, 2023 compared to the three months ended September 30, 2022. Our effective tax rate (“ETR”) was 16.5% for the three months ended September 30, 2023 compared to 22.9% for the three months ended September 30, 2022. The change 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 increased 6.3%, or 6.2% on a constant currency basis, for the three months ended September 30, 2023 compared to the three months ended September 30, 2022, primarily driven by higher average selling prices of our latest generation Pro V1 and Pro V1x golf balls launched in the first quarter of 2023.

Operating income in our Titleist golf balls segment increased $5.5 million, or 14.4%, compared to the prior year period. The increase in operating income primarily resulted from an increase of $8.7 million in gross profit, partially offset by higher operating expenses of $3.3 million. The increase in gross profit was primarily driven by higher average selling prices and lower inbound freight costs. Operating expenses increased primarily as a result of increases of $2.7 million in advertising and promotional expenses and $1.6 million in selling expense, partially offset by a decrease of $1.6 million in administrative expenses.

Titleist Golf Clubs Segment

Net sales in our Titleist golf clubs segment increased 17.6%, or 17.9% on a constant currency basis, for the three months ended September 30, 2023 compared to the three months ended September 30, 2022. The increase was largely due to higher sales volumes of our T-Series irons launched in the third quarter of 2023 and our TSR hybrids and Scotty Cameron Super Select putters, each launched in the first quarter of 2023. This increase was partially offset by lower sales volumes of drivers, fairways and wedges.

Operating income in our Titleist golf clubs segment increased $9.6 million, or 35.7% compared to the prior year period. The increase in operating income primarily resulted from an increase of $16.8 million in gross profit, partially offset by higher operating expenses of $6.3 million and intangible amortization expense of $0.9 million. The increase in gross profit was primarily driven by higher sales volumes, lower royalty expense and lower inbound freight costs. Operating expenses increased primarily due to increases of $3.1 million, $2.4 million and $1.0 million in advertising and promotional, selling and research and development expenses, respectively, largely due to increased employee-related and new product launch expenses. Intangible amortization expense increased due to the acquisition of trademarks in the fourth quarter of 2022.

Titleist Golf Gear Segment

Net sales in our Titleist golf gear segment decreased 19.4%, or 19.9% on a constant currency basis, for the three months ended September 30, 2023 compared to the three months ended September 30, 2022. The decrease primarily resulted from lower sales volumes of golf bags and headwear due to strong sales volume in the third quarter of 2022 as supply chain and fulfillment constraints recovered from the first quarter of 2022.

Operating income in our Titleist golf gear segment decreased $5.6 million, or 87.5% compared to the prior year period. The decrease in operating income primarily resulted from a decrease of $5.2 million in gross profit. The decrease in gross profit was primarily due to lower sales volumes, partially offset by a decrease in inbound freight costs.

FootJoy Golf Wear Segment

Net sales in our FootJoy golf wear segment increased 3.8%, or 3.4% on a constant currency basis, for the three months ended September 30, 2023 compared to the three months ended September 30, 2022. The increase was primarily due to higher average selling prices in apparel.

Operating income in our FootJoy golf wear segment decreased $3.4 million, or 178.9% compared to the prior year period. The decrease in operating income primarily resulted from lower gross profit of $4.9 million, partially offset by lower operating expenses of $1.5 million. The decrease in gross profit was primarily due to unfavorable manufacturing overhead absorption and increased promotional activity in footwear, partially offset by lower inbound freight costs. Operating expenses decreased primarily as a result of a decrease of $1.3 million in selling expense largely due to lower retail commission expense in Korea and lower third party distribution expense.

Nine Months Ended September 30, 2023 Compared to the Nine Months Ended September 30, 2022

Net sales by reportable segment is summarized as follows:

(in millions)

Net sales information by region is summarized as follows:

(in millions)

Segment operating income by reportable segment is summarized as follows:

(in millions)

Net Sales

For the nine months ended September 30, 2023 net sales increased 8.0%, or 9.9% on a constant currency basis, compared to the nine months ended September 30, 2022. This increase was driven primarily by higher sales volumes in Titleist golf balls, Titleist golf clubs and Titleist golf gear. A decline in sales volume of products that are not allocated to one of our four reportable segments also contributed to the change in net sales.

