Callaway Golf Company (NYSE: ELY) — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual filing, not a standalone fourth-quarter report; quarterly figures are noted where relevant. Amounts are in U.S. dollars.
Business context
Callaway sells golf clubs and balls, apparel, gear and accessories through the Callaway, Odyssey, OGIO, TravisMathew and Jack Wolfskin brands. It reported two segments: Golf Equipment and Apparel, Gear and Other. In October 2020, it agreed to acquire Topgolf in an all-stock transaction; the merger was pending at year-end.
Financial performance and liquidity
| Metric | 2020 | 2019 |
|---|---|---|
| Net sales | $1,589.5 million | $1,701.1 million |
| Gross profit / gross margin | $657.6 million / 41.4% | $766.8 million / 45.1% |
| Operating income (loss) | ($105.5) million | $132.7 million |
| Net income (loss) attributable to Callaway | ($126.9) million | $79.4 million |
| Diluted EPS | ($1.35) | $0.82 |
| Cash from operating activities | $228.2 million | $86.6 million |
| Cash and cash equivalents at year-end | $366.1 million | $106.7 million |
| Working capital at year-end | $521.4 million | $266.1 million |
Revenue declined 6.6% year over year. Golf Equipment sales rose 0.4% to $982.7 million: clubs increased 2.4%, while balls declined 7.3%. Apparel, Gear and Other sales fell 15.9% to $606.8 million. E-commerce sales increased 34.5% overall. The company generated $228.2 million from operations and spent $39.3 million on capital expenditures.
The reported loss included a $174.3 million non-cash impairment charge: $148.4 million for Jack Wolfskin goodwill and $25.9 million for its trade name. Excluding specified impairment, amortization, convertible-note discount and acquisition/other costs, management reported non-GAAP net income of $64.4 million and diluted EPS of $0.67, versus $105.7 million and $1.10 in 2019. These non-GAAP measures are not substitutes for GAAP results.
Year-end available liquidity, including cash and availability under credit facilities, was approximately $632.2 million. The balance sheet reported $650.6 million of long-term debt and $14.6 million of current long-term debt, in addition to $22.1 million outstanding under asset-based credit facilities. Debt includes the $441.6 million Term Loan B and $258.8 million face amount of convertible notes; the notes’ year-end carrying amount was $183.1 million, net of discount and issuance costs. The company was in compliance with its reported credit-facility covenants at year-end.
Changes, outlook and material items
- COVID-19 disrupted manufacturing, retail, distribution and demand, particularly in the first half. Management cited record golf-equipment sales in the third and fourth quarters as participation and demand for socially distanced outdoor activities increased. Apparel and soft-goods sales also recovered faster than expected in the second half.
- Gross margin fell 370 basis points, reflecting lower sales, idle facilities, soft-goods inventory reductions and higher freight costs; higher e-commerce mix and favorable currency effects partly offset the pressure. Cost actions reduced operating expenses by $45.3 million excluding impairment charges.
- Management expected COVID-19 to continue affecting 2021, though less severely than in 2020, and anticipated continued golf-equipment demand and recovery in soft goods. The filing does not provide a clear quantified full-year 2021 earnings or revenue forecast.
- The Topgolf merger was expected to close around March 8, 2021, subject to shareholder approval and other conditions. Callaway estimated issuing about 90 million shares; former Topgolf holders were expected to own approximately 48.5% of the combined company. Callaway also expected to assume approximately $550–$600 million of Topgolf long-term debt, net of cash.
- Merger-related risks include integration costs, dilution and possible EPS dilution, failure to achieve expected benefits, a $75 million termination fee in specified circumstances, and six shareholder lawsuits challenging merger disclosures. Callaway said it intended to defend the lawsuits and did not expect pending litigation to materially affect its business or financial results.
- The company suspended quarterly dividends in August 2020 and suspended open-market repurchases in the second quarter. It paid $0.02 per share in dividends during 2020 and repurchased approximately $12.0 million of shares before suspension.
- Other unusual items included a $11.0 million gain from settling a cross-currency swap and a $14.8 million increase in net foreign-currency transaction gains. The merger could also limit use of tax carryforwards; management said its assessment of any deferred-tax-asset valuation allowance would follow closing.
Key risks and contingencies
Principal risks include ongoing pandemic effects; discretionary consumer demand and retail/customer credit; competition, product-cycle and inventory forecasting; seasonal and weather-related demand; international supply-chain, tariff and currency exposure; reliance on limited suppliers; variable-rate debt, covenant and liquidity requirements; and merger approval, integration, financing and dilution risks. The company disclosed environmental remediation obligations at its Chicopee, Massachusetts facility and routine legal matters; it said historical environmental compliance costs had not materially harmed the business. Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting.
Investor verification checklist
- Confirm the Topgolf merger’s completion, final share issuance, debt assumed, transaction costs and realized operating benefits.
- Track sales and margins by segment, particularly whether golf-equipment demand persists and Apparel, Gear and Other recovers.
- Review cash generation, borrowing availability, debt maturities, variable-rate exposure and continued covenant compliance.
- Assess the assumptions underlying the Jack Wolfskin impairment and whether further impairment or tax valuation allowances are required.
- Monitor merger litigation, the potential use of tax carryforwards, and the company’s dividend and repurchase policies.