Callaway Golf Company — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Unaudited results; comparisons are with the corresponding 2017 periods. The 2018 results include TravisMathew for the full quarter, while 2017 included it only from its August acquisition.
Financial results
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Net sales | $262.7 million | $243.6 million | $1,062.2 million | $857.1 million |
| Gross margin | 43.9% | 43.1% | 47.9% | 46.8% |
| Operating income | $10.7 million | $6.0 million | $171.0 million | $99.3 million |
| Net income attributable to Callaway | $9.5 million | $3.1 million | $133.2 million | $60.2 million |
| Diluted EPS | $0.10 | $0.03 | $1.37 | $0.62 |
- Q3 sales rose 7.8%; nine-month sales rose 23.9%. Nine-month growth included $15.6 million of favorable foreign-exchange impact; Q3 currency impact was unfavorable by $1.1 million.
- Q3 segment sales: Golf Clubs $142.4 million, down 2.5%; Golf Balls $44.7 million, up 14.3%; Gear, Accessories and Other $75.6 million, up 29.5%. For nine months, the respective increases were 18.0%, 21.6% and 42.8%.
- Q3 gross margin improved 80 basis points and nine-month margin 110 basis points. Management cited pricing and product mix, including TravisMathew, partly offset by higher material and product-technology costs.
- Operating cash flow for nine months was $120.9 million versus $110.8 million. Capital expenditures were $26.1 million versus $16.8 million. Cash declined to $70.8 million from $85.7 million at December 31, 2017.
- At September 30, asset-based facility borrowings were $4.3 million, down from $87.8 million at year-end; the equipment note was $10.2 million. Japan facility borrowings were zero. Available liquidity, including cash and facility availability net of borrowings and letters of credit, was $330.2 million.
- Total current assets were $473.1 million and current liabilities $207.1 million. Inventory was $237.5 million, down from $262.5 million at year-end; receivables were $130.0 million, up from $94.7 million.
Changes, outlook and risks
- Growth reflected a strong 2018 product line and market conditions, as well as the TravisMathew acquisition and higher OGIO and apparel sales. Q3 Golf Clubs sales were affected by product-launch timing, particularly earlier woods launches in 2018.
- Revenue standard Topic 606 was adopted January 1, 2018. It accelerated recognition of estimated sales promotions and price concessions and reduced nine-month reported net sales by $6.5 million versus the stated amount without adoption; Q3 reported sales were $2.6 million higher. Comparatives were not restated.
- The nine-month effective tax rate was 21.2%, versus 33.7% in 2017, principally reflecting the Tax Act. Q3 rate was 12.1%, including a discrete return-to-provision benefit. The company recorded $0.9 million of additional transition-tax expense in Q3 and said its Tax Act accounting remained under assessment.
- Management said current cash, operating cash generation and borrowing availability should fund planned operating needs, capital expenditures, contractual obligations and commitments for at least 12 months. Expected 2018 capital expenditures were approximately $35–$40 million. The filing provides no specific sales or earnings guidance.
- Key risks include seasonality and weather, consumer demand and retailer purchasing, foreign exchange and hedging effectiveness, supply constraints, promotional activity, trade or tariff changes, and credit-facility covenant compliance. The company reported covenant compliance at quarter-end.
- A major European customer entered administration in Q3; the company recorded additional bad-debt provision, with credit-loss provision of $2.3 million for the quarter versus $1.1 million a year earlier. The Topgolf investment was $70.8 million, carried at cost less impairment because fair value was not readily determinable; an observable orderly price change could materially affect reported results.
- Minimum unconditional purchase obligations were $65.8 million over the next four years; operating-lease commitments were $61.7 million. Management said pending legal matters were not expected to have a material adverse effect, but could not estimate aggregate potential loss.
Investor verification priorities
- Separate organic growth from acquisition contributions, product-launch timing, currency effects and Topic 606 timing changes.
- Track Golf Clubs, Golf Balls and Gear, Accessories and Other segment margins and whether higher product costs or promotional activity pressure profitability.
- Monitor cash conversion, seasonal receivables and inventory, capital spending, and the company’s use of repurchases and credit facilities.
- Review the European customer’s exposure and collections, Tax Act measurement updates, and any impairment or observable valuation changes in the Topgolf investment.
- Confirm future covenant headroom and the effect of lease commitments and other contractual obligations on liquidity.