Callaway Golf Company (NYSE: ELY) — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Amounts are in U.S. dollars; financial statements are unaudited. Callaway operates Topgolf, Golf Equipment, and Apparel, Gear and Other. Comparisons are affected by the March 8, 2021 Topgolf merger: Q1 2022 includes a full quarter of Topgolf results, versus approximately one month in Q1 2021.
Financial performance
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Net revenue | $1,040.2 million | $651.6 million |
| Operating income | $94.3 million | $76.1 million |
| Net income | $86.7 million | $272.5 million |
| Diluted EPS | $0.44 | $2.19 |
| Net cash used in operating activities | $185.3 million | $78.6 million |
| Capital expenditures | $124.3 million | $28.8 million |
- Revenue increased 59.6%; operating income rose 23.9%. Operating margin was approximately 9.1%, compared with 11.7%.
- Net income and EPS fell substantially, principally because Q1 2021 included a $252.5 million non-cash gain from revaluing Callaway’s pre-merger Topgolf investment. Q1 2022 also included a $15.7 million income tax benefit; the effective tax rate was negative 22.0%.
- Management reported non-GAAP net income of $70.9 million and diluted EPS of $0.36 for Q1 2022, versus $76.6 million and $0.62, respectively, in Q1 2021. These measures exclude specified non-recurring and non-cash items.
Revenue and segment trends
- Topgolf: Revenue was $322.0 million and segment operating income $6.5 million. Year-over-year growth is not directly comparable given the merger timing; management also cited new venues, strong walk-in traffic, and recovering event bookings.
- Golf Equipment: Revenue increased 24.2% to $468.0 million; segment operating income rose 18.7% to $100.8 million. Demand for Rogue ST clubs and Chrome Soft balls, higher selling prices, and improved supply contributed.
- Apparel, Gear and Other: Revenue increased 37.4% to $250.2 million; segment operating income rose 30.2% to $26.7 million. TravisMathew and Callaway products were strong; Jack Wolfskin was affected by supply constraints and COVID-19 restrictions.
Management attributed overall growth to the full-quarter Topgolf contribution and continued demand for golf equipment and apparel. Reported international revenue was adversely affected by foreign exchange by $21.2 million.
Cash, debt and liquidity
- Cash and cash equivalents were $245.0 million at March 31, down from $352.2 million at December 31, 2021. Operating cash use was $185.3 million, reflecting, among other factors, a $311.4 million increase in accounts receivable.
- Available liquidity, including cash and unused credit-facility availability, was $575.6 million, down $177.2 million from year-end. Current assets were $1,403.5 million and current liabilities $1,156.5 million.
- Long-term debt, net, was $1,070.5 million; asset-based credit-facility borrowings were $219.3 million. The company reported compliance with applicable debt covenants.
- Additional fixed obligations are substantial: balance-sheet operating lease liabilities totaled $1,434.0 million, deemed landlord financing was $463.5 million, and future payments include $1,421.2 million for signed leases not yet commenced. These amounts are not all equivalent to funded debt.
Outlook, risks and unusual items
- The filing gives no specific revenue or earnings guidance. Management said it believes the business is positioned for near- and long-term growth, citing Topgolf expansion, golf-equipment leadership, and apparel brand exposure.
- For 2022, expected capital expenditures were approximately $315 million: $230 million for Topgolf and $85 million for the legacy Callaway business.
- Management expects foreign exchange to remain an unfavorable revenue factor for the rest of 2022. It cautioned that inflation may raise product and operating costs and that price increases may not fully offset them.
- Risks highlighted include inflation and reduced consumer spending, COVID-19 effects, supply-chain and supplier constraints, adverse weather and seasonality, foreign exchange, and Topgolf integration, expansion, and realization of anticipated benefits.
- Q1 included $3.8 million of charges related to suspending Jack Wolfskin retail operations in Russia amid the Russia-Ukraine war. Non-GAAP results also exclude Topgolf IT integration costs and legal and credit-agency fees related to a postponed debt refinancing.
- Legal matters include routine claims and potential intellectual-property disputes. Management could not estimate the ultimate aggregate loss from pending matters; it reported no material change to the risk factors in its 2021 Form 10-K.
Most important facts for investors to verify
- Separate underlying segment trends from the merger-driven comparison, especially when assessing Topgolf growth and consolidated margins.
- Track operating cash flow, receivables, inventory, and available liquidity as the company funds seasonal working capital and Topgolf expansion.
- Review the full debt maturity, interest-rate, lease, deemed-landlord-financing, and not-yet-commenced lease commitments alongside planned capital spending.
- Assess the sustainability of earnings excluding the Q1 2021 Topgolf revaluation gain and the Q1 2022 tax benefit and other adjustments.
- Monitor inflation, supply constraints, currency movements, venue openings, and the Russia-related business impact against management’s outlook.