Callaway Golf Company (NYSE: ELY) — Q1 2021 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2021. Callaway completed its all-stock merger with Topgolf on March 8, 2021 and began consolidating Topgolf from that date. Topgolf’s reported results cover March 8 through April 4, so the reported year-over-year comparison is not like-for-like. The combined company reports Golf Equipment, Apparel, Gear and Other, and Topgolf segments.
Key financial metrics
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Net revenue | $651.6 million | $442.3 million |
| Operating income | $76.1 million | $40.7 million |
| Net income | $272.5 million | $28.9 million |
| Diluted EPS | $2.19 | $0.30 |
| Net cash used in operating activities | $78.6 million | $93.7 million |
- Revenue grew 47.3%; Golf Equipment revenue rose 29.2% to $376.9 million and Apparel, Gear and Other rose 20.9% to $182.1 million. Topgolf contributed $92.6 million for its partial reported period.
- Operating margin was approximately 11.7%, versus 9.2% a year earlier. Cost of products was 55.5% of product revenue, compared with 55.8%.
- GAAP net income included a $252.5 million non-cash gain from revaluing Callaway’s pre-merger Topgolf investment. Excluding the company’s specified adjustments, non-GAAP net income was $76.6 million and diluted EPS was $0.62, versus $31.0 million and $0.32 a year earlier.
- Cash and cash equivalents were $397.3 million at March 31, up from $366.1 million at year-end. Available liquidity, including cash and unused credit capacity, was $713.1 million.
- Long-term debt, net, was $1.175 billion; asset-based credit facility borrowings were $15.3 million. Merger-assumed debt included $343.0 million under Topgolf’s term loan and $160.0 million under its revolving facility. The company also reported substantial lease obligations, including $1.208 billion of operating lease liabilities and $223.2 million of deemed landlord financing liabilities.
- Operating cash outflow improved year over year but remained negative; accounts receivable growth was a significant cash use. Capital expenditures were $28.8 million.
Material changes versus the prior comparable period
- Topgolf added a new operating segment and substantially expanded the company’s assets, liabilities, and share count. Callaway issued approximately 89.8 million shares for the merger; former Topgolf shareholders held about 48.7% of the combined company immediately after closing.
- Total assets increased to $7.109 billion from $1.981 billion at December 31, 2020, primarily reflecting the merger. Goodwill rose to $2.032 billion, including $1.976 billion recognized in the preliminary purchase-price allocation.
- Operating income improved on increased revenue, operating leverage, and favorable foreign exchange, partly offset by higher freight costs and merger-related costs. Interest expense rose to $17.5 million from $9.2 million, reflecting convertible-note interest and debt assumed with Topgolf.
- Net income and EPS increased sharply, but the comparison is dominated by the one-time Topgolf investment gain. The diluted weighted-average share count rose to 124.6 million from 95.7 million.
Outlook, commentary, risks, and unusual items
- Management said demand for golf equipment remained unusually strong and the soft-goods recovery was better than expected. It expected momentum and recovery in golf equipment, soft goods, and Topgolf to continue in 2021; the filing does not provide a specific full-year revenue or earnings forecast.
- Management stated that available resources should fund operations, planned capital expenditures, debt repayments, and contractual commitments for at least 12 months from filing. Estimated 2021 capital expenditures were approximately $235 million.
- COVID-19 continued to affect international retail, Topgolf venue traffic and events, staffing, construction, and supply chains. The company noted possible future closures and continuing occupancy or safety restrictions.
- Topgolf’s expansion entails significant venue construction and lease commitments. The filing disclosed $828.5 million of minimum lease payments for signed leases not yet commenced, approximately $75 million of minimum capital commitment for those leases, and $155 million of capital commitments in its obligations table. Total disclosed contractual obligations were $5.112 billion.
- Other risks include labor shortages and wage inflation, venue execution and profitability, competition for entertainment spending, food and supply costs, licensing and regulatory requirements, and integration and synergy realization. The company also identified foreign-exchange and interest-rate exposure; its sensitivity analysis estimated a $31.9 million loss under a hypothetical 10% adverse currency movement in forward contracts.
- The Topgolf purchase-price allocation remained preliminary. The company recorded a $38.9 million tax valuation allowance related to certain deferred tax assets and reported $28.4 million of gross uncertain-tax-position liabilities. Routine legal matters were disclosed; management said it could not estimate an ultimate aggregate loss.
Important facts for investors to verify
- How Topgolf’s revenue, venue traffic, margins, and cash generation develop beyond the short post-merger reporting period, and whether integration synergies are realized.
- Underlying earnings excluding the $252.5 million revaluation gain, acquisition costs, amortization, and tax valuation allowance; assess the company’s non-GAAP adjustments alongside GAAP results.
- Debt repayment capacity, covenant compliance, borrowing availability, and the effect of Topgolf’s leverage and lease commitments on liquidity.
- Whether strong golf demand and the soft-goods recovery persist, given seasonality, supply-chain constraints, freight costs, and ongoing COVID-19 impacts.
- Final purchase accounting, including goodwill and intangible-asset valuations, and the recoverability of deferred tax assets.