The increase in net sales in the United States was primarily the result of increases in Titleist golf balls of $61.5 million, Titleist golf clubs of $54.6 million, FootJoy golf wear of $21.8 million and Titleist golf gear of $8.3 million. The increase in Titleist golf balls was primarily driven by higher sales volumes and higher average selling prices of our latest generation Pro V1 and Pro V1x golf balls. The increase in Titleist golf clubs was primarily driven by higher sales volumes associated with the launches of our T-Series irons, TSR hybrids, drivers and fairways and Scotty Cameron Super Select putters, partially offset by lower sales volumes of second model year wedges. The increase in FootJoy golf wear was primarily driven by higher sales volumes of apparel and higher average selling prices of apparel and footwear, partially offset by lower sales volumes of footwear. The increase in Titleist golf gear was primarily driven by higher sales volumes of golf bags and higher average selling prices in our travel and headwear product categories.

Net sales in regions outside the United States decreased 0.4%, or increased 3.6% on a constant currency basis. Net sales increased in Rest of World and Japan, partially offset by a decrease in Korea and EMEA, on a constant currency basis. The increase in Rest of World was due to sales increases across all reportable segments. In Japan, net sales increased across all reportable segments except FootJoy golf wear. In EMEA, the decrease was due to lower sales volumes in FootJoy golf wear, partially offset by increases in all other reportable segments. In Korea, the decrease was primarily due to lower sales volumes of products that are not allocated to one of our four reportable segments and lower sales volumes in FootJoy golf wear, partially offset by increases in all other reportable segments.

Gross Profit

Gross profit increased $87.1 million for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. Gross margin increased to 53.0% for the nine months ended September 30, 2023 compared to 52.4% for the nine months ended September 30, 2022. The increase in gross profit was primarily the result of increases in Titleist golf clubs of $53.1 million, Titleist golf balls of $45.6 million, and Titleist golf gear of $8.3 million, partially offset by a decrease in FootJoy golf wear of $10.4 million. This increase in gross profit was primarily due to the sales volume changes discussed above, lower inbound freight costs across all reportable segments and lower royalty expense in Titleist golf clubs. The remaining change in gross profit was due to lower sales volumes of products not allocated to one of our four reportable segments. The increase in gross margin was primarily due to the lower inbound freight costs.

Selling, General and Administrative Expenses

SG&A expenses increased $37.4 million for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. This increase was primarily due to an increase of $17.4 million in advertising and promotional expenses, an increase of $13.7 million in selling expense, $7.9 million of costs related to the optimization of our distribution and custom fulfillment capabilities and includes the favorable impact of changes in foreign currency exchange rates. The increase in advertising and promotional expenses was primarily related to new product launches. The increase in selling expense was primarily due to the higher sales volumes as discussed previously and higher employee-related expenses, partially offset by lower retail commission expense in Korea. Administrative expense was largely flat as increased employee-related expenses were mostly offset by lower information technology-related expenses. Additionally, SG&A includes a decrease of $11.5 million in foreign currency transaction losses, partially offset by a decrease in gains on foreign exchange forward contracts of $4.4 million.

Research and Development

R&D expenses increased $4.8 million for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 primarily as a result of an increase in employee-related expenses.

Intangible Amortization

Intangible amortization expense increased $4.8 million for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 primarily as a result of the acquisition of trademarks related to our Titleist golf club and Titleist golf gear businesses in the fourth quarter of 2022 and the first quarter of 2023, respectively.

Interest Expense, net

Interest expense, net increased $22.3 million for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 primarily due to an increase in borrowings and interest rates.

Other Expense, net

Other expense, net decreased $3.8 million for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 primarily due to a decrease in the non-service cost component of net periodic benefit expense, as well as changes in the fair value of Rabbi trust assets.

Income Tax Expense

Income tax expense decreased $0.1 million for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. Our ETR was 19.0% for the nine months ended September 30, 2023 compared to 20.6% for the nine months ended September 30, 2022. The change in 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 increased 13.9%, or 15.5% on a constant currency basis, for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. The increase was primarily driven by higher sales volumes and higher average selling prices of our latest generation Pro V1 and Pro V1x golf balls launched in the first quarter of 2023.

