Callaway Golf Company — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Financial statements are unaudited. Callaway designs and sells golf clubs, balls, bags and related products; its reportable segments are golf clubs and golf balls. The business is seasonal, with most sales and profitability generally occurring in the first half.
Financial performance
| Metric | Q2 2015 | Six months 2015 |
|---|---|---|
| Net sales | $230.5 million, down 0.6% from $231.9 million | $514.7 million, down 11.8% from $583.8 million |
| Gross profit / margin | $101.7 million / 44.1%, versus $90.8 million / 39.2% | $229.0 million / 44.5%, versus $255.7 million / 43.8% |
| Operating income | $18.6 million, versus $10.8 million | $55.5 million, versus $72.5 million |
| Net income | $12.8 million, versus $3.4 million | $48.6 million, versus $58.7 million |
| Diluted EPS | $0.15, versus $0.04 | $0.54, versus $0.66 |
| Operating cash flow | Used $32.7 million in the first half, versus $31.3 million used in the prior-year period |
Q2 sales were nearly flat on a reported basis, while management estimated 7% growth on a constant-currency basis. First-half reported sales fell 12%; on a constant-currency basis they fell 6%. These are non-GAAP comparisons, not substitutes for reported results. Q2 gross margin improved substantially; the first-half increase was more modest. Higher gross margins reflected pricing and product mix, plus manufacturing efficiencies, partly offset by foreign exchange and higher component costs.
First-half cash and cash equivalents declined to $26.7 million from $37.6 million at year-end. Capital expenditures were $5.9 million; operating cash use plus capital expenditures totaled approximately $38.6 million. Receivables rose seasonally to $220.4 million, while inventory declined to $171.4 million. Total assets were $682.6 million and shareholders’ equity was $343.3 million at June 30.
Debt, liquidity and capital resources
At June 30, the company had $29.1 million outstanding under its primary asset-based revolving credit facility and $13.5 million under its Japan facility. Convertible notes had a $109.0 million carrying value and $112.5 million principal, mature in August 2019 and carry a 3.75% coupon. Total borrowings across these facilities and notes were approximately $151.6 million by carrying value. The primary facility had approximately $116.5 million of additional borrowing availability; reported total liquidity, including cash, was $143.2 million. The company reported compliance with applicable debt covenants.
Management said current cash, expected operating cash flows and credit-facility availability should fund planned operations and obligations for at least 12 months. About 81% of cash was held outside the United States; the company did not intend to repatriate it for ordinary domestic liquidity needs because of potential incremental U.S. taxes.
Changes, outlook and risks
- Drivers and mix: Q2 golf-club sales declined 2% reported but rose 6% on a constant-currency basis; golf-ball sales rose 5% reported and 11% constant currency. XR irons, Big Bertha and XR hybrids, and Chrome Soft balls were cited as successful launches. First-half sales weakness reflected unfavorable exchange rates, shifted product-launch timing that affected Q1, and softer international demand, particularly in Asia.
- Expenses and unusual effects: First-half operating expenses decreased $9.8 million, primarily due to the timing of advertising and promotional spending and favorable currency effects. Management expected much of the marketing-spend reduction to shift into the second half, alongside increased tour expense. Q2 G&A rose by $3.0 million, mainly from higher stock-compensation expense. Foreign-currency contract valuation changes significantly affected other income or expense; first-half other income was $0.5 million versus $5.2 million of other expense in 2014.
- Guidance: The filing gives no full-year revenue or earnings guidance. Expected 2015 capital expenditures were $15–18 million. Management said brand momentum and market share were improving, the product pipeline remained robust, and the turnaround was on track, while noting no assurance of future cash generation.
- Principal risks: Foreign exchange—especially a stronger U.S. dollar—international market weakness, consumer demand, retailer inventory and promotional activity, seasonality and weather, execution of the turnaround, product-launch timing, supplier and manufacturing constraints, and continued access to credit. A 10% adverse foreign-currency movement implied an estimated $12.9 million maximum one-day loss on forward contracts under the company’s sensitivity model; management said underlying exposures could partly offset that hypothetical effect.
- Contingencies: Minimum unconditional purchase obligations were $82.0 million over the next three years, including $74.4 million for the remainder of 2015. Routine legal matters were not expected by management to materially affect financial position, though outcomes were described as unpredictable. A U.S. deferred-tax valuation allowance remains; sustained U.S. profitability could support a future reversal. The company reported no material changes to previously disclosed risk factors.
Most important facts for investors to verify
- Whether sales and demand recover after the first-half decline, particularly in Asia, and whether product-launch timing supports second-half results.
- Whether gross-margin improvements persist despite currency movements and higher product-component costs.
- Whether operating cash flow turns positive and seasonal receivables convert to cash as expected; reported first-half operating cash flow was negative despite net income.
- Remaining borrowing-base availability, covenant compliance, and the location and practical availability of the company’s cash.
- How much planned second-half marketing and tour spending affects operating expenses, and whether 2015 capital expenditures remain within the $15–18 million estimate.