Nick Baines

Financial Statement Analysis

Professor Barrett

May 2016

Introduction

The Callaway Golf Company was incorporated in California in 1982 with the main purpose of designing, manufacturing and selling high quality golf clubs. The Company became a publicly traded corporation in 1992, and in 1999, reincorporated in the state of Delaware. The Company has evolved over time from a manufacturer of golf clubs to one of the leading manufacturers and distributors of a full line of golf equipment and accessories.

The Company designs, manufactures and sells high quality golf clubs, golf balls, golf bags and other golf-related accessories. The Company designs its products to be technologically advanced and in this regard invests a considerable amount in research and development each year. The Company’s golf products are designed for golfers of all skill levels, both amateur and professional, and are generally designed to conform to the Rules of Golf as published by the United States Golf Association ("USGA") and the ruling authority known as the R&A. The Company has two reportable operating segments that are organized on the basis of products, namely the golf clubs segment and golf balls segment. The golf clubs segment consists of Callaway Golf woods, hybrids, irons and wedges and Odyssey putters. This segment also includes other golf-related accessories, royalties from licensing of the Company’s trademarks and service marks and sales of pre-owned golf clubs. The golf balls segment consists of Callaway Golf balls that are designed, manufactured and sold by the Company.

The Company generally sells its products to retailers, directly and through its wholly-owned subsidiaries, and to third-party distributors. The Company sells pre-owned golf products through its website, www.callawaygolfpreowned.com. In addition, the Company sells Callaway Golf and Odyssey products direct to consumers through its websites www.callawaygolf.com and www.odysseygolf.com. The Company also licenses its trademarks and service marks in exchange for a royalty fee to third parties for use on golf related accessories, including golf apparel and footwear, prescription eyewear, golf gloves, umbrellas and practice aids. The Company’s products are sold in the United States and in over 100 countries around the world.

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Governance & Communication Analysis

Analyst CallThe analyst call began with a long introduction by the head of investor relations. The purpose of

his introduction was to ensure that it was understood that any statements made were forward-looking and not definite statements. Following this introductory statement the CEO, Oliver Brewer, began to talk.

Mr. Brewer begins with talking about how the company has had a strong year with broad based growth across the company. He spoke about how the company is growing and how he predicts future growth. For example, he stated that the company experienced a 14% growth during the quarter and they improved in market share, to its highest mark since 2003, as well as gained a leadership position in the golf club business. In the past year, Callaway’s irons were the number one selling brand, and their new irons received 5/5 stars on the Golf Digest hot list. Not only that, but their golf ball business is booming as well. For example, the ball business is now a profitable category within Callaway Golf, they are the number two selling ball in the United States, and they have experienced a 46% increase in ball shipments.

As a whole, Callaway Golf has eliminated all long term debt, which will support their future strategic opportunities. This is not limited to the United States, however. Callaway Golf is the number one American club brand in Japan, as well as the number 1 selling hard-goods brand in Europe. To further this growth around the world, they are building a new “Super-Hub” located in the United Kingdom which will allow Callaway to shop their own clubs more cost effectively and time efficiently. The Super Hub is not their only planned improvement; Callaway is also planning on increasing their iron product life cycle to two years and increase investor relation activities.

Overall, Callaway Golf is growing, their market share is improving, and so are their products. Mr. Brewer is very optimistic about their future, and he is planning on some major improvements within the company.

Following this analyst call, I would have a few questions for Mr. Brewer. First off, I would ask for more specifications as to what this new “Super Hub” will be able to do and how building something like this could help them to profit in the long run. In addition to that, I would ask why he has so much confidence with their new equipment moving forward and why he believes that they will have continued success.

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Corporate GovernanceCallaway Golf Company’s current CEO is Oliver G. Brewer III. While Mr. Brewer is the

CEO, he is not the chair of the board; that position belongs to Samuel H. Armacost. Before he was with Callaway, Oliver Brewer was the President and CEO of Adams Golf from January 2002 until March 2012, when he took his current position with Callaway. Prior to that, Brewer was the Senior Vice President of Sales and Marketing of Adams Golf from September 1998 to August 2000. Mr. Brewer has an M.B.A. from Harvard University and a B.S. in Economics from the College of William and Mary.

The Audit Committee consists of five independent directors; according to Callaway all five of these men meet the "financial literacy" and "financial expertise" requirements of the NYSE.

