Callaway Golf Company — Q1 2017 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2017, compared with Q1 2016. Callaway designs and sells golf clubs, balls, bags and related accessories. The quarter included OGIO, acquired January 11, 2017, and the company’s Japan apparel joint venture, established in 2016. Results are seasonal; management says most golf-club and golf-ball sales and profitability generally occur in the first half of the year.
Key financial results
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net sales | $308.9 million | $274.1 million |
| Gross profit / margin | $147.7 million / 47.8% | $132.4 million / 48.3% |
| Operating income | $44.2 million | $45.3 million |
| Income before taxes | $39.1 million | $39.8 million |
| Income tax provision | $13.2 million | $1.4 million |
| Net income attributable to Callaway | $25.7 million | $38.4 million |
| Diluted EPS | $0.27 | $0.40 |
| Cash used in operating activities | $62.8 million | $71.5 million |
- Sales grew 12.7%. Management attributed approximately 2.9 percentage points of growth to the core business and 9.8 points to gear and accessories, including the Japan apparel joint venture and OGIO.
- Gross margin declined 0.5 percentage points, mainly because the acquired and expanded businesses had lower margins; favorable Epic product mix partly offset the impact.
- Operating expenses rose 18.9% to $103.5 million, including acquisition-related costs and higher employee, marketing and tour expenses. Management cited approximately $4.0 million of non-recurring OGIO transaction and transition charges.
- The higher tax provision primarily reflected U.S. taxes after a significant portion of the U.S. deferred-tax valuation allowance was reversed in Q4 2016. This, together with OGIO-related one-time charges, contributed to lower net income and EPS.
- Segment sales: golf clubs $193.6 million, down 0.8%; golf balls $48.2 million, up 16.4%; gear, accessories and other $67.1 million, up 78.5%. Clubs benefited from Epic woods but were affected by lower irons and putters; balls benefited from Supersoft and Chrome Soft X.
Financial position, liquidity and capital allocation
- Cash and equivalents were $48.0 million at March 31, down from $126.0 million at year-end; the decrease primarily reflected approximately $66.0 million used for OGIO and seasonal cash needs.
- Operating cash outflow improved by $8.7 million year over year. Investing cash outflow was $64.9 million, including $58.6 million for acquisitions and $6.3 million of capital expenditures.
- Borrowings under asset-based credit facilities totaled $77.0 million; cash less borrowings was approximately negative $29.0 million. The company reported total available liquidity, including cash, of $249.7 million.
- Current assets were $491.5 million and current liabilities $248.9 million. Accounts receivable increased seasonally to $245.1 million; inventory declined to $179.0 million from $189.4 million at year-end.
- The company reported compliance with credit-facility covenants. Management believed available cash, operating cash flows and credit facilities would fund operating needs, capital expenditures and obligations for at least 12 months.
- 2017 capital expenditures were expected to be approximately $25–30 million. The company declared a $0.01-per-share dividend and repurchased 1.435 million shares for $15.4 million during the quarter.
Outlook, risks and unusual items
- No full-year revenue or earnings guidance is provided in the filing. Management expects to fund operations through cash, operating cash flow and facility borrowings as needed.
- Key disclosed risks include demand and consumer acceptance, retailer inventory and purchasing patterns, seasonality and weather, foreign-exchange movements, supply and manufacturing disruptions, promotional activity, golf participation, and maintaining credit availability and covenant compliance. OGIO integration and the performance of the Japan joint venture are also relevant uncertainties.
- Foreign currency forward contracts had a $28.3 million estimated maximum one-day loss under a hypothetical 10% adverse currency move; management noted that underlying hedged transactions would partly offset such a loss. This sensitivity is not a forecast of actual loss.
- Unconditional purchase obligations totaled $78.3 million over the next six years. Routine and other legal matters were disclosed; management could not estimate aggregate potential loss but did not expect pending matters to have a material adverse effect.
- The company held a 15% cost-method investment in Topgolf valued at $49.0 million; management reported no impairment indicators and could not practicably estimate fair value at quarter-end. New accounting guidance may require fair-value adjustments in future periods.
Important facts for investors to verify
- Whether Epic and newer golf-ball products sustain demand and offset weaker irons and putter sales.
- OGIO and the Japan apparel joint venture’s contribution to revenue, margins, cash generation and integration costs in subsequent quarters.
- Whether cash conversion improves as seasonal receivables are collected, and how credit-facility borrowings change through the year.
- The sustainability of reported profitability after the tax-allowance reversal and one-time acquisition-related charges.
- Progress against the $25–30 million 2017 capital-expenditure outlook, and any material changes in purchase commitments, legal contingencies or Topgolf valuation exposure.