Callaway 2010 Annual Report Download - page 58

The Company’s accounts receivable balance fluctuates throughout the year as a result of the general
seasonality of the Company’s business. The Company’s accounts receivable balance will generally be at its
highest during the first and second quarters and decline significantly during the third and fourth quarters as a
result of an increase in cash collections and lower sales. As of December 31, 2010, the Company’s net accounts
receivable increased $4.8 million to $144.6 million from $139.8 million as of December 31, 2009. This increase
was primarily due to an increase in past-due balances partially offset by a reduction in average payment terms.
The Company believes that the allowance for doubtful accounts as of December 31, 2010 is adequate to provide
for any potential bad debts.
The Company’s inventory balance also fluctuates throughout the year as a result of the general seasonality
of the Company’s business. Generally, the Company’s buildup of inventory levels begins during the fourth
quarter and continues heavily into the first quarter as well as into the beginning of the second quarter in order to
meet demand during the height of the golf season. Inventory levels start to decline toward the end of the second
quarter and are at their lowest during the third quarter. The Company’s net inventory increased $49.4 million to
$268.6 million as of December 31, 2010 compared to $219.2 million as of December 31, 2009. This increase is
driven primarily by the earlier timing of planned product launches for the 2011 golf season compared to 2010, in
addition to lower than anticipated sales on certain of the Company’s older in-line golf products primarily due to
the continued delay in the recovery of the golf industry in 2010. The Company expects to sell this inventory in
the normal course of business in 2011.
Liquidity and Capital Resources
Sources of Liquidity
The Company’s primary credit facility is a $250.0 million Line of Credit with a syndicate of eight banks
under the terms of the Company’s November 5, 2004 Amended and Restated Credit Agreement (as subsequently
amended, the “Line of Credit”). The Line of Credit expires February 15, 2012. The Company expects to extend
its current Line of Credit or replace it with another financing facility to supplement the Company’s cash flows
from operations.
The lenders in the syndicate are Bank of America, N.A., Union Bank of California, N.A., Barclays Bank,
PLC, JPMorgan Chase Bank, N.A., US Bank, N.A., Comerica West Incorporation, Fifth Third Bank, and
Citibank, N.A. To date, all of the banks in the syndicate have continued to meet their commitments under the
Line of Credit despite the recent turmoil in the financial markets. If any of the banks in the syndicate were unable
to perform on their commitments to fund the Line of Credit, the Company’s liquidity would be impaired, unless
the Company were able to find a replacement source of funding under the Line of Credit or from other sources.
The Line of Credit provides for revolving loans of up to $250.0 million, although actual borrowing
availability can be effectively limited by the financial covenants contained therein. The financial covenants are
tested as of the end of a fiscal quarter (i.e. on March 31, June 30, September 30, and December 31, each year). So
long as the Company is in compliance with the financial covenants on each of those four days, the Company has
access to the full $250.0 million. In accordance with the Company’s business seasonality, average outstanding
borrowings will typically be higher during the first half of the year during the height of the golf season, and
lower during the second half of the year.
The financial covenants include a consolidated leverage ratio covenant and an interest coverage ratio
covenant, both of which are based in part upon the Company’s trailing four quarters’ earnings before interest,
income taxes, depreciation and amortization, as well as other non-cash expense and income items as defined in
the agreement governing the Line of Credit (“adjusted EBITDA”). The consolidated leverage ratio provides that
as of the end of the quarter the Company’s Consolidated Funded Indebtedness (as defined in the Line of Credit)
may not exceed 2.75 times the Company’s adjusted EBITDA for the previous four quarters then ended. The
interest coverage ratio covenant provides that the Company’s adjusted EBITDA for the previous four quarters
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