1. Samuel H. Armacost: Mr. Armacost was the Managing Director of an investment management and venture capital firm for eight years, served as the President and CEO of BankAmerica Corporation for five years, and prior to that served as the CFO of Bank America Corporation.

2. Ronald S. Beard: Former partner of Gibson, Dunn & Crutcher LLP from 1964 until 2001.

3. John F. Lundgren: Chairman and CEO of Stanley Black & Decker, Inc. Prior, Lundgren held various positions in finance with Georgia Pacific and its predecessors. Lundgren received his MBA from Stanford University.

4. Adebayo O. Ogunlesi: Mr. Ogunlesi is the Chairman and Managing Partner of Global Infrastructure Management, LLC (a private equity firm with over $15 billion in assets). Prior to founding Global Infrastructure Management, Mr. Ogunlesi spent 23 years at Credit Suisse where he held senior positions, including Executive Vice Chairman and Chief Client Officer and prior to that Global Head of Investment Banking.

5. Anthony S. Thornley: From 2002 until 2005, Mr. Thornley served as President and CEO of QUALCOMM Incorporated. Before that, he served as QUALCOMM’s CFO for 8 years.

All of the members of the board, other than Ronald S. Beard, seem more than qualified. Since Mr. Beard has only had law experience, I question his financial expertise.

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Oliver G. Brewer III‘s base salary was $750,000, $1,005,000 was received as a bonus, and $2,100,000 was received as a long-term; totaling $3,855,000. The bonus that he received was based upon goals that were set for the company that he achieved and exceeded in the past year. For 2014, after taking into account the bonus pool accrual, the Company achieved EBITDA for 2014 of $51.9 million (compared to $20.8 million in 2013 — an increase of $31.1 million). This exceeded the target amount.

BlackRock Institutional Trust Company, N.A. currently holds the highest percentage of Callaway Golf Company’s stock at 10.4% (7,374,257 shares). BlackRock, as well as the other top owners of Callaway Golf Company’s stock, are reported as institutions.

There is only one class of stock currently outstanding, and that is common stock. There are currently 77,593,917 shares outstanding. The holders of common stock are entitled to one vote for each share of common stock on all matters submitted to a vote of the Company’s shareholders. Although to date no shares of Series-A Junior Participating preferred stock have been issued, if such shares were issued, each share of Series A Junior Participating Preferred Stock would entitle the holder thereof to 1,000 votes on all matters submitted to a vote of the shareholders of the Company. The holders of Series-A Junior Participating Preferred Stock and the holders of common stock shall generally vote together as one class on all matters submitted to a vote of the Company’s shareholders. Shareholders entitled to vote for the election of directors are entitled to vote cumulatively for one or more nominees.

5

Strategy Analysis

Porter’s Five ForcesRivalry Among Existing Firms

Rivalry among existing firms in the golf club business is very high, but there is not much growth in the industry. While you would expect price wars in this situation, that is not the case. This is due to the fact that while there is not much growth in the market, there is a high rate of new products and innovation being released by all of the existing firms.

There is a balance of competition in the golf club industry. Callaway Golf Company’s main competitors are Acushnet Company (Titleist & Cobra), Nike Golf, Taylormade golf, Ping, SRI Sports Limited (Cleveland & Srixon), Mizuno Corporation, and Bridgestone Golf. These firms avoid head-on competition by attempting to differentiate their products from the other firms in the market. For example, the Callaway Golf Company has recently paired with Boeing to create their new drivers and fairway woods. They have used this partnership to advertise their new clubs as being “faster” and “more aerodynamic” because Boeing’s airplanes are fast and aerodynamic. This is just one of the many ways that golf companies can differentiate their products.

Threat of New Entrants

It is very difficult to enter the golf club industry, and therefore makes it very unlikely that there will be any new entrants into the industry. The first mover advantage is very strong in the golf club industry. IT is extremely hard for new entrants to gain a large amount of market share, since existing companies have developed strong brand recognition over the years.

Due to the fact that the golf industry is an economy of scale, the only way that a new entrant could enter the industry is if it has a large amount of capital. Not only will it cost a lot to research and develop products, but the brand loyalty in the market is so strong that it will take time for anyone to even want to buy a new company’s product (even if it is high quality).

