Callaway Golf Company (NYSE: ELY) — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unaudited results. Callaway sells golf equipment and apparel, gear and other products through wholesale, retail and e-commerce channels; its brands include Callaway, OGIO, TravisMathew and Jack Wolfskin.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $297.0 million | $446.7 million | $739.3 million | $962.9 million |
| Gross profit | $122.1 million | $206.8 million | $317.7 million | $445.3 million |
| Gross margin | 41.1% | 46.3% | 43.0% | 46.2% |
| Operating income (loss) | $(177.4) million | $45.2 million | $(136.8) million | $114.8 million |
| Net income (loss) attributable to Callaway | $(167.7) million | $28.9 million | $(138.8) million | $77.6 million |
| Diluted earnings (loss) per share | $(1.78) | $0.30 | $(1.47) | $0.81 |
- Q2 sales declined 33.5% year over year; first-half sales fell 23.2%. Both reportable segments declined: Q2 Golf Equipment sales fell 28.2% to $209.9 million and Apparel, Gear and Other fell 43.6% to $87.1 million.
- The $174.3 million Q2 goodwill and trade-name impairment drove the GAAP operating and net losses. The charge related to Jack Wolfskin and comprised $148.4 million of goodwill and $25.9 million of trade-name impairment.
- Management reported non-GAAP diluted EPS of $0.06 for Q2 and $0.29 for the first half, versus $0.37 and $0.99, respectively, in 2019. These company-defined measures exclude impairment and other specified items and are not substitutes for GAAP results.
- Cash and cash equivalents were $164.4 million at June 30, up from $106.7 million at year-end 2019. Six-month operating cash flow was negative $20.3 million; investing cash flow was negative $30.3 million, and financing cash flow was positive $109.2 million.
- Available liquidity, including cash and availability under credit facilities after borrowings and letters of credit, was $483.1 million. The company reported $55.6 million outstanding under asset-based credit facilities. Long-term debt was $628.9 million and current long-term debt was $8.7 million on the balance sheet.
- In May, Callaway issued $258.8 million of 2.75% convertible senior notes due 2026; it paid $31.8 million for capped-call transactions. The notes’ initial conversion price is $17.62 per share. The company also had $444.0 million principal outstanding under its Term Loan B facility and $26.8 million under equipment notes.
Material changes and management commentary
- COVID-19-related closures and restrictions disrupted retail, manufacturing, distribution and supply chains. Wholesale and retail sales were hit hardest, while e-commerce increased significantly. Management said the businesses recovered more quickly than expected late in Q2 and into Q3 as golf courses reopened and participation rose.
- Gross margin fell amid lower sales and fixed-cost under-absorption, a less favorable sales mix, temporary manufacturing and distribution shutdowns, and higher U.S. tariffs on imports from China. Higher e-commerce sales partly offset these pressures.
- Operating expenses declined through workforce, compensation, marketing, travel and other cost reductions. Management reported operating-expense savings of $36.4 million in Q2 and $50.2 million in the first half versus the comparable 2019 periods.
- Other income included an $11.0 million gain from discontinuing a cash-flow hedge. The company unwound the cross-currency swap but retained an interest-rate hedge on part of its Term Loan B exposure.
Outlook, risks and contingencies
- Management expected COVID-19 to continue reducing revenue, gross margin and operating income for the rest of fiscal 2020 and potentially beyond. It said the pandemic’s duration and financial impact remained uncertain. No full-year revenue or earnings guidance was provided.
- Management believed cash, operating cash flows and credit availability would fund operating needs, capital expenditures, debt service and contractual obligations for at least 12 months from the filing. It also cautioned that weaker demand or cash flow could challenge debt service and covenant compliance, and that additional financing might not be available on acceptable terms.
- 2020 capital expenditure expectations were reduced from approximately $55 million to a range of $35 million to $40 million. The quarterly dividend and open-market share repurchases were suspended; the company repurchased $22.0 million of shares during the first half.
- The company reported compliance with credit-facility covenants at June 30. Its ABL facility includes a fixed-charge coverage covenant that applies if borrowing-base availability falls below specified thresholds. The Japan ABL facility was due to expire in January 2021.
- Other exposures include $77.1 million of minimum unconditional purchase obligations, lease commitments, uncertain tax positions, and routine legal matters. Management said pending legal matters were not expected to have a material adverse annual impact, but could not estimate ultimate aggregate losses.
- The company held a 14% minority investment in Topgolf valued at $90.1 million and provided its pro rata share of a working-capital note, approximately $6.5 million. It reported no impairment of the investment at June 30.
Important facts for investors to verify
- Whether sales, margins and operating cash flow recovered after quarter-end, and whether the improvement in golf participation and e-commerce persisted.
- The assumptions underlying the Jack Wolfskin impairment and whether further impairment or valuation-allowance changes become necessary.
- Liquidity availability, seasonal borrowing needs, debt maturities, interest costs and continued covenant compliance, particularly if pandemic-related disruption persists.
- The timing and consequences of the Japan ABL facility’s January 2021 expiration, and any changes to dividend, repurchase or capital-spending plans.
- The composition and sustainability of reported non-GAAP earnings, including excluded charges and hedge gains, alongside GAAP results.