Callaway Golf Company — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. Although requested as 2017 Q4, this is an annual filing; quarterly figures are included where relevant. Callaway designs and sells golf clubs, balls, bags, apparel and related lifestyle products. It acquired OGIO in January and TravisMathew in August 2017 and reports three segments: Golf Clubs, Golf Balls, and Gear, Accessories and Other.
Financial performance and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net sales | $1,048.7 million | $871.2 million |
| Gross profit / margin | $480.4 million / 45.8% | $385.0 million / 44.2% |
| Operating income | $78.8 million | $44.2 million |
| Income before taxes | $68.1 million | $58.4 million |
| Net income attributable to Callaway | $40.8 million | $189.9 million |
| Diluted EPS | $0.42 | $1.98 |
| Cash from operating activities | $117.7 million | $77.7 million |
- Sales rose 20.4%. By segment, Golf Clubs increased 10.4% to $643.1 million; Golf Balls increased 6.7% to $162.5 million; Gear, Accessories and Other increased 78.1% to $243.1 million, substantially reflecting acquisitions and the Japan apparel joint venture.
- Management attributed higher gross margin mainly to Epic product mix, higher average selling prices and less promotional activity; higher component and freight costs and foreign exchange partly offset the improvement.
- Reported net income fell sharply year over year, largely because FY2016 included a $156.6 million non-cash tax benefit from releasing a U.S. deferred-tax valuation allowance and a $17.7 million Topgolf investment gain. FY2017 included $11.3 million in acquisition transaction and transition costs and $7.5 million of Tax Act expense, partly offset by a $4.1 million non-recurring tax benefit. Excluding the specified items, management reported non-GAAP FY2017 net income of $51.3 million and diluted EPS of $0.53, versus $22.8 million and $0.24 in FY2016.
- FY2017 investing cash outflow was $230.6 million, including $183.5 million net cash used for acquisitions, $26.2 million of capital expenditures and $21.5 million invested in golf-related ventures. Financing cash inflow was $69.4 million.
- Year-end cash was $85.7 million, down from $126.0 million. Working capital was $151.6 million versus $273.6 million. Inventory increased to $262.5 million from $189.4 million, including acquired inventory and launch-related purchases; inventory was 25.0% of trailing sales versus 21.7% a year earlier.
- Year-end borrowings comprised $74.0 million under the primary ABL facility, $13.8 million under Japan facilities and an $11.8 million equipment note. The company reported $238.9 million of available liquidity after letters of credit and compliance with its credit-facility covenants. The $330 million ABL commitment is subject to borrowing-base availability and other restrictions.
Material changes and quarterly results
- OGIO and TravisMathew expanded the lifestyle and soft-goods business; together with the Japan apparel joint venture, they contributed materially to segment growth. FY2017 included only partial-year results for TravisMathew and OGIO.
- Fourth-quarter 2017 net sales were $191.7 million, gross profit $79.7 million and net loss attributable to Callaway $19.4 million, or a diluted loss of $0.20 per share. Fourth-quarter 2016 sales were $163.7 million and attributable net income was $123.3 million; that quarter included the large non-cash tax valuation-allowance release. The filing presents no clear standalone Q4 comparison adjusted for these items.
- The company reorganized reporting into three operating segments effective January 1, 2017, and reclassified prior-year segment amounts for comparison.
- The November 2017 refinancing amended and restated the primary ABL facility. The company also entered into an equipment note and renewed its Japan credit facilities in January 2018.
Outlook, commentary and risks
- Management said existing cash, expected 2018 operating cash flow and current or future credit-facility availability should fund operating needs, capital expenditures and obligations for at least the next 12 months. The filing provides no specific revenue or earnings guidance.
- Management cited continued brand momentum, increased hard-goods market share and strong demand for Epic woods and newer golf-ball products. The business remains seasonal; golf-club and ball profitability generally concentrates in the first half, while some acquired gear and apparel demand is stronger in the second half.
- Key risks include consumer and retailer demand, intense competition and short product cycles, weather and golf participation, reliance on limited suppliers, international and currency exposure, import tariffs or trade-policy changes, and integration of the OGIO and TravisMathew acquisitions.
- The Tax Act accounting was provisional, and management was still assessing provisions that could affect future tax rates. Deferred tax asset use may also be limited by a future ownership change. About 93% of year-end cash was held outside the United States; management said it did not intend to repatriate funds for ordinary domestic liquidity needs.
- Other items to monitor include ABL borrowing-base and covenant constraints, elevated inventory, warranty claims tied to certain 2015 putter models (which management said it had resolved), and the valuation of the illiquid Topgolf investment. The company reported no goodwill or indefinite-lived intangible impairment in 2017.
Most important facts for investors to verify
- How much of sales and earnings growth reflects organic performance versus acquired businesses and the Japan joint venture; confirm comparable-period and pro forma figures.
- Whether the 45.8% gross margin and improved operating results can be sustained after accounting for product mix, freight, input costs and promotional activity.
- Inventory sell-through, working-capital needs and operating cash conversion, particularly ahead of seasonal demand.
- Current ABL availability, facility covenants and debt service capacity; reported liquidity depends partly on borrowing-base availability.
- Final Tax Act accounting and the realizability and potential limitations of deferred tax assets and carryforwards.
- Acquisition integration progress and the carrying value and accounting treatment of the Topgolf investment.