Finally, legal barriers, such as patents and copyrights make it very difficult for a new entrant in the industry to make a quality product. Due to the amount of time that it takes to develop a quality product, and the amount of quality products that are on the market, it is very unlikely that a new firm can enter the industry without copying another company.

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Due to these factors, Callaway is not in danger of new entrants in the market taking their business or their market share.

Threat of Substitute Products

The threat of substitute products in the golf club industry is very low. There are no specific substitutes to golf clubs, unless someone changes sports completely and substitutes their golf clubs for a baseball bat, soccer ball, etc. This threat is low, however, because those who play golf do not consider golf to be like other “sports”, it is a more leisurely and low-impact activity that, like its equipment, does not have a substitute.

Bargaining Power of Buyers

The number of buyers for Callaway products is very high, so the power of the buyers of our products is very low. There is not much price sensitivity in this market due to the fact that all of Callaway’s main competitors have the same price point with their equipment. In addition, when a buyer wants a quality product, like what Callaway produces, they are willing to pay the price that comes with it, in turn; they do not exert any power over the companies.

Technically, buyers of golf equipment have relative bargaining power over golf club companies because of the large number of buyers and the limited number of golf equipment manufacturers. But, this theory does not apply to this market because of the extremely similar price point that exists between all of the manufacturers.

Bargaining Power of Suppliers

Supplier power is relatively low in the golf equipment industry. This is due to the fact that golf clubs are made using very common metals, such as iron and steel. Since these metals are commonly found, there is a wide variety of suppliers that can supply club manufacturers with the materials that they need. Because of this, club manufacturers can easily find a substitute supplier if they do not like the price or the service of their current supplier.

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Company Strategy AnalysisThe Callaway Golf Company follows a product differentiation strategy. Callaway only

puts high quality products on the shelves and does not undercut the prices of any of their competitors. Callaway spends, on average, $32,491,200 (as shown on their statement of operations) each year on research and development, showing that they are trying to continue updating and innovating their products. This is shown in their recent campaign to partner with The Boeing Company, who manufactures aircrafts, to help design their new golf clubs. By creating this partnership, they are drastically differentiating themselves from the rest of the golf club market.

Callaway also differentiates itself by representing the high profile golfers that they represent. By representing some of the top players in the world, they are showing their potential consumers that they indeed have the highest quality product on the market, and they are definitely worth the price.

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Financial Analysis

Recasted Income StatementCallaway Golf Company

Recasted Income Statement(In Thousands)

Year Ended December 31,2012 2013 2014

Sales $ 834,065.00 $ 842,801.00 $ 886,945.00Cost of Sales $ (585,897.00) $ (528,043.00) $ (529,019.00)SG&A $ (334,861.00) $ (294,583.00) $ (295,893.00)Other Operating Expense $ (29,542.00) $ (30,937.00) $ (31,285.00)Investment Income $ (4,963.00) $ (8,565.00) $ (9,061.00)Other Income / Expense $ 3,152.00 $ 6,005.00 $ (48.00)Tax expenses $ (4,900.00) $ (5,599.00) $ (5,631.00)Net Income $ (122,946.00) $ (18,921.00) $ 16,008.00

Recasted Balance Sheet9

Callaway Golf CompanyRecasted Balance Sheet

(In Thousands)Year Ended December 31,

2012 2013 2014Cash & Marketable Securities $ 52,003.00 $ 36,793.00 $ 37,635.00Accounts Receivable $ 91,072.00 $ 92,203.00 $ 109,848.00Inventory $ 211,734.00 $ 263,492.00 $ 207,229.00Other Current Assets $ 32,187.00 $ 29,115.00 $ 29,321.00Total Current Assets $ 386,996.00 $ 421,603.00 $ 384,033.00Long-Term Tangible Assets $ 89,093.00 $ 71,341.00 $ 58,093.00Long-Term Intangible Assets $ 120,133.00 $ 120,412.00 $ 119,000.00Other Long-Term Assets $ 41,414.00 $ 50,507.00 $ 63,685.00Total Long-Term Assets $ 250,640.00 $ 242,260.00 $ 240,778.00Total Assets $ 637,636.00 $ 663,863.00 $ 624,811.00Accounts Payable $ 129,021.00 $ 157,120.00 $ 123,251.00Other Current Liabilities $ 32,545.00 $ 69,076.00 $ 60,877.00Total Current Liabilities $ 161,566.00 $ 226,196.00 $ 184,128.00Long-Term Debt $ 113,698.00 $ 107,835.00 $ 108,574.00Deferred Taxes $ 33,533.00 $ 39,658.00 $ 38,910.00Other Long-Term Liabilities $ 7,131.00 $ 5,555.00 $ 1,665.00Total Liabilities $ 315,928.00 $ 379,244.00 $ 333,277.00Common Shareholders' Equity $ 321,708.00 $ 284,619.00 $ 291,534.00Total Shareholders' Equity $ 321,708.00 $ 284,619.00 $ 291,534.00Total Liabilities & Shareholders' Equity $ 637,636.00 $ 663,863.00 $ 624,811.00