Operating income in our Titleist golf balls segment increased $30.7 million, or 30.4% compared to the prior year period. The increase in operating income resulted from higher gross profit of $45.6 million, partially offset by higher operating expenses of $14.5 million. The increase in gross profit was primarily driven by higher sales volumes and lower inbound freight costs. Operating expenses increased primarily as a result of increases of $7.4 million and $6.2 million in selling and advertising and promotional expenses, respectively.

Titleist Golf Clubs Segment

Net sales in our Titleist golf clubs segment increased 14.8%, or 16.8% on a constant currency basis, for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. The increase was largely due to higher sales volumes of our T-Series irons launched in the third quarter of 2023, TSR drivers and fairways launched in the third quarter of 2022 and TSR hybrids and Scotty Cameron Super Select putters, each launched in the first quarter of 2023. This increase was partially offset by lower sales volumes of second model year wedges.

Operating income in our Titleist golf clubs segment increased $30.3 million, or 34.4% compared to the prior year period. The increase in operating income resulted from higher gross profit of $53.1 million, partially offset by higher operating expenses of $20.1 million and intangible amortization expense of $2.8 million. The increase in gross profit was primarily due to higher sales volumes, lower royalty expense and lower inbound freight costs. Operating expenses increased primarily as a result of increases of $10.0 million and $6.8 million in selling and advertising and promotional expenses, respectively. Intangible amortization expense increased due to the acquisition of trademarks in the fourth quarter of 2022.

Titleist Golf Gear Segment

Net sales in our Titleist golf gear segment increased 7.0%, or 9.0% on a constant currency basis, for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. The increase was primarily driven by higher sales volumes and higher average selling prices across all product categories.

Operating income in our Titleist golf gear segment increased $6.4 million, or 31.5% compared to the prior year period. The increase in operating income resulted from higher gross profit of $8.3 million, partially offset by higher intangible amortization expense of $1.7 million. Gross profit increased primarily due to lower inbound freight costs, higher sales volumes and higher average selling prices. Intangible amortization expense increased due to the acquisition of trademarks in the first quarter of 2023.

FootJoy Golf Wear Segment

Net sales in our FootJoy golf wear segment decreased 1.4%, or increased 0.6% on a constant currency basis, for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. The increase in constant currency was primarily due to a sales volume increase in apparel, largely offset by a sales volume decrease in footwear.

Operating income in our FootJoy golf wear segment decreased $12.4 million, or 27.4% compared to the prior year period. The decrease in operating income resulted from lower gross profit of $10.4 million and higher operating expenses of $1.9 million. Gross profit decreased primarily as a result of the sales volume decrease and unfavorable manufacturing absorption and increased promotional activity in footwear, partially offset by increased sales volumes in apparel and lower inbound freight costs. Operating expenses increased primarily as a result of an increase of $3.4 million in advertising and promotional expenses, partially offset by a $1.3 million decrease in selling expense largely due to lower retail commission expense in Korea.

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. Additionally, from time to time, we may make strategic acquisitions and investments to complement our products, technologies or businesses, which could impact our liquidity needs. 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 September 30, 2023, we had $55.1 million of unrestricted cash and cash equivalents (including $13.0 million attributable to our FootJoy golf shoe variable interest entity). As of September 30, 2023, 96.4% of our total unrestricted cash and 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 to the United States from time to time to satisfy domestic liquidity needs arising in the ordinary course of business.

Macroeconomic factors 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 current and future economic trends and conditions, 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 ended December 31, 2022.

Debt and Financing Arrangements

As of September 30, 2023, we had $385.1 million of availability under our multi-currency revolving credit facility after giving effect to $7.8 million of outstanding letters of credit. Additionally, we had $27.5 million of availability under certain local credit facilities of our subsidiaries.

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 of September 30, 2023, we were in compliance with all covenants under our credit agreement.

