Callaway Golf Company — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Unaudited results; comparisons are with Q1 2019 unless noted. The company sells golf equipment and apparel, gear and other products, including brands such as Callaway, TravisMathew, OGIO and Jack Wolfskin.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $442.3 million | $516.2 million | Down 14.3% |
| Gross profit / margin | $195.7 million / 44.2% | $238.4 million / 46.2% | Margin down 200 basis points |
| Income from operations | $40.7 million | $69.6 million | Down 41.6% |
| Net income | $28.9 million | $48.5 million | Down 40.4% |
| Diluted EPS | $0.30 | $0.50 | Down $0.20 |
| Cash used in operating activities | $93.7 million | $120.6 million | Use narrowed by $26.9 million |
| Capital expenditures | $17.0 million | $11.3 million | Up $5.7 million |
Revenue fell across both segments: Golf Equipment declined 9.9% to $291.7 million; Apparel, Gear and Other declined 21.8% to $150.6 million. Golf balls were down 34.5%, while golf clubs declined 4.0%. Japan was the only major region with reported growth, up 5.6%; management also cited growth in Korea. Foreign exchange reduced sales by $3.8 million.
Cash and cash equivalents were $166.6 million at March 31, up from $106.7 million at year-end. The increase reflected financing, including $191.0 million in net proceeds from credit facilities; operating activities used cash. Accounts receivable rose to $259.5 million from $140.5 million at year-end, while inventory fell to $412.7 million from $456.6 million.
At March 31, asset-based credit facilities had $335.6 million outstanding; long-term debt included $445.2 million under the Term Loan Facility and $28.3 million of equipment notes. The company reported $259.4 million of available liquidity, comprising cash and remaining facility availability after borrowings and letters of credit. It was in compliance with debt covenants at quarter-end. Shareholders’ equity was $760.0 million.
Material changes and drivers
- COVID-19-related shutdowns and restrictions disrupted retail and wholesale demand, supply and distribution, and company facilities. Management said the effects significantly hurt Q1 sales, particularly from mid-March onward.
- Gross margin was pressured by lower sales, increased U.S. tariffs on imports from China, and temporary redundant distribution-center costs. Selling expenses fell with lower media and tour spending; G&A also declined, partly because Q1 2019 included $4.7 million of Jack Wolfskin acquisition-related costs.
- Apparel, Gear and Other reported a $3.8 million pretax loss, versus $22.1 million pretax income a year earlier. Golf Equipment pretax income fell to $58.6 million from $70.6 million.
- Other income was $6.5 million versus a $1.9 million expense, mainly reflecting foreign-currency hedge gains. This partially offset operating deterioration.
- Foreign-currency translation reduced accumulated other comprehensive income by $14.9 million during the quarter.
Outlook, liquidity actions and risks
- The company did not provide earnings or revenue guidance. It said the duration and overall impact of COVID-19 could not be reasonably estimated and warned near-term and later results would be significantly adversely affected.
- Management reported early signs of recovery in parts of Asia, stronger-than-expected April performance in China, and global e-commerce sales exceeding expectations. These developments did not establish a quantified recovery outlook.
- Through April 30, the company said it had reduced planned operating expenses and capital expenditures by almost 20%, including lower discretionary and infrastructure spending and voluntary compensation reductions for senior leaders and directors. It also focused on reducing inventory and conserving cash; open-market repurchases were suspended.
- 2020 capital expenditure expectations were reduced from $55.0 million to approximately $32.5–$37.5 million.
- After quarter-end, the company issued $258.75 million of 2.75% convertible senior notes due 2026. It reported net proceeds of approximately $218 million after capped-call costs and transaction expenses; capped-call transactions cost approximately $31.8 million and are intended to reduce potential dilution.
- Other key risks include weaker consumer demand or retailer payments, further supply-chain interruptions, foreign-exchange and interest-rate exposure, tariffs, seasonal working-capital needs, debt service and covenant compliance. The company disclosed routine legal matters but could not estimate aggregate potential losses; it did not expect pending matters to have a material annual adverse effect.
Investor facts to verify
- Whether COVID-19 disruptions, customer demand and operating capacity recover as management anticipated, and how subsequent results compare with the Q1 decline.
- Liquidity, borrowing-base availability and covenant headroom as seasonal receivables and inventory change; the filing’s $259.4 million liquidity figure is as of March 31.
- Cash generation and working-capital trends, particularly receivables, inventory and operating cash use.
- Execution of the revised capital-spending plan and the actual cash proceeds and potential dilution from the convertible notes and capped calls.
- Whether segment margins improve, especially in Apparel, Gear and Other, and the continuing effects of tariffs, distribution costs and foreign exchange.