Common Size Income Statement

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Callaway Golf Company

Common Size Income StatementYear Ended December 31,

2012 2013 2014

Sales 100.00% 100.00% 100.00%

Cost of Sales 70.25% 62.65% 59.65%

SG&A 40.15% 34.95% 33.36%

Other Operating Expense 3.54% 3.67% 3.53%

Investment Income 0.60% 1.02% 1.02%

Other Income / Expense -0.38% 0.71% 0.01%

Tax expenses 0.59% 0.66% 0.63%

Net Income 14.74% 2.25% 1.80%

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DuPont Analysis

12

Return on Equity5.49%

Return on Assets2.56%

Profit Margin1.8%

Net Income$16,008,000

Sales$886,945,000

Total Asset Turnover141.95%

Sales$886,945,000

Total Assets$624,811,000

Equity Multiplier

2.1432

Profitability Analysis Ratios

Profit Margin(Net Income/Sales)

2012 2013 2014-0.16 -0.02 0.02

2012 2013 2014-0.20

-0.15

-0.10

-0.05

0.00

0.05

0.10

0.15

0.20

A company’s profit margin reflects income for each dollar of revenue earned. Profit margin is an indicator of the security of a company’s profits. If a company has a low profit margin then, while the company may have high sales, it is not a very profitable company. In addition, if a company has a low profit margin, it may be an indicator that it possesses a low market share in its industry.

Callaway’s profit margin is on the rise; this is due to its increasing net income that is a product of a decreasing cost of sales.

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Return on Assets(Net Income/Total Assets)

2012 2013 20140.03 -0.03 0.03

2012 2013 2014-0.20

-0.15

-0.10

-0.05

0.00

0.05

0.10

0.15

0.20

Return on assets is an indicator of how profitable a company is relative to its total assets. It gives an idea as to how efficient management is at using its assets to generate earnings.

The net income for Callaway has been constantly increasing, so the reason for the fluctuation in ROA is the company’s total assets. In 2013 the total assets (mostly due to inventory) had a large rise, and then went back down to normal in 2014. This must have been an error, expecting a rise in demand, by management when deciding how much inventory to order throughout the year.

Return on Equity14

(Net Income / Total Equity)

2012 2013 20140.05 -0.07 0.05

2012 2013 2014-0.20

-0.15

-0.10

-0.05

0.00

0.05

0.10

0.15

0.20

Return on equity is the amount of net income returned as a percentage of shareholders equity. It measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested.

Callaway’s ROE has fluctuated over the last several years. This is due to a sharp decrease in shareholders’ equity as well as a large rise in net income in 2014. While I am not completely sure what the cause of the equity decrease was, I believe it has something to do with the large increase in Callaway’s assets in 2013.

Gross Profit Margin((Sales - Cost of Sales) / Sales)

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2012 2013 20140.30 0.37 0.40

2012 2013 2014-0.50

-0.40

-0.30

-0.20

-0.10

0.00

0.10

0.20

0.30

0.40

0.50

Gross profit margin is used to assess a company’s financial health by calculating the proportion of money left over from revenues after accounting for the cost of goods sold. This margin can be used when a company needs to pay for additional expenses, or is saved for a later date.

Callaway’s gross profit margin is slowly increasing. This is due mostly to Callaway’s increasing sales; in 2014Callaway had a 5.24% sales growth. That, combined with a steady cost of sales, will result in an increased gross profit margin.