On October 3, 2023, Acushnet Company (the "Issuer"), a wholly owned subsidiary of the Company, completed the issuance and sale of $350.0 million in gross proceeds of the Issuer's 7.375% senior unsecured notes due 2028 (the “Notes”). The proceeds from the Notes offering were used to repay $345.6 million of the outstanding borrowings under the Company's multi-currency revolving credit facility, as well as to pay fees and expenses related to the Notes offering.

See “Notes to Unaudited Condensed Consolidated Financial Statements – Note 5 – Debt and Financing Arrangements,” Item 1 of Part I included elsewhere in this report and “Notes to Consolidated Financial Statements-Note-11-Debt and Financing Arrangements” in our Annual Report on Form 10-K for the year ended December 31, 2022 for a description of our debt and financing arrangements. Additionally, see “Risk Factors,” Item 1A of Part II included elsewhere in this report and “Risk Factors - Risks Related to Our Indebtedness” as described in our Annual Report on Form 10-K for the year ended December 31, 2022 for further discussion surrounding the risks and uncertainties related to our debt and financing arrangements.

Dividends and Share Repurchase Program

During the nine months ended September 30, 2023, we paid dividends on our common stock of $40.1 million to our shareholders. During the fourth quarter of 2023, our Board of Directors declared a dividend of $0.195 per share of common stock to shareholders of record as of December 1, 2023 and payable on December 15, 2023.

As of September 30, 2023, our Board of Directors had authorized us to repurchase up to an aggregate of $700.0 million of our issued and outstanding common stock. During the nine months ended September 30, 2023, we repurchased 4,150,817 shares of common stock at an average price of $49.40 for an aggregate of $205.0 million. Included in this amount were 2,168,528 shares of common stock repurchased from Magnus Holdings Co., Ltd. (“Magnus”), a wholly-owned subsidiary of Fila Holdings Corp., on January 23, 2023, for an aggregate of $100.0 million in satisfaction of our obligations pursuant to our previously disclosed Magnus share repurchase agreement.

On June 9, 2023, we entered into a new agreement with Magnus to purchase from Magnus an equal amount of our common stock as we purchase on the open market, over the period of time from June 12, 2023 through October 27, 2023, up to an aggregate of $100.0 million at the same weighted average per share price ("the 2023 Agreement"). In relation to this agreement, we recorded a liability of $79.8 million to purchase an additional 1,439,400 shares of common stock from Magnus as of September 30, 2023.

As of September 30, 2023, we had $202.4 million remaining under the current share repurchase authorization, including $100.0 million related to the 2023 Agreement. Between October 1, 2023 and October 27, 2023, we purchased an additional 385,594 shares of our common stock on the open market for an aggregate of $20.2 million, bringing the cumulative total open market purchases since the inception of the 2023 Agreement to $100.0 million. As a result, we expect to purchase 1,824,994 shares of our common stock from Magnus for an aggregate of $100.0 million on November 3, 2023, in satisfaction of our obligation under the 2023 Agreement.

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.

Business Developments

In January 2023, we acquired certain trademarks from West Coast Trends, Inc., an industry leader specializing in Club Glove premium performance golf travel products, for $25.2 million. See “Notes to Unaudited Condensed Consolidated Financial Statements-Note-16 - Other Business Developments,” Item 1 of Part I included elsewhere in this report for additional information.

Capital Expenditures

We made $42.4 million of capital expenditures during the nine months ended September 30, 2023. Capital expenditures for the full year are expected to be approximately $75.0 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.

Cash Flows

The following table presents the major components of net cash flows from operating, investing and financing activities for the periods indicated:

(in thousands)

35

Cash Flows from Operating Activities

The increase in cash provided by operating activities was primarily related to changes in working capital, largely driven by inventory. These inventory changes relate to an increase in demand for certain of our products and improvements in our inventory position and supply chain. At any specific point in time, working capital is subject to many variables, including seasonality and inventory management, the timing of cash receipts and payments, vendor payment terms and fluctuations in foreign exchange rates.

Cash Flows from Investing Activities

The increase in cash used in investing activities was primarily driven by cash paid for trademark acquisitions during the nine months ended September 30, 2023, as well as an increase in capital expenditures.

Cash Flows from Financing Activities

The increase in cash used in financing activities was primarily due to a decrease in net proceeds from borrowings, as well as an increase in purchases of our common stock.

