Callaway Golf Co annual report, FY2019

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Callaway Golf Company (NYSE: ELY) — FY 2019 Form 10-K

Reporting period: Fiscal year ended December 31, 2019. The filing is an annual report, not a standalone fourth-quarter filing; quarterly results are also summarized below. Callaway sells golf equipment and, following acquisitions of OGIO, TravisMathew and Jack Wolfskin, an expanding range of apparel, gear and lifestyle products. Jack Wolfskin was acquired in January 2019, and the company reported two segments: Golf Equipment and Apparel, Gear and Other.

Financial results and liquidity

  • Revenue: $1.701 billion, up 36.9% year over year. Jack Wolfskin contributed $356.2 million; excluding the acquisition, sales increased 8.2%. Golf Equipment sales rose 7.3% to $979.2 million; Apparel, Gear and Other rose 118.8% to $721.9 million.
  • Profitability: Gross profit was $766.8 million; gross margin fell to 45.1% from 46.5%. Operating income increased to $132.7 million from $128.4 million. Net income attributable to Callaway was $79.4 million, down from $104.7 million; diluted EPS was $0.82 versus $1.08. The effective tax rate was 17.3%, compared with 19.8%.
  • Non-GAAP measure: The company reported adjusted diluted EPS of $1.10 versus $1.08, excluding specified acquisition, transition, hedging and purchase-accounting items. This is a company-defined non-GAAP measure and is not a substitute for GAAP results.
  • Cash flow and investment: Operating cash flow was $86.6 million, down from $92.3 million. Capital expenditures were $54.7 million. Investing cash outflow was $535.7 million, including $463.1 million for Jack Wolfskin and $17.9 million invested in golf-related ventures. Financing cash inflow was $492.5 million.
  • Balance sheet and liquidity: Cash was $106.7 million; working capital was $266.1 million. Inventory was $456.6 million, up from $338.1 million. Available liquidity, including cash and borrowing availability under credit facilities, was $303.3 million at year-end.
  • Debt: At year-end, borrowings included $446.4 million under the Term Loan Facility, $114.5 million under the primary ABL Facility, $30.1 million under Japan ABL facilities and $19.7 million in equipment notes. The Term Loan was used to help finance Jack Wolfskin and matures in 2026; the ABL Facility matures in 2024. The company reported compliance with applicable debt covenants.
  • Fourth quarter: Revenue was $311.9 million, versus $180.7 million in Q4 2018. Net loss attributable to Callaway was $29.2 million, versus $28.5 million; diluted loss per share was $0.31 in both quarters.

Material changes versus the prior year

  • Revenue growth was primarily acquisition-driven: Jack Wolfskin added scale and shifted the business mix toward apparel and outdoor products. The company also cited continued TravisMathew growth and successful 2019 golf product launches.
  • GAAP net income declined despite higher sales and operating income. The company attributed pressure to sharply higher interest expense, acquisition-related costs, purchase-accounting charges and currency impacts. Interest expense rose to $39.3 million from $5.5 million, primarily due to acquisition financing.
  • Gross margin declined 140 basis points. The company cited a $10.9 million Jack Wolfskin inventory step-up charge, a shift toward premium golf products with higher costs, tariffs and unfavorable currency effects; TravisMathew growth partially offset these pressures.
  • Cash from operations decreased, while debt, inventory, receivables and total assets increased following the acquisition. The company also acquired the remaining 48% of its Japanese apparel joint venture for approximately $18.5 million.
  • The company changed its reportable segments and geographic presentation in 2019; prior-period figures were reclassified for comparison.

Outlook, commentary, risks and unusual items

  • Management said available cash, expected operating cash flow and credit-facility availability should fund operating needs, capital expenditures, debt service and contractual obligations for at least 12 months from the filing date. No numerical earnings or revenue guidance is provided in the filing text.
  • COVID-19 had already disrupted Asian supply chains, temporarily closed company offices and stores in China, and affected tournaments and consumer demand. Management warned of a potentially significant adverse effect on 2020 results, while noting that the scale and duration were uncertain.
  • Other key risks include acquisition integration and realizing synergies; discretionary consumer demand and retail inventory; golf participation and seasonality; tariffs and foreign exchange; concentrated suppliers and shipping disruptions; weather-sensitive Jack Wolfskin outerwear demand; and variable-rate debt and covenant restrictions.
  • Jack Wolfskin contributed $356.2 million of 2019 revenue and a reported net loss of $15.5 million, including acquisition accounting and other costs. The company recorded no goodwill or indefinite-lived intangible-asset impairment in 2019. Its approximately 14% Topgolf investment was carried at cost; its fair value was not readily determinable.
  • The company reported routine and other legal matters but said it could not estimate the aggregate potential loss; it did not expect currently pending matters to materially affect annual results. It also disclosed $72.9 million of minimum unconditional purchase obligations and $1.1 million of standby letters of credit.
  • Auditors issued an unqualified opinion on the consolidated financial statements and internal controls. However, Jack Wolfskin—representing 21% of 2019 sales and 6% of year-end assets—was excluded from the 2019 internal-control assessment; the company expected to include it in 2020.

Important facts for investors to verify

  • How COVID-19 affected 2020 demand, manufacturing, supply-chain continuity and store operations after the filing date.
  • Jack Wolfskin’s post-acquisition profitability, integration progress, and whether expected operational and distribution synergies are being realized.
  • Debt repayment capacity, variable-rate exposure, borrowing availability and continuing covenant compliance.
  • Inventory quality and sell-through, receivable collections, and the adequacy of reserves for returns and sales incentives.
  • The valuation and liquidity implications of the Topgolf investment and the company’s other capital-allocation commitments, including repurchases and dividends.