Callaway Golf Company (NYSE: ELY) — Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Financial statements are unaudited. Unless otherwise noted, dollar amounts below are in millions.
Business context and period highlights
Callaway sells golf equipment and apparel, gear and accessories. Following its January 2019 acquisition of Jack Wolfskin, the company reports two segments: Golf Equipment and Apparel, Gear and Other. Comparatives were reclassified to the new segment presentation.
Jack Wolfskin materially expanded the soft-goods business and contributed $134.1 million of Q3 sales and $275.2 million of nine-month sales. Its fall/winter seasonality contributed to stronger Q3 results; the company reported a $18.2 million Jack Wolfskin net loss for the nine-month period, including acquisition-related inventory and distributor-relationship costs.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $426.2 | $262.7 | $1,389.1 | $1,062.2 |
| Gross profit | $191.4 | $115.2 | $636.6 | $508.4 |
| Gross margin | 44.9% | 43.9% | 45.8% | 47.9% |
| Operating income | $40.5 | $10.7 | $155.3 | $171.0 |
| Income before taxes | $33.2 | $11.1 | $127.3 | $169.2 |
| Net income attributable to Callaway | $31.0 | $9.5 | $108.6 | $133.2 |
| Diluted EPS | $0.32 | $0.10 | $1.13 | $1.37 |
| Interest expense | $9.6 | $1.1 | $30.2 | $4.7 |
Q3 revenue rose 62.2%, while nine-month revenue rose 30.8%. Q3 operating margin was approximately 9.5%, versus 4.1% a year earlier; nine-month operating margin was approximately 11.2%, versus 16.1%. Nine-month net sales included an estimated $30.1 million adverse foreign-exchange impact. Nine-month GAAP earnings were lower despite sales growth, reflecting increased expenses and acquisition financing costs.
- Segment sales: Q3 Golf Equipment sales were $210.5 million, up 12.5%; Apparel, Gear and Other sales were $215.7 million, up 185.3%, largely due to Jack Wolfskin. For nine months, segment sales were $826.5 million and $562.6 million, respectively.
- Profit drivers and costs: Q3 gross margin improved by 100 basis points, aided by Jack Wolfskin, TravisMathew and higher-margin golf-club launches. Nine-month gross margin declined 210 basis points; the $10.7 million Jack Wolfskin inventory fair-value charge accounted for 80 basis points, with product mix and currency also weighing on margin.
- Cash flow: Nine-month operating cash flow was $63.9 million, down from $120.9 million. Capital expenditures were $36.8 million. Investing cash outflow was $499.9 million, including $463.1 million for the Jack Wolfskin acquisition, net of cash acquired. Ending cash was $88.2 million, compared with $64.0 million at year-end 2018.
- Liquidity and debt: Available liquidity, including cash and remaining availability under credit facilities, was $340.2 million. The balance sheet showed $110.7 million outstanding under asset-based facilities and $445.0 million of long-term debt, plus $7.3 million current debt. Separately, disclosed principal outstanding included $447.6 million on the Term Loan B, $110.7 million on revolving facilities and $20.9 million on equipment notes. The company reported compliance with applicable debt covenants.
- Other balance-sheet items: Accounts receivable was $223.4 million and inventory was $340.3 million at September 30. Operating lease liabilities totaled $158.3 million following adoption of the new lease standard.
Outlook, commentary and risks
Management stated that current cash, expected operating cash generation and credit-facility availability should fund operating needs, capital expenditures, debt repayments and contractual commitments for at least the next 12 months. The filing does not provide a full-year revenue or earnings forecast. Expected 2019 capital expenditures were approximately $50–$55 million; no material capital-expenditure commitments were reported.
Management attributed growth to Jack Wolfskin, continued TravisMathew momentum and golf-equipment product launches. It cited increased investment in marketing, tour and the business to support growth. The company noted that golf sales are seasonal and that Jack Wolfskin sales and profitability are weighted toward fall and winter.
Principal risks and uncertainties include consumer demand and retailer ordering, promotional and inventory conditions, weather and seasonality, foreign exchange, import tariffs and trade policy, supplier and manufacturing disruption, acquisition integration and synergy execution, interest rates and continued debt-covenant compliance, tax estimates and the realization of deferred tax assets. The Jack Wolfskin purchase-price allocation remained under evaluation. Routine legal claims and intellectual-property matters were disclosed; management said it could not estimate aggregate potential losses, but did not expect pending matters to materially affect annual results or financial condition.
Non-GAAP results exclude specified acquisition, transition, hedging and purchase-accounting items. For the nine months, adjusted diluted EPS was $1.35 versus $1.39 in 2018; these measures are supplemental and not substitutes for GAAP results.
Important facts for investors to verify
- Whether Jack Wolfskin integration, seasonality and expected operating synergies support sustained profitability after the acquisition-related and inventory-step-up costs.
- How the company’s debt service, floating-rate exposure and covenant headroom develop; the filing reports substantial term-loan principal due after 2023.
- Whether receivables, inventory and operating cash flow normalize as seasonal sales and product-launch timing change.
- Whether gross-margin pressure from product mix and currency persists, and how much earnings depend on acquisition-related adjustments and non-GAAP exclusions.
- How foreign-currency movements, tax estimates and outstanding purchase commitments affect cash generation and reported results.