Off-Balance Sheet Arrangements

As of September 30, 2023, other than as discussed above, we did not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.

Critical Accounting Estimates

There have been no material changes to our critical accounting estimates from the information provided in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in our Annual Report on Form 10-K for the year ended December 31, 2022.

Recently Issued Accounting Standards

We have reviewed all recently issued accounting standards and have determined that, other than as disclosed in "Notes to Unaudited Condensed Consolidated Financial Statements-Note-1-Summary of Significant Accounting Policies," Item 1 of Part I included elsewhere in this report, such accounting standards will not have a significant impact on our consolidated financial statements or otherwise do not apply to our operations.

We are exposed to various market risks, which may result in potential losses arising from adverse changes in market rates, such as interest rates, foreign exchange rates and commodity prices and availability, as well as inflation risk. We do not enter into derivatives or other financial instruments for trading or speculative purposes and do not believe we are exposed to material market risk with respect to our cash and cash equivalents.

Interest Rate Risk

We are exposed to interest rate risk under our various credit facilities which accrue interest at variable rates, as described in "Notes to Unaudited Condensed Consolidated Financial Statements-Note-5- Debt and Financing Arrangements,” Item 1 of Part I, included elsewhere in this report. Interest rate risk is highly sensitive due to many factors, including U.S. monetary and tax policies, U.S. and international economic factors and other factors beyond our control. We are exposed to changes in the level of interest rates and to changes in the relationship or spread between interest rates for our floating rate debt. Our floating rate debt requires payments based on a variable interest rate index. Increases in interest rates may reduce our net income by increasing the cost of our debt.

From time to time, we enter into interest rate swap contracts to reduce our interest rate risk. Under these contracts, we pay fixed and receive variable rate interest, in effect converting a portion of our floating rate debt to fixed rate debt. As of September 30, 2023, the notional value of our outstanding interest rate swap contract was $100.0 million. See "Notes to Unaudited Condensed Consolidated Financial Statements-Note-6-Derivative Financial Instruments" for further discussion of our interest rate swap contract.

We performed a sensitivity analysis to assess the potential effect of a hypothetical movement in interest rates on our annual pre-tax interest expense. As of September 30, 2023, we had $491.2 million of outstanding indebtedness at variable interest rates after giving effect to $100.0 million of hedged floating rate indebtedness. The sensitivity analysis, while not predictive in nature, indicated that a one percentage point increase in the interest rate applied to these borrowings as of September 30, 2023 would have resulted in an increase of $4.9 million in our annual pre-tax interest expense. This sensitivity analysis disregards fluctuations in balances of our outstanding variable rate indebtedness due to borrowings and repayments throughout the year.

Foreign Exchange Risk

We are exposed to foreign currency transaction risk related to transactions denominated in a currency other than functional currency. In addition, we are exposed to currency translation risk resulting from the translation of the financial results of our consolidated subsidiaries from their functional currency into U.S. dollars for financial reporting purposes.

We use financial instruments to reduce the earnings and shareholders' equity volatility relating to transaction risk. The principal financial instruments we enter into on a routine basis are foreign exchange forward contracts, primarily pertaining to the U.S. dollar, the Japanese yen, the British pound sterling, the Canadian dollar, the Korean won and the euro. The periods of the foreign exchange forward contracts designated as hedges correspond to the periods of the forecasted hedged transactions, which do not exceed 24 months subsequent to the latest balance sheet date. We do not enter into derivative financial instrument contracts for trading or speculative purposes.

We performed a sensitivity analysis to assess potential changes in the fair value of our foreign exchange forward contracts relating to a hypothetical movement in foreign currency exchange rates. The gross U.S. dollar equivalent notional amount of all foreign exchange forward contracts outstanding at September 30, 2023 was $193.2 million, representing a net settlement asset of $8.4 million. The sensitivity analysis of changes in the fair value of our foreign exchange forward contracts outstanding as of September 30, 2023, while not predictive in nature, indicated that the net settlement asset of $8.4 million would decrease by $13.0 million resulting in a net settlement liability of $4.6 million, if the U.S. dollar uniformly weakened by 10% against all currencies covered by our contracts.

