Callaway Golf Company — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; the filing also reports fourth-quarter results. Callaway designs and sells golf clubs, balls and accessories through golf-club and golf-ball segments, in the U.S. and more than 100 countries.
Financial performance and liquidity
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Net sales | $871.2 million | $843.8 million |
| Gross profit / margin | $385.0 million / 44.2% | $357.6 million / 42.4% |
| Operating income | $44.2 million | $26.9 million |
| Net income attributable to Callaway | $189.9 million | $14.6 million |
| Diluted EPS | $1.98 | $0.17 |
| Cash from operating activities | $77.7 million | $30.6 million |
| Cash and cash equivalents at year-end | $126.0 million | $49.8 million |
| Working capital at year-end | $273.6 million | $212.9 million |
FY 2016 reported earnings included a $140.6 million net non-cash benefit from reversing much of the U.S. deferred-tax valuation allowance and a $17.7 million pre-tax gain on a partial sale of Topgolf shares. Excluding those items, management reported net income of $31.6 million and diluted EPS of $0.33, versus $14.6 million and $0.17 in 2015. The filing reports an income-tax benefit of $132.6 million for 2016, compared with a $5.5 million provision in 2015.
Revenue grew 3.2% year over year, or 2.3% on a constant-currency basis. Golf-club sales rose 2.6% and golf-ball sales rose 6.4%. Woods sales fell 9.2%, while accessories and other sales rose 17.4%, driven in part by the Japan apparel joint venture consolidated from July 2016. Gross margin improved 180 basis points, primarily from operational efficiencies and higher average selling prices, partly offset by promotional activity and foreign-exchange effects.
Year-end borrowings were $12.0 million, all under the Japan asset-based facility; there were no borrowings on the primary ABL facility. The company reported $225.2 million of total available liquidity, including cash and available credit. It was in compliance with credit-facility covenants. Cash capital expenditures were $16.2 million. Cash dividends were $0.04 per share for the year.
Fourth-quarter sales were $163.7 million versus $153.3 million in the prior-year quarter. Net income attributable to Callaway was $123.3 million, versus a $30.5 million loss, chiefly reflecting the tax-valuation-allowance reversal and the Topgolf gain; quarterly EPS should not be viewed as representative of recurring operating performance.
Material changes versus the prior period
- Sales, operating income, operating cash flow and gross margin improved from 2015; reported net income rose sharply but was dominated by the tax benefit and investment-sale gain.
- Cash increased by $76.2 million during 2016. Inventory fell $19.5 million to $189.4 million, while net accounts receivable increased $12.3 million to $127.9 million.
- Interest expense declined to $2.4 million from $8.7 million, following retirement of the convertible notes in 2015.
- In July 2016, Callaway formed and consolidated a 52%-owned apparel joint venture in Japan. In January 2017, it acquired OGIO for $75.5 million, subject to working-capital adjustments; the acquisition was subsequent to year-end and is not included in 2016 results.
Outlook, commentary and risks
Management said it was pleased with 2016 progress and cited market-share gains, better profitability and cash generation despite softer-than-expected conditions, particularly in Asia. It expects to fund operations and planned requirements for at least the next 12 months from cash, operating cash flow and credit facilities as needed. The filing provides no specific revenue or earnings guidance.
Key risks include discretionary consumer demand and golf participation; seasonal and weather-driven sales; intense competition, discounting and product-launch execution; foreign-currency movements; reliance on a limited number of suppliers and global shipping; customer credit risk; potential trade restrictions or tariffs; and credit-facility availability and covenant compliance. The company’s trade-receivables insurance expired in October 2016, and it had no such coverage at year-end. Management identified OGIO integration as a risk. Other exposures include intellectual-property disputes, warranty claims, tax-asset realization and Topgolf investment illiquidity and valuation uncertainty.
Contractual cash obligations totaled $109.9 million at year-end, including $49.3 million of unconditional purchase obligations and $25.6 million of operating leases. Management said pending legal matters were not expected to have a material annual impact, while noting outcomes are uncertain and aggregate potential loss could not be estimated. The auditor issued an unqualified opinion on the financial statements, and management and the auditor reported effective internal control over financial reporting at year-end.
Important facts for investors to verify
- Reconcile recurring earnings with the reported $189.9 million net income, including the tax-allowance release and Topgolf gain.
- Track whether sales growth and margin improvement continue, particularly in woods, Asia and the newly consolidated apparel business.
- Review OGIO’s purchase-price allocation, integration progress, financing and post-acquisition contribution.
- Confirm liquidity, seasonal borrowing availability and compliance with ABL covenants; assess the implications of uninsured receivables.
- Monitor realization of deferred tax assets and the carrying value and potential liquidity of the Topgolf investment.