Callaway Golf Company — FY2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. The filing also reports fourth-quarter results; the company designs and sells golf clubs, golf balls and accessories under brands including Callaway and Odyssey, primarily through retailers, subsidiaries and distributors in the U.S. and about 100 countries.
Financial results
| Metric | FY2012 | FY2011 |
|---|---|---|
| Net sales | $834.1 million | $886.5 million |
| Gross profit / margin | $248.2 million / 29.8% | $311.3 million / 35.1% |
| Operating loss | $116.2 million | $81.1 million |
| Net loss | $122.9 million | $171.8 million |
| Diluted loss per share | $1.96 | $2.82 |
| Cash from operating activities | $(28.8) million | $10.1 million |
- Sales fell 6%; golf clubs segment sales declined 4% to $694.5 million and golf balls declined 13% to $139.6 million. Irons sales fell 17%; putters rose 6% and accessories and other rose 4%.
- Gross margin contracted about 5 percentage points. Management cited $36.2 million of restructuring-related charges in cost of sales, increased promotions and higher club component costs; lower conversion costs partly offset these factors.
- Annual net loss narrowed, but operating loss widened. The comparison is affected by the 2011 $52.5 million U.S. deferred-tax valuation allowance and $21.6 million tax expense related to intercompany profits.
- Fourth quarter: Sales were $119.9 million versus $153.9 million in Q4 2011; gross profit was $9.3 million versus $37.6 million. Net loss was $70.7 million versus $63.0 million, with diluted loss per share of $1.01 in both quarters.
Liquidity, debt and capital
- Year-end cash was $52.0 million; working capital was $225.4 million, down from $251.5 million. Capital expenditures were $18.4 million.
- Operating cash flow was negative $28.8 million, compared with positive $10.1 million in 2011. Cash increased by $9.0 million, mainly reflecting $46.8 million of net cash proceeds from convertible notes and proceeds from brand sales.
- The company had no borrowings under its asset-based revolving credit facility at year-end. Reported availability was about $40.5 million; cash plus available facility liquidity totaled about $92.5 million. Average 2012 borrowings were $50.3 million. The facility matures June 30, 2016.
- In August 2012, Callaway issued $112.5 million of 3.75% convertible senior notes due 2019; the balance-sheet carrying amount was $107.1 million. The notes are convertible at an initial price of approximately $7.50 per share. The company also retained $41.9 million of preferred-stock liquidation preference at year-end.
- The company was compliant with its credit-facility covenants at year-end, but disclosed it would not have met the fixed-charge coverage ratio if that covenant had been triggered. It was not triggered because availability remained above $25 million.
Changes, outlook and notable items
- July 2012 cost-reduction initiatives included workforce reductions, licensing certain non-core product lines, moving the integrated-device business to a third-party model, and restructuring golf-ball manufacturing. About 300 employees left during 2012, reducing headcount from roughly 1,800 to 1,500.
- The company recorded $54.1 million of charges for these initiatives in 2012 and estimated total charges of about $60 million, with approximately $5.9 million more expected over the following 12 months. It projected roughly $60 million in gross annualized savings, about two-thirds of total charges expected to be non-cash.
- Callaway sold its Top-Flite and Ben Hogan brand assets in early 2012 for net proceeds of $26.9 million and recorded a $6.6 million gain. It completed the sale of its Chicopee, Massachusetts golf-ball facility in February 2013, with a reduced-space leaseback.
- Management said the initiatives were intended to improve 2013 results and cash generation. This is a forward-looking expectation, not a guarantee; the filing does not provide quantified 2013 revenue or earnings guidance.
- Key risks include discretionary consumer demand, intense competition and promotional pricing, short product cycles and demand forecasting, international currency exposure, customer and supplier concentration, seasonality and weather, and dependence on the ABL facility if operating cash flow remains weak. The company also warned that ownership changes could limit use of tax-loss carryforwards.
- The company paid $0.04 per common share in dividends during 2012 and intended to continue quarterly dividends subject to capital availability, board determinations and credit-facility restrictions.
Investor verification priorities
- Verify the pace and cash cost of restructuring, whether the remaining charges stay near the estimate, and whether targeted savings are realized.
- Track sales, pricing and margins—especially irons and golf balls—and distinguish underlying performance from discontinued brands, promotions and restructuring effects.
- Assess liquidity through seasonal working-capital swings, operating cash flow, borrowing-base availability and the fixed-charge covenant trigger.
- Review convertible-note dilution potential, remaining preferred-stock obligations and any constraints on dividends under the ABL facility.
- Check the assumptions supporting U.S. deferred tax assets and the ability to use loss carryforwards, including potential Section 382 ownership-change limits.