The sensitivity analysis described above recalculates the fair value of the foreign exchange forward contracts outstanding by replacing the actual foreign currency exchange rates and current month forward rates with foreign currency exchange rates and forward rates that reflect a 10% weakening of the U.S. dollar against all currencies covered by our contracts. All other factors are held constant. The sensitivity analysis disregards the possibility that foreign currency exchange rates can move in opposite directions and that gains from one currency may or may not be offset by losses from another currency. The analysis also disregards the offsetting change in value of the underlying hedged transactions and balances.

The financial markets and currency volatility may limit our ability to cost-effectively hedge these exposures. The counterparties to derivative contracts are major financial institutions with investment grade credit ratings. We monitor the credit quality of these financial institutions on an ongoing basis.

Commodity Risk

We are exposed to commodity price and availability risks with respect to certain materials and components used by us, our suppliers and our manufacturers, including polybutadiene, urethane and Surlyn for the manufacturing of our golf balls, titanium and steel for the assembly of our golf clubs, leather and synthetic fabrics for our golf shoes, golf gloves, golf gear and golf apparel, and resin and other petroleum-based materials for a number of our products.

Impact of Inflation

Our results of operations and financial condition are presented based on historical cost, and inflation in the cost of our products, overhead costs or wage rates may adversely affect our operating results. While it is difficult to accurately measure the impact of inflation due to the imprecise nature of the estimates required, we believe that inflation in the form of increased raw materials and other input costs, including inbound freight and wage rates, have impacted our business, results of operations, financial position and cash flows during the nine months ended September 30, 2023 and 2022. Sustained and higher inflationary environments, including increased raw material and other input costs, could materially impact our business, results of operations, financial position and cash flows in the future.

Evaluation of Disclosure Controls and Procedures. Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the fiscal quarter ended September 30, 2023. Based on such evaluation, our principal executive officer and principal financial officer have concluded that as of such date, our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting. There were no changes in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

You should carefully consider each of the risk factors included in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022, as well as the other information set forth in this report. There have been no material changes to the risk factors as described in our Annual Report on Form 10-K for the year ended December 31, 2022, other than the risk factors included below.

A high degree of leverage could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or in our industry, expose us to interest rate risk to the extent of our variable rate debt, and prevent us from meeting our obligations under our indebtedness.

As of September 30, 2023, we had $592.8 million of indebtedness. As of September 30, 2023, we had available borrowings under our multi-currency revolving credit facility of $385.1 million after giving effect to $7.8 million of outstanding letters of credit and we had available borrowings remaining under our local credit facilities of $27.5 million. As of September 30, 2023, the notional value of our outstanding interest rate swap contracts was $100.0 million. In addition, on October 3, 2023, Acushnet Company, our wholly-owned subsidiary, issued $350 million in gross proceeds of 7.375% senior unsecured notes due 2028 (the “Notes”), which proceeds were used in part to repay $345.6 million of borrowings under our multi-currency revolving credit facility.

A high degree of leverage could have important consequences for us, including:

• requiring us to utilize a substantial portion of our cash flows from operations to make payments on our indebtedness, reducing the availability of our cash flows to fund working capital, capital expenditures, product development, acquisitions, general corporate and other purposes;
• increasing our vulnerability to adverse economic, industry, or competitive developments;
• exposing us to the risk of increased interest rates because many of our borrowings are at variable rates of interest;
• making it more difficult for us to satisfy our obligations with respect to our indebtedness, including the Notes, and any failure to comply with the obligations of any of our debt instruments, including financial maintenance covenants and restrictive covenants, could result in an event of default under the indenture governing the Notes, if not cured or waived, and the agreements governing our other indebtedness;
• restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;
• limiting our ability to obtain additional financing for working capital, capital expenditures, product development, debt service requirements, acquisitions, and general corporate or other purposes; and
• limiting our flexibility in planning for, or reacting to, changes in our business or market conditions and placing us at a competitive disadvantage compared to our competitors who are less highly leveraged and who, therefore, may be able to take advantage of opportunities that our leverage prevents us from exploiting.