EBIT Margin(Earnings before Interest & Taxes / Sales)

2012 2013 2014

16

-0.14 -0.02 0.02

2012 2013 2014-0.20

-0.15

-0.10

-0.05

0.00

0.05

0.10

0.15

0.20

EBIT margin is a measurement of a company's operating profitability as a percentage of its total revenue. Because EBIT excludes interest and taxes, it margin can provide an investor with a clear view of a company's operating profitability and cash flow. Since Callaway has been making large strides in recent years in its revenue and profitability, it is fitting that Callaway’s EBIT margin is rising as well.

Accounts Receivable Turnover(Sales / Accounts Receivable)

2012 2013 2014

17

9.16 9.14 8.07

2012 2013 20140.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

10.00

Accounts receivable turnover indicates the efficiency with which a firm manages the credit it issues to customers. Because accounts receivable is money owed on a credit agreement without interest, companies are essentially extending interest-free loans to their clients. Because of the time value of money principle, a company loses more money the longer it takes to collect on its credit sales. If a company is irresponsible with managing their accounts receivable, their AR turnover will plummet.

In 2014, Callaway experienced a 19% increase in their accounts receivable. Due to this, their AR turnover ratio went from being consistent to being on a decline.

Days’ Receivable(Accounts Receivable / Average Sales per Day)

2012 2013 2014

18

39.85 39.93 45.21

2012 2013 201430.00

32.00

34.00

36.00

38.00

40.00

42.00

44.00

46.00

48.00

50.00

The days’ receivable ratio is a measurement of the average number of days that accounts receivable are outstanding before they are collected as cash. Through the years, Callaway’s days’ receivable tends to stay fairly stable. Although, in 2014 Callaway’s days’ receivable had a slight increase; this was most likely due to their increase in sales. Because a purchase that is made from Callaway is most likely a sporting goods store making a very large purchase, this number does not seem too high.

Inventory Turnover(Cost of Goods Sold / Inventory)

2012 2013 2014-2.77 -2.00 -2.55

19

2012 2013 2014-4.00

-3.50

-3.00

-2.50

-2.00

-1.50

-1.00

-0.50

0.00

Inventory turnover represents the number of times that a company’s inventory is sold and replaced over a certain period. In 2013 inventory turnover for Callaway decreased, but by a lesser amount than the year before; in 2014 it decreased again, but by a larger amount. I believe that this decrease in turnover is due to the fact that Callaway is performing more effectively and efficiently as a company. This lower turnover implies that Callaway is buying supplies and creating inventory at the correct times during the year; selling less often in larger quantities.

Days’ Inventory(Inventory / Average COGS per Day)

2012 2013 2014131.91 182.13 142.98

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2012 2013 2014100.00

110.00

120.00

130.00

140.00

150.00

160.00

170.00

180.00

190.00

200.00

Days’ inventory calculates the average number of days that items are held in inventory before they are sold. In 2013, Callaway had a spike in days’ inventory; this was due to the bad year of sales that they experienced. But, in 2014 Callaway experienced a 39 day drop in days’ inventory. This can be attributed to, not only more efficient selling but, a $44 million increase in sales. An increase in sales ensures that a company’s inventory will be taken out of inventory.

Accounts Payable Turnover(Cost of Goods Sold / Accounts Payable)

2012 2013 20144.54 3.36 4.29

21

2012 2013 20140.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

Accounts payable turnover is used to measure the rate at which a company pays off its suppliers. The measure shows investors how many times per period the company pays its average payable amount. Callaway hit a low in 2013 with only a 3.36 turnover rate. But in 2014, this figure rose 28%; representing that, while they are increasing the efficiency of their business, Callaway’s sales are on the rise, so in order to pay off their increasing cost of sales, they will need a little more time.

Days’ Payable(Accounts Payable / Average COGS per Day)

2012 2013 201480.38 108.61 85.04

22

2012 2013 201475.00

80.00

85.00

90.00

95.00

100.00

105.00

110.00

115.00

Days’ payable represents the average number of days that accounts payable is outstanding before it is paid in cash. In 2013, Callaway experienced an extremely high days’ payable. This was due to their low sales and negative profit (loss) numbers. With sales numbers like they had, it would be extremely difficult to pay off their debts in a timely fashion. This figure improved in 2014 with their increased sales numbers and positive profit.

