Callaway Golf Company (NYSE: ELY) — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. The March 8, 2021 Topgolf merger materially changed the company’s scale and mix; 2021 results include Topgolf from the merger date, while 2020 comparatives do not. Topgolf’s reported periods follow a different fiscal calendar. Unless noted, amounts below are in U.S. dollars.
Key financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net revenue | $856.5M | $475.6M | $2,421.7M | $1,214.8M |
| Operating income (loss) | $76.0M | $63.5M | $259.4M | ($73.3M) |
| Net income (loss) | ($16.0M) | $52.4M | $348.2M | ($86.4M) |
| Diluted EPS | ($0.09) | $0.54 | $2.03 | ($0.92) |
| Operating margin | 8.9% | 13.4% | 10.7% | (6.0%) |
Q3 revenue rose 80.1%, including $333.8M from Topgolf. Golf Equipment revenue increased 8.3% to $289.6M and Apparel, Gear and Other revenue increased 11.9% to $233.1M. Nine-month revenue nearly doubled, reflecting Topgolf revenue of $751.9M and growth in the legacy segments. Q3 Topgolf segment operating income was $23.9M; Golf Equipment operating income fell $11.0M to $45.8M, while Apparel, Gear and Other rose $8.7M to $34.6M.
Q3 net loss chiefly reflected a $66.2M income-tax provision on $50.2M of pretax income, an effective tax rate of 131.8%. The company cited tax valuation allowances and its interim tax-rate method. Nine-month GAAP net income included a $252.5M noncash gain from remeasuring Callaway’s pre-merger Topgolf investment; the nine-month effective tax rate was 22.0%. Management reported non-GAAP net income of $26.3M, or $0.14 per diluted share, for Q3 and $173.4M, or $1.01 per diluted share, for the nine-month period. These company-defined measures exclude specified items and are not GAAP results.
Q3 operating margin was lower than the prior year despite higher operating income, reflecting the addition of Topgolf’s service and venue costs and a different revenue mix. Q3 SG&A was $217.7M, or 25.4% of revenue, versus $127.1M, or 26.7%, a year earlier. Interest expense increased to $28.8M from $12.9M, mainly due to debt and deemed landlord financing assumed with Topgolf.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $246.8M, versus $122.6M a year earlier. Capital expenditures were $198.9M; net cash used in investing was $9.0M, including $171.3M of cash acquired in the merger.
- Cash and cash equivalents were $508.2M at September 30, 2021, up from $366.1M at year-end 2020. Reported available liquidity, including undrawn revolving-credit availability, was $918.0M.
- Long-term debt, net, was $1.049B and asset-based credit-facility borrowings were $30.1M. Debt carrying values include the convertible notes’ accounting discount. The company also reported $1.237B of operating lease liabilities and $312.0M of long-term deemed landlord financing.
- Management said current cash, expected operating cash flow and available facilities were expected to fund operating needs, capital spending, debt repayments and other obligations for at least 12 months from the filing date. The company reported covenant compliance at September 30, 2021.
Material changes, outlook and risks
- The Topgolf merger added a third reportable segment and substantially increased goodwill, intangible assets, venue assets, lease commitments, debt and share count. Approximately 89.8M shares were issued to Topgolf stockholders. The preliminary purchase-price allocation remained subject to finalization.
- Management described Q3 as a record revenue and operating-income quarter, citing strong Topgolf venue traffic and event bookings and continued demand for golf equipment and apparel. It identified shipping-container shortages, U.S. port delays, higher freight and commodity costs, staffing challenges and inflationary pressure.
- The company was expanding Topgolf: at quarter-end it had 66 company-operated U.S. venues, three in the U.K., and additional venues under construction. Management expected continued venue pre-opening costs and higher labor and benefit costs as Topgolf expanded.
- No quantified full-year revenue or earnings guidance is provided in the supplied filing text. Management estimated 2021 capital expenditures of approximately $225M and forecast an annualized 2021 tax rate in the low twenties, while noting interim tax-rate volatility.
- Future results are exposed to COVID-19 effects on demand and operations, supply-chain delays and supplier concentration, consumer and retailer demand, foreign exchange, seasonality and weather, labor and inflation costs, and execution and integration risks related to Topgolf. The Topgolf credit agreement’s leverage covenant relief was scheduled through approximately March 2022, with a 7.75-to-1.00 test in the following quarter unless earlier restored; minimum liquidity requirements apply during the relief period.
- Future commitments are significant: $2.199B of future operating-lease payments, plus $800.8M for signed leases not yet commenced; $602.4M of future deemed-landlord-financing payments; and approximately $85.1M of minimum unconditional purchase obligations. The filing also cites approximately $83M of minimum lease-related capital commitment and estimates $152M of 2021 capital expenditures for venue leases.
- The company reported routine legal matters and potential intellectual-property claims but said it could not estimate the ultimate aggregate loss. It reported no material changes to previously disclosed risk factors. Disclosure controls were assessed as effective; integration of Topgolf controls and phased ERP implementation were ongoing.
- Subsequent to quarter-end, Callaway completed a $30M minority investment in Five Iron Golf.
Most important facts for investors to verify
- Separate Topgolf’s post-merger contribution and the merger-related accounting gain from recurring performance; compare periods with the company’s pro forma disclosures and consider the non-comparable 2020 pandemic base.
- Track whether golf-equipment and apparel demand, venue traffic and event bookings persist, and whether freight, commodity, staffing and inflation costs ease or further pressure segment margins.
- Review the unusually high Q3 tax provision, deferred-tax valuation allowances, tax-rate assumptions and the distinction between GAAP and company-defined non-GAAP earnings.
- Assess debt service, covenant terms and the combined burden of leases, deemed landlord financing, venue construction commitments and leases signed but not yet commenced against cash generation and liquidity.
- Monitor completion of Topgolf purchase accounting and integration, including control and ERP changes, venue openings, and whether anticipated growth and synergies are realized.