Callaway Golf Company (NYSE: ELY) — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. The filing was submitted August 4, 2022. Callaway operates Topgolf, Golf Equipment and Active Lifestyle businesses. Topgolf’s reporting calendar changed in 2022, and its results are not fully comparable with 2021: the first-half 2021 figures include Topgolf only from the March 8 merger date.
Financial results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $1,115.7M | $913.6M | $2,155.9M | $1,565.2M |
| Operating income | $129.0M | $107.3M | $223.3M | $183.4M |
| Net income | $105.4M | $91.7M | $192.1M | $364.2M |
| Diluted EPS | $0.53 | $0.47 | $0.97 | $2.28 |
Q2 revenue rose 22.1%; operating income rose 20.2%. Q2 operating margin was 11.6%, versus 11.7% a year earlier; net margin was 9.4%, versus 10.0%. First-half revenue grew 37.7% and operating income 21.8%, while net income fell 47.3%. The 2021 first-half comparison included a $252.5M non-cash gain on the step-up in value of Callaway’s pre-merger Topgolf investment; excluding specified items, non-GAAP first-half diluted EPS was $0.84 versus $0.92.
Segment trends: Q2 revenue and segment operating income were Topgolf $403.7M and $44.2M; Golf Equipment $451.9M and $100.3M; Active Lifestyle $260.1M and $22.5M. Topgolf revenue increased 24.1%, with new venues, walk-in traffic and event bookings cited as drivers. Golf Equipment revenue increased 12.6%, supported by demand for clubs and balls, while operating income rose 2.2%. Active Lifestyle revenue increased 39.2%, with apparel and accessories growth; segment operating income rose 43.3%.
Cash flow and liquidity: First-half operating cash flow was negative $48.1M, versus positive $100.5M in 2021. The filing attributes the 2022 outflow in part to increases in receivables ($284.1M cash use) and inventory ($95.8M cash use). Capital expenditures were $243.0M, versus $120.8M. Cash and cash equivalents were $178.3M at June 30, down from $352.2M at year-end 2021. Reported liquidity, including cash and available U.S. and Japan credit-facility capacity, was $640.3M.
Debt and obligations: Debt principal totaled $1,107.6M under long-term arrangements, plus $98.9M outstanding on asset-based credit facilities. Net long-term debt was $1,067.4M. The company reported compliance with applicable credit covenants. Lease and deemed-landlord-financing obligations are also substantial: the filing lists $2,387.1M of future operating lease payments and $2,092.3M of future DLF payments, before imputed interest. Current ratio was approximately 1.29, based on current assets of $1,341.7M and current liabilities of $1,036.3M.
Changes, outlook and risks
- Management cited strong demand across golf equipment and lifestyle brands, improved retail inventory supply, Topgolf venue growth, and pricing and operating efficiencies. It also cited higher freight and commodity costs, inflation, higher operating expenses and unfavorable foreign-exchange effects.
- Foreign-currency movements reduced international revenue by $38.6M in Q2 and $59.9M in the first half versus the prior-year periods. Management expected currency to remain a significant headwind for the rest of 2022.
- The company expected approximately $325M of 2022 capital expenditures: $250M for Topgolf and $75M for the legacy Callaway business. Management said available funds, operating cash generation and financing access should cover requirements for at least the next 12 months. No full-year revenue or earnings guidance is provided in the supplied filing text.
- Key risks discussed include inflation and weaker consumer spending, COVID-related disruption, supply-chain constraints, foreign exchange and variable interest rates, seasonal and weather effects, Topgolf integration and expansion execution, and the ability to realize expected growth and synergies. Jack Wolfskin suspended its Russia retail operations amid the Russia-Ukraine war; related charges were included among non-recurring items.
- Other notable items: the company adopted ASU 2020-06 on convertible-debt accounting, increasing diluted shares through the if-converted method; a $15.0M discrete tax benefit was recorded in Q1 related to purchase-accounting finalization and valuation allowances. A $100M share repurchase program was authorized in May; no purchases under that program had occurred by June 30.
Investor facts to verify
- Assess whether operating cash flow improves as seasonal receivables and inventory convert to cash.
- Track Topgolf venue openings, same-venue demand, capital spending and the large future lease and DLF commitments.
- Review debt maturities, variable-rate exposure and liquidity availability; the filing places most scheduled debt maturities in 2026.
- Check whether pricing and efficiencies continue to offset inflation, freight costs and currency headwinds without weakening demand or margins.
- Separate recurring performance from the prior-year Topgolf gain, tax valuation-allowance effects, non-GAAP adjustments and the 2021/2022 Topgolf period-comparability differences.