PP&E Turnover(Sales / Property, Plant, & Equipment)

2012 2013 20149.36 11.81 15.27

23

2012 2013 20140.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

18.00

20.00

The PP&E turnover ratio measures how able a company is to generate net sales from property, plant and equipment investments. In general, a higher PP&E turnover ratio indicates that a company has more effectively utilized investments to generate revenue. Callaway has been experiencing a constant growth in their PP&E turnover. This is due to their steadily increasing sales number. With sales in the numerator, slowly growing, and PP&E staying relatively stagnant, Callaway’s PP&E turnover will continue to rise.

Long-Term Asset Turnover(Sales / Long-Term Assets)

2012 2013 20143.33 3.48 3.68

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2012 2013 20143.00

3.10

3.20

3.30

3.40

3.50

3.60

3.70

3.80

3.90

4.00

The long-term asset turnover ratio measures how able a company is to generate net sales from its long-term assets. In general, a higher long-term asset turnover ratio indicates that a company has more effectively utilized investments to generate revenue. Callaway has been experiencing a constant growth in their long-term asset turnover. This is due to their steadily increasing sales number. With sales in the numerator, slowly growing, and PP&E staying relatively stagnant, Callaway’s long-term asset turnover will continue to rise.

Risk Analysis

Non-Financial Risk Analysis

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Three risk factors that could have an impact on The Callaway Golf Company are less people playing golf, Callaway losing to its competition, and professional golfers denying their products.

A reduction in the number of rounds of golf played or in the number of golf participants could adversely affect the Company’s sales

Callaway’s sales are dependent upon the fact that people are playing golf. If people do not play golf, then they will not feel the need to upgrade their clubs to the latest and greatest Callaway clubs. This will happen because of two reasons. First of all, if someone stops playing golf altogether then they will have no reason to buy anything golf-related. Secondly, if someone is playing golf very seldom, then they will most likely be satisfied with the old clubs that they have and not feel a need to pay for something that they will only use a few times during the year.

The Company faces intense competition in each of its markets and if it is unable to maintain a competitive advantage, loss of market share, revenue, or profitability may result.

The demand for constant quality and innovation in the golf industry is very high; each year golf companies come out with at least one new brand of irons, woods, drivers, etc. While Callaway is currently having growing success with their new brands of clubs, this success is not guaranteed. In the future, other brands may become more dominant and leave a company, like Callaway, behind. This can easily happen if a product that has been heavily invested in happens to not be received well by the golf consumer base.

Once the consumer base stops believing in the product, they will stop buying it altogether. This ripple-effect will cause Callaway’s market share, revenue, and profitability to plummet. This has happened to many golf companies in the past; they were highly renowned brands (such as McGregor, Lynx, and Maxfli), and then before you knew it they were getting bought out by another company or going out of business.

The Company’s sales and business could be materially and adversely affected if professional golfers do not endorse or use the Company’s products.

Professionals are the most important and influential spokespeople for companies attempting to influence amateur golfers. This can be an asset and a detriment to Callaway. This can work in favor of Callaway if players have success with Callaway’s products. But, if players attribute their failures to Callaway’s golf clubs and want to use other equipment, then this can work as a large detriment to Callaway’s marketing efforts.

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If the average Joe wants to find the golf clubs that will make him/her the best golfer that they can be, they will look to what the professionals are using. If they see that even professionals don’t use Callaway clubs, then the average Joe will definitely not want to use Callaway clubs. The consumer will slowly start buying competitor’s equipment; this creates a ripple effect. Once people begin to buy non-Callaway clubs, they will tell their friends to buy non-Callaway clubs, and eventually Callaway will not sell enough equipment to stay in business.

Financial Risk Ratios

Current Ratio

27

(Current Assets / Current Liabilities)

2012 2013 20142.40 1.86 2.09

2012 2013 20141.00

1.20

1.40

1.60

1.80

2.00

2.20

2.40

2.60

2.80

3.00

The current ratio is a ratio that measures a company's ability to pay short-term and long-term obligations. To gauge this ability, the current ratio considers the current total assets of a company relative to that company’s total current liabilities. Callaway experienced a downturn in their current ratio in 2013. This was due to their poor performance with their accounts payable. This 18% increase of accounts payable in 2013 was a large detriment, but was stabilized in 2014.