Servicing our indebtedness, including the Notes, will require a significant amount of cash. Our ability to generate sufficient cash depends on many factors, some of which are not within our control.

Our ability to make payments on our indebtedness, including the Notes, and to fund planned capital expenditures will depend on our ability to generate cash in the future. To a certain extent, this is subject to general economic, financial, competitive, legislative, regulatory, and other factors that are beyond our control. If we are unable to generate sufficient cash flows to service our debt and meet our other commitments, we may need to restructure or refinance all or a portion of our debt, sell material assets or operations, or raise additional debt or equity capital. We may not be able to effect any of these actions on a timely basis, on commercially reasonable terms, or at all, and these actions may not be sufficient to meet our capital requirements. In addition, any refinancing of our indebtedness could be at a higher interest rate, and the terms of our existing or future debt arrangements and the indenture governing the Notes may restrict us from effecting any of these alternatives. Our failure to make the required interest and principal payments on our indebtedness could result in an event of default under the indenture governing the Notes and the agreements governing our other indebtedness, which may result in the acceleration of some or all of our outstanding indebtedness. In the absence of sufficient resources to service our debt and meet our other commitments, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. Our multi-currency revolving credit facility and the indenture governing the Notes will restrict our ability to dispose of assets and use the proceeds from the disposition. We may not be able to consummate those dispositions or to obtain the proceeds that we could realize from them and these proceeds may not be adequate to meet any debt service obligations then due. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations.

We and our subsidiaries may be able to incur significant amounts of debt, which could exacerbate the risks associated with our current indebtedness.

We and our subsidiaries may be able to incur substantial additional indebtedness in the future. Although the indenture governing the Notes and the agreements governing our other indebtedness contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of significant qualifications and exceptions and, under certain circumstances, the amount of indebtedness that could be incurred in compliance with these restrictions could be substantial. If we incur additional debt, the risks associated with our substantial existing debt, including our ability to service our debt, could intensify.

The indenture governing the Notes contains, and the credit agreement governing our multi-currency revolving credit facility contains, restrictions that limit our flexibility in operating our business.

The indenture governing the Notes contains, and the credit agreement governing our multi-currency revolving credit facility contains, various covenants that limit our ability to engage in specified types of transactions. These covenants limit the ability of our subsidiaries to, among other things:

• incur additional indebtedness and guarantee indebtedness;
• issue certain preferred stock or similar equity securities;
• pay dividends or make other distributions in respect of, or repurchase or redeem, our capital stock;
• prepay, redeem or repurchase certain debt;
• make loans and investments;
• sell assets;
• incur liens;
• enter into transactions with affiliates;
• enter into agreements restricting our subsidiaries’ ability to pay dividends; and
• consolidate, merge or sell all or substantially all of our assets.

As a result of these and other covenants and restrictions, we are limited in how we conduct our business, and we may be unable to raise additional debt or equity financing to compete effectively or to take advantage of new business opportunities. In addition, we may be required to maintain specified financial maintenance ratios and satisfy other financial condition tests. The terms of any future indebtedness we may incur could include more restrictive covenants. We cannot assure you that we will be able to maintain compliance with these covenants in the future and, if we fail to do so, that we will be able to obtain waivers from the lenders and/or amend the covenants. A breach of any of these covenants, among others, could result in a default under one or more of these agreements, including as a result of cross default provisions, which, if not cured or waived, could result in our being required to repay these borrowings before their maturity. If we are unable to repay outstanding borrowings when due, the lenders under our multi-currency revolving credit facility have the right to proceed against the collateral granted to them to secure the debt. If lenders under the multi-currency revolving credit facility accelerate the debt thereunder, then the obligations under the Notes could be accelerated. We cannot provide assurance that, if the indebtedness under our multi-currency revolving credit facility and the Notes were to be accelerated, our assets would be sufficient to repay in full that indebtedness and our other indebtedness. If not cured or waived, such acceleration could have a material adverse effect on our business and our prospects.

Any decline in the ratings of our corporate credit or the ratings of the Notes could impact our ability to access capital.

Any decline in the ratings of our corporate credit or the Notes could increase our cost of financing and limit our ability to refinance maturing liabilities or access the capital markets to meet liquidity needs.