Callaway Golf Company — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. Although the request identifies 2015 Q4, this filing reports full-year results; fourth-quarter figures below are unaudited supplementary data. Callaway designs, manufactures and sells golf clubs, balls and related products, with golf clubs and golf balls as its reportable segments.
Financial results and liquidity
| Metric | 2015 | 2014 |
|---|---|---|
| Net sales | $843.8 million | $886.9 million |
| Gross profit / margin | $357.6 million / 42.4% | $357.9 million / 40.4% |
| Operating income / margin | $26.9 million / 3.2% | $30.7 million / 3.5% |
| Net income | $14.6 million | $16.0 million |
| Diluted EPS | $0.17 | $0.20 |
| Cash from operations | $30.6 million | $36.9 million |
| Capital expenditures | $14.4 million | $10.8 million |
| Cash and cash equivalents, year-end | $49.8 million | $37.6 million |
Year-end working capital was $212.9 million. The company reported $15.0 million outstanding under its Japan asset-based facility and no borrowings under its primary ABL facility; convertible notes were eliminated during 2015. Total available liquidity, including cash, was reported at $155.3 million. Operating cash flow less capital expenditures was approximately $16.2 million, versus $26.1 million in 2014.
In the fourth quarter, net sales were $153.3 million versus $134.6 million a year earlier; gross profit was $51.1 million versus $36.9 million. The company recorded a net loss of $30.5 million, compared with a $41.5 million loss in Q4 2014.
Changes versus prior periods
- Full-year sales fell 5% reported, but increased 1% to $897.0 million on the company’s constant-currency basis. Foreign exchange reduced reported sales by $53.2 million; international sales were especially weak in Asia.
- U.S. sales rose 6% to $446.5 million, while sales outside the U.S. declined 15% reported. Golf-club sales fell 7% reported; golf-ball sales increased 4%.
- Woods sales decreased 18%, while irons rose 3%, putters rose 6%, and golf balls rose 4%. Chrome Soft balls, XR irons, Mac Daddy 3 wedges and Odyssey Works putters supported performance.
- Gross margin improved 200 basis points, mainly from improved product mix and pricing, fewer closeouts and promotions, and manufacturing efficiencies. Operating expenses increased $3.5 million, including higher stock compensation and professional fees.
- Convertible-note exchanges and conversions issued approximately 15 million common shares, removing the notes from year-end debt but increasing the share count. The company’s balance-sheet equity rose to $412.9 million from $291.5 million.
Outlook, commentary and risks
- Management said operational performance, market share and brand momentum improved despite currency pressure, and cited the company’s No. 1 U.S. total-golf-club dollar market share position. It expects current cash, operating cash flow and credit facilities to fund operations and commitments for at least 12 months, but gave no numerical earnings or revenue guidance in the supplied filing text.
- The company expects ongoing foreign-exchange exposure; its constant-currency figures are non-GAAP measures and do not eliminate all currency effects. A stronger U.S. dollar, particularly against the yen, could further weigh on results. Cash flow from operations declined year over year, and inventory rose to $208.9 million.
- In February 2016, Topgolf announced a planned share repurchase. Callaway agreed to sell a portion of its Topgolf holding; the company estimated proceeds of $23.1–$26.1 million and a 2016 gain of about $17.4–$19.7 million. Completion and final amounts were uncertain; Topgolf shares are illiquid.
- A planned Japan apparel joint venture with TSI was expected to be finalized in the second half of 2016, subject to definitive agreements and closing conditions. Callaway expected to own 52% and consolidate the venture if completed.
- Principal risks include discretionary consumer demand and golf participation, intense competition and pricing pressure, seasonality and weather, international market weakness and currency changes, dependence on limited suppliers, inventory forecasting, credit-facility covenant requirements, and potential limits on realizing U.S. tax assets. The U.S. deferred-tax valuation allowance was $164.6 million at year-end.
- Other notable items: the company reported no 2015 goodwill or intangible-asset impairment, was in compliance with credit-facility covenants at year-end, and management and the independent auditor concluded internal control over financial reporting was effective. The auditor gave an unqualified opinion on the financial statements.
Investor verification priorities
- Review the reconciliation and assumptions behind constant-currency sales and margin comparisons, and track the continuing impact of foreign exchange.
- Confirm 2016 operating cash flow, inventory levels, seasonal borrowing availability and compliance with ABL covenants.
- Verify the completion, proceeds and accounting gain from the Topgolf repurchase, and assess the valuation and liquidity risks of the remaining investment.
- Check the status, final terms and consolidation effects of the proposed TSI apparel joint venture.
- Assess dilution following the 15 million-share debt conversion and monitor future share-based compensation and repurchases.
- Review the realizability and any ownership-change limits on U.S. tax-loss and credit carryforwards, along with material developments in legal contingencies.