Callaway Golf Company — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports unaudited fourth-quarter results. Callaway designs, manufactures and sells golf clubs, balls, apparel, bags and accessories. Its 2018 reporting segments were Golf Clubs, Golf Balls, and Gear, Accessories and Other.
Financial results
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Net sales | $1,242.8 million | $1,048.7 million | +18.5% |
| Gross profit / margin | $578.4 million / 46.5% | $480.4 million / 45.8% | Margin +0.7 percentage points |
| Operating income | $128.4 million | $78.8 million | +63.0% |
| Income before taxes | $131.3 million | $68.1 million | +92.8% |
| Net income attributable to Callaway | $104.7 million | $40.8 million | +151.1% |
| Diluted EPS | $1.08 | $0.42 | +157.1% |
| Cash from operating activities | $92.3 million | $117.7 million | −21.6% |
- Revenue growth reflected strength across all segments, the 2018 product lineup, improved industry conditions, favorable foreign exchange of $14.2 million, and a full year of TravisMathew results. Gear, Accessories and Other grew 35.7%, Golf Balls 20.4%, and Golf Clubs 11.5%.
- Gross margin improved mainly on higher selling prices and favorable product mix, including TravisMathew, partly offset by higher material, technology and manufacturing costs. Operating expenses rose 12.0% to $449.9 million, slower than revenue growth.
- The effective income tax rate fell to 19.8% from 38.8%, principally following the U.S. corporate tax rate reduction under the Tax Act and higher R&D credits. FY 2017 also included acquisition costs and Tax Act effects; FY 2016 earnings included a large, noncash deferred-tax valuation-allowance reversal and a Topgolf investment gain, so comparisons with 2016 are distorted.
Fourth-quarter performance
Q4 2018 sales were $180.7 million versus $191.7 million in Q4 2017. Gross profit was $70.0 million versus $79.7 million. Callaway reported a net loss attributable to the company of $28.5 million, compared with a $19.4 million loss in Q4 2017; diluted loss per share was $0.30 versus $0.20. The filing describes Q4 as seasonally weaker for golf-related sales; it does not provide a clear explanation in the excerpt for the full year-over-year increase in the quarterly loss.
Financial position, cash flow and capital
- At December 31, 2018, cash was $64.0 million, working capital $221.7 million, and total assets $1,052.9 million. Cash declined $21.7 million year over year.
- Operating cash flow was $92.3 million, down from $117.7 million, principally due to the timing of inventory purchases and receivable collections. Capital expenditures were $36.8 million. The company repaid $49.6 million of credit-facility and long-term debt, repurchased $22.5 million of shares, and paid $3.8 million in dividends.
- Year-end borrowings included $40.3 million under asset-based facilities and $9.6 million under an equipment note. Available liquidity, including cash and unused capacity under the U.S./Canada/U.K. and Japan facilities, was $256.4 million. The company reported covenant compliance and expected to fund requirements for at least 12 months from filing.
- After year-end, Callaway completed the Jack Wolfskin acquisition for approximately €460 million (about $525 million, subject to working-capital adjustments), financed principally with a $480 million Term Loan B due January 2026. The loan bears floating interest, subject to hedging on part of the principal, and is secured by company assets. The acquisition materially changes the company’s debt profile relative to the December 2018 balance sheet.
- Inventory rose $75.6 million to $338.1 million; inventory as a share of trailing sales increased to 27.2% from 25.0%. Management attributed the increase to business growth, product-launch timing and more inventory in transit.
Outlook, commentary and risks
- Management expects Jack Wolfskin to expand the lifestyle business and create growth opportunities in active and urban outdoor categories. It planned to assess global operations, supply chain, distribution and reporting segments following the acquisition. The filing gives no quantified earnings or revenue guidance.
- Management cited a strong 2018 product line and improved market conditions, but noted that poor weather delayed the start of the golf season. Golf sales and profitability are seasonal, with most golf-segment profitability generally generated in the first half of the year.
- Key risks include consumer demand and golf participation, intense competition and promotional pricing, product-launch execution and inventory forecasting, weather and seasonality, reliance on limited suppliers and concentrated retail customers, foreign exchange, tariffs and trade restrictions, and integration and profitability risks from Jack Wolfskin and the broader apparel and retail expansion.
- Other items to monitor include variable-rate borrowing costs and credit-facility covenants; tax-law and deferred-tax-asset estimates; foreign currency hedges; and environmental remediation obligations at the former Chicopee facility. Management said pending legal matters were not expected to have a material annual effect, while noting outcomes are uncertain.
Important facts for investors to verify
- Jack Wolfskin’s post-acquisition sales, margins, integration costs, cash generation and debt reduction, including the actual impact of the $480 million term loan and interest-rate hedges.
- Whether inventory growth converts to sales without elevated discounting, returns or obsolescence, and whether receivable collections remain sound.
- Underlying operating performance excluding acquisition-related and foreign-exchange items, and the durability of 2018’s improved margins and tax rate.
- Compliance with debt covenants, borrowing availability and any constraints on dividends or share repurchases; the filing’s stated liquidity assessment covers at least 12 months from issuance.
- Whether reported annual trends align with quarterly results: golf sales are seasonal, and Q4 2018 produced a larger loss despite annual earnings growth.