Quick Ratio((Cash + Short-Term Investments + Accounts Receivable) / Current Liabilities)

2012 2013 2014

28

0.89 0.74 1.08

2012 2013 20140.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

2.00

The quick ratio is an indicator of a company’s short-term liquidity. This is because it measures a company’s ability to meet its short-term obligations with its most liquid assets; the ratio excludes inventories from current assets. This ratio, like the current ratio, experienced a downturn for Callaway in 2013. The 18% increase in accounts payable in 2013 hurt Callaway’s quick ratio, but it was quickly increasing again in 2014.

Cash Ratio((Cash + Marketable Securities) / Current Liabilities)

29

2012 2013 20140.32 0.16 0.20

2012 2013 20140.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

1.00

The cash ratio can determine if, and how quickly, a company can repay its short-term debt. A strong cash ratio is useful to creditors when deciding how much debt, if any, they would be willing to extend to the asking party. Callaway’s recent high total liabilities have considerably hurt their cash ratio. If I were a creditor I would think about how much I leant to Callaway considering this ratio as well as their payable turnover ratio.

Liabilities-To-Equity Ratio(Total Liabilities / Shareholders’ Equity)

2012 2013 20140.98 1.33 1.14

30

2012 2013 20140.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

2.00

The liabilities to equity ratio is used to measure a company's financial leverage. The liabilities to equity ratio indicates how much debt a company is using to finance its assets relative to the amount of value represented in shareholders’ equity. Callaway carries a fairly high liabilities to equity ratio. I believe this is because Callaway is utilizing their debt to invest in the future. For example, the large “Super Hub” that they are planning to build in the United Kingdom.

Interest Coverage Ratio((Net Income + Interest Expense + Tax Expense) / Interest Expense)

2012 2013 2014-24.19 -3.69 0.09

31

2012 2013 2014-25.00

-20.00

-15.00

-10.00

-5.00

0.00

5.00

The interest coverage ratio is used to determine how easily a company can pay interest on outstanding debt. Callaway, as they are improving in financial performance, is improving their interest coverage ratio. This is due to the fact that their net income has improved by over $138 million from 2012 to 2014. This increase has drastically improved Callaway’s ability to pay their interest expenses.

Forecasting

Dividend Payout Ratio(Cash Dividends Paid / Net income)

= 0.194

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Sustainable Growth Rate(Return on Equity x (1 – Dividend Payout Ratio))

= 4.42%

CAPMRE = Rf + ßE (E(RM) – Rf)

CAPM Components SourcesRisk-Free Rate 2.27% www.treasury.govImplied Market Risk Premium 4.17% www.market-risk-premia.comISRG Beta 1.018 www.ycharts.com & finance.yahoo.com

Required Rate of Return 4.20%

Weighted Average Cost of Capital(wERE + wDRD(1-TC))

Debt $161,566.00Equity $321,708.00Weighted Debt 33.43%Weighted Equity 66.57%Tax Rate 26.00%Return on Debt 3.49%Return on Equity 4.59%WACC 3.9%

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Forecasted Income Statement

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2012 2013 2014 2015 2016 2017 2018 2018Sales 834,065.00$ 842,801.00$ 886,945.00$ 954,781.07$ 1,026,134.18$ 1,092,822.59$ 1,147,767.17$ 1,205,513.66$

Growth - 1.05% 5.24% 7.65% 7.47% 6.50% 5.03% 5.03%Woods 198,078.00$ 249,809.00$ 269,468.00$ 297,034.58$ 325,044.94$ 353,486.37$ 382,507.60$ 413,069.96$

Growth - 26.12% 7.87% 10.23% 9.43% 8.75% 8.21% 7.99%Irons 169,151.00$ 178,771.00$ 200,174.00$ 227,097.40$ 255,121.22$ 280,301.69$ 302,669.76$ 325,884.53$

Growth - 5.69% 11.97% 13.45% 12.34% 9.87% 7.98% 7.67%Putters 92,588.00$ 87,787.00$ 81,161.00$ 84,001.64$ 87,823.71$ 90,361.81$ 86,729.27$ 84,500.33$

Growth - -5.19% -7.55% 3.50% 4.55% 2.89% -4.02% -2.57%Golf Balls 235,624.00$ 131,104.00$ 136,989.00$ 144,427.50$ 151,981.06$ 158,881.00$ 164,012.86$ 169,490.89$

