Callaway Golf Company — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2017. Amounts are in U.S. dollars; financial statements are unaudited.
Business context
Callaway designs and sells golf clubs, balls, bags and related products. Its 2017 results include OGIO, acquired in January, and TravisMathew, acquired in August, as well as the Japan apparel joint venture. The company reorganized reporting into Golf Clubs, Golf Balls, and Gear, Accessories and Other; prior-period segment figures were reclassified.
Key financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $243.6 million | $187.9 million | $857.1 million | $707.5 million |
| Gross profit / margin | $104.9 million / 43.1% | $78.9 million / 42.0% | $400.8 million / 46.8% | $321.9 million / 45.5% |
| Operating income (loss) | $6.0 million | $(5.3) million | $99.3 million | $60.9 million |
| Net income (loss) attributable to Callaway | $3.1 million | $(5.9) million | $60.2 million | $66.6 million |
| Diluted EPS | $0.03 | $(0.06) | $0.62 | $0.70 |
| Operating cash flow | Not separately presented | Not separately presented | $110.8 million | $85.6 million |
Q3 sales grew 29.6%; nine-month sales grew 21.1%. Growth reflected the Epic product line, golf-ball launches and acquired/apparel businesses. Gross-margin improvement reflected higher selling prices and favorable product mix, partly offset by higher club component and freight costs and warranty claims. Q3 operating expenses were $98.9 million, including acquisition-related transaction and transition costs; nine-month expenses were $301.5 million.
For the first nine months, the company reported $30.7 million of income tax expense versus $4.6 million a year earlier. The change primarily reflects U.S. tax expense recognized in 2017 after a significant portion of the U.S. deferred-tax-asset valuation allowance was reversed in late 2016. The 2016 comparison also includes a $17.7 million pretax gain from selling part of the Topgolf investment.
Financial position and liquidity
- At September 30, cash and cash equivalents were $82.0 million, down from $126.0 million at December 31, 2016. Current assets were $446.6 million and current liabilities $257.1 million.
- Borrowings under credit facilities totaled $70.6 million, versus $12.0 million at year-end 2016. Available liquidity, including cash and facility availability after letters of credit, was $195.1 million. The company reported compliance with applicable financial covenants.
- Cash used for acquisitions, net of cash acquired, was $181.8 million; capital expenditures were $16.8 million. Cash provided by operations was $110.8 million.
- Management expects to fund operations from cash, operating cash flow and credit facilities, and believes liquidity will cover operating needs, capital expenditures and obligations for at least 12 months. Expected 2017 capital expenditures are $25–$30 million.
Material changes, outlook and risks
- OGIO was acquired for approximately $66.0 million and TravisMathew for approximately $124.6 million, both in cash. Purchase-price allocations remain subject to adjustment. The acquisitions added $44.4 million of sales in the first nine months; TravisMathew’s included net loss was described as nominal, while OGIO net income was not separately determinable.
- Company-defined non-GAAP results exclude acquisition costs and adjust 2016 for tax comparability and the Topgolf gain. On this basis, nine-month 2017 net income was $66.5 million versus $32.9 million in 2016; these measures are not substitutes for GAAP results.
- The company gave no specific revenue or earnings forecast in this filing. It expects to refinance its Japan asset-based facilities, which expire in January 2018. The main ABL facility matures in June 2019; a newly added $60 million term-loan facility had no borrowings at quarter-end.
- Management cited seasonality, consumer demand, retailer purchasing and inventory, promotions, foreign exchange, product acceptance, supply constraints, weather, golf participation and acquisition integration as risks. Foreign-region sales were adversely affected by currency movements. A hypothetical 10% adverse currency move implied an estimated maximum one-day loss of $7.6 million on forward contracts; management noted underlying exposures could partly offset it.
- Warranty expense rose, primarily from claims on certain 2015 putter models; management said the quality issues were resolved. The company disclosed routine and other legal matters but said it could not estimate aggregate potential losses and did not expect currently pending matters to have a material adverse effect. Minimum unconditional purchase obligations were $72.7 million over six years.
Important facts for investors to verify
- Whether OGIO and TravisMathew integration delivers expected growth and profitability, and how much reported growth is attributable to acquisitions.
- Whether Epic demand, pricing and product mix can sustain margins despite higher component and freight costs, promotional activity and warranty claims.
- Cash generation, seasonal borrowing needs, covenant compliance, and refinancing of the Japan facilities before their January 2018 expiration.
- The tax effects of deferred-tax assets and uncertain tax positions, and any future fair-value changes to the $50.5 million Topgolf investment.
- Progress against the $25–$30 million 2017 capital-spending expectation and the $72.7 million of minimum purchase obligations.