Callaway Golf Company — Q1 2013 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2013, compared with Q1 2012. Callaway designs, manufactures and sells golf clubs and golf balls, with seasonal sales typically concentrated in the first half. Segment reporting is for golf clubs and golf balls.
Financial performance and liquidity
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Net sales | $287.8 million | $285.1 million |
| Gross profit / margin | $130.4 million / 45.3% | $124.4 million / 43.6% |
| Operating income | $40.1 million | $27.8 million |
| Net income | $41.7 million | $31.8 million |
| Diluted EPS | $0.47 | $0.37 |
| Cash used in operating activities | $100.6 million | $92.4 million |
- Net sales rose 1%; golf clubs contributed $244.8 million and golf balls $43.0 million. Golf-club segment pretax income was $44.0 million versus $32.6 million; golf-ball segment pretax income was $6.2 million versus $1.6 million.
- At March 31, cash was $28.1 million, accounts receivable $255.7 million, inventory $202.0 million and total assets $764.3 million. Cash declined $23.9 million during the quarter.
- ABL borrowings were $79.5 million; the company reported $51.5 million of additional availability and $91.1 million of average liquidity during the quarter. The ABL rate was 4.75%. Convertible notes had a $107.3 million net carrying value and bear 3.75% interest, with $112.5 million principal due in 2019.
- Capital expenditures were $3.1 million. Total shareholders’ equity was $354.5 million.
Material changes versus Q1 2012
- Gross margin increased 1.7 percentage points, supported by product mix and cost-reduction savings. Operating expenses fell $6.2 million overall, including an $8.5 million reduction in selling expense; G&A rose $2.4 million, partly because the prior-year period included a $6.6 million gain on brand sales.
- New X Hot woods and Versa putters, alongside earlier product launch timing, supported sales. Favorable U.S. sales were partly offset by weaker sales in Europe and other markets, unfavorable foreign exchange, and the prior sale of Top-Flite and Ben Hogan and transition of apparel and footwear to a third-party model.
- Q1 2013 included $3.5 million of pretax cost-reduction charges; Q1 2012 included the $6.6 million brand-sale gain. The tax provision was $2.5 million in 2013 versus a $0.3 million benefit in 2012, making the periods’ tax comparisons less representative.
Outlook, risks and unusual items
- Management said the turnaround was on track and expected full-year 2013 operating results to be significantly improved from 2012. It cautioned that a delayed golf-season start due to inclement weather could affect Q2 and that foreign-exchange headwinds were expected to continue. No numerical earnings or revenue guidance was provided.
- The company expected $60 million in annualized savings from its cost-reduction initiatives, with approximately $7.4 million of additional charges expected over the next nine months. Cumulative charges through March 31 were $57.6 million against an estimated $65 million total.
- Management believed cash, expected operating cash flow and ABL availability would cover liquidity needs for at least 12 months. However, Q1 operating cash use was substantial and seasonal; the company said it would not have met the fixed-charge coverage ratio if that covenant had applied, but borrowing-base availability remained above the $25 million trigger and it was not subject to the test.
- 2013 capital expenditures were estimated at $15–$20 million. Minimum contractual obligations included $76.2 million of purchase commitments and $37.1 million of operating leases.
- Principal risks include product demand and consumer spending, execution and costs of the turnaround, weather and golf seasonality, foreign exchange, credit-facility availability and covenant compliance, supply/manufacturing disruptions, and golf participation or rule changes. The company also disclosed routine and other legal matters but could not estimate aggregate potential losses; management did not expect current matters to materially affect financial position.
- U.S. deferred tax assets remained subject to a valuation allowance. The company reported $7.8 million of uncertain tax-position liabilities before potential offsets. Foreign-currency derivatives were not designated for hedge accounting; their estimated maximum one-day loss under a hypothetical 10% currency move was $18.2 million, which management said could be partly offset by the underlying exposures.
Important facts for investors to verify
- Whether new product demand, reorder activity and the delayed start to the golf season support management’s full-year improvement expectation.
- Progress toward the estimated $60 million annualized savings, remaining restructuring charges and the effect on margins and cash generation.
- Seasonal cash collections, ABL borrowing-base availability and covenant triggers, especially given negative Q1 operating cash flow.
- The continuation and magnitude of foreign-exchange pressure, and the degree to which hedges offset it.
- Convertible-note dilution and preferred-stock conversion/dividend terms, alongside future liquidity and contractual-obligation requirements.
- Any change in deferred-tax-asset valuation allowances, uncertain tax positions or the outcome of legal contingencies.