Growth - -44.36% 4.49% 5.43% 5.23% 4.54% 3.23% 3.34%Accessories & Other 235,624.00$ 195,330.00$ 199,153.00$ 202,219.96$ 206,163.25$ 209,791.72$ 211,847.68$ 212,567.96$

Growth - -17.10% 1.96% 1.54% 1.95% 1.76% 0.98% 0.34%Cost of Sales (585,897.00)$ (528,043.00)$ (529,019.00)$ (541,398.04)$ (552,117.73)$ (561,779.79)$ (571,049.15)$ (579,843.31)$

Growth - -9.87% 0.18% 2.34% 1.98% 1.75% 1.65% 1.54%Gross Margin 248,168.00$ 314,758.00$ 357,926.00$ 417,985.98$ 482,481.22$ 552,633.99$ 632,379.07$ 721,101.86$

Growth - 26.83% 13.71% 16.78% 15.43% 14.54% 14.43% 14.03%SG&A (334,861.00)$ (294,583.00)$ (295,893.00)$ (296,869.45)$ (297,077.26)$ (290,452.43)$ (281,448.41)$ (270,809.66)$

Growth - -12.03% 0.44% 0.33% 0.07% -2.23% -3.10% -3.78%Other Operating Expense (29,542.00)$ (30,937.00)$ (31,285.00)$ (31,754.28)$ (32,144.85)$ (32,925.97)$ (33,294.74)$ (33,621.03)$

Growth - 4.72% 1.12% 1.50% 1.23% 2.43% 1.12% 0.98%Investment Income (4,963.00)$ (8,565.00)$ (9,061.00)$ (9,986.13)$ (10,771.04)$ (11,501.31)$ (12,266.15)$ (12,999.67)$

Growth - 72.58% 5.79% 10.21% 7.86% 6.78% 6.65% 5.98%Other Income / Expense 3,152.00$ 6,005.00$ (48.00)$ (5.99)$ (1.90)$ (1.66)$ (1.87)$ (2.31)$

Growth - 90.51% -100.80% -87.52% -68.32% -12.45% 12.42% 23.87%Tax expenses (4,900.00)$ (5,599.00)$ (5,631.00)$ (5,668.73)$ (5,744.69)$ (5,800.99)$ (5,936.73)$ (6,041.22)$

Growth - 14.27% 0.57% 0.67% 1.34% 0.98% 2.34% 1.76%Net Income (122,946.00)$ (18,921.00)$ 16,008.00$ 73,701.41$ 136,741.49$ 211,951.62$ 299,431.17$ 397,627.97$

Growth - -84.61% -184.60% 360.40% 85.53% 55.00% 41.27% 32.79%

Year Ended December 31,(In Thousands)

Forecasted Income StatementCallaway Golf Company

The forecasted income statement was constructed by analyzing past growth rates with the idea that Callaway would slowly increase in revenue, yet at the same time decrease costs due to economies of scale, and in the long run increase profits. I forecasted Callaway’s sales with the knowledge that their equipment is on the rise. I know that their equipment is improving in quality and popularity, which will cause an increase in growth in the next few years to come. Additionally, I forecasted that Callaway’s SG&A will decrease due to an increase in efficiency within the company. This increase in efficiency will be, in part, due to the new “Super Hub” that will be built in the United Kingdom that will allow Callaway to ship its own products more efficiently and st effectively. Further, I forecasted that Callaway’s cost of sales will be at a constant incline due to their forecasted increase in sales; the two go hand in hand.

Sustainability Report

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In Callaway Golf Company’s sustainability report, they show that they are very environmentally conscious. They explain how “it is important to conduct its business in an environmentally, economically and socially sustainable manner.” Further, they explain that they are focused on reducing emissions, hazardous waste, water usage, as well as improving their recycling program.

In order to achieve these goals, Callaway is implementing the following enhancements throughout the company: Facilities through the partnership with local utilities to implement energy reduction initiatives such as energy efficient lighting, demand response energy management and heating, ventilation and air conditioning optimization; manufacturing through lean initiatives and waste minimization; product development through specification of environmentally preferred substances; logistics improvements and packaging minimization; and supply chain management through social, safety and environmental responsibility audits of suppliers.

Callaway’s Sustainability Report shows that Callaway is really trying to improve their sustainability as a whole throughout the company. They are implementing a wide variety of strategies to achieve this goal, showing that this strategy is well thought out, and will be a permanent change in the company.

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