Callaway Golf Company (NYSE:ELY) announced its financial results for the third quarter ended September 30, 2007. Highlights for the third quarter include:
-- Net sales of $235.5 million, an increase of 22% compared to $193.8 million for the same period in 2006. These strong sales are primarily the result of sales of Fusion drivers and X series irons, as well as increases in sales of accessories and golf balls.
-- Fully diluted earnings per share of $0.02 on 67.6 million shares outstanding compared to a loss per share of $0.18 on 67.0 million shares outstanding in 2006. The third quarter 2007 results include a gain of approximately $0.03 per diluted share related to the sale of a building.
-- Fully diluted earnings per share include $0.04 of after-tax charges for gross margin improvement initiatives. The third quarter of 2006 includes after-tax charges of $0.01 for the integration of Top-Flite and $0.01 for the restructuring initiatives announced in September 2005. Excluding these charges, the Company's pro forma fully diluted earnings per share for the third quarter of 2007 would have been $0.06 compared to a loss per share of $0.16 for the third quarter of 2006.
-- Gross profit for the third quarter of 2007 increased 39% to $94.0 million (or 40% of net sales) compared to $67.7 million (or 35% of net sales) for the third quarter of 2006. The increase in gross profit as a percent of sales is primarily the result of the Company's gross margin improvement initiatives announced in November, 2006 and secondarily a more favorable mix of higher margin Fusion woods and X-series irons products.
-- Operating expenses for the third quarter of 2007 were $93.1 million (or 40% of net sales) compared to $84.6 million (or 44% of net sales) in 2006. The dollar increase is primarily due to higher marketing expenses, increased annual incentive compensation associated with the improved financial results compared to 2006, higher legal expenses to enforce the Company's intellectual property rights, and higher selling expenses associated with increased sales, partially offset by the gain recognized on the sale of a building.
Highlights for the first nine months include:
-- Net sales increased 13% to $950.2 million, a new record for the Company. Net Sales were $838.0 million for the same period in 2006.
-- Fully diluted earnings per share increased 110% to $1.03 on 68.4 million shares outstanding, as compared to $0.49 on 68.8 million shares outstanding in 2006.
-- Fully diluted earnings per share include after-tax charges of $0.07 associated with the Company's gross margin improvement initiatives. Results for the first nine months of 2006 include after-tax charges of $0.04 for the integration of Top-Flite and $0.01 for restructuring. Excluding these charges, the Company's pro forma fully diluted earnings per share for 2007 and 2006 would have been $1.10 and $0.54 respectively, an increase of 104%.
-- Gross profit for 2007 was $429.9 million (or 45% of net sales) compared to $339.3 million (or 40% of net sales) for 2006. The increase in gross profit is due to the positive results of the Company's gross margin initiatives and a more favorable mix of higher margin products.
-- Operating expenses for 2007 were $311.0 million (or 33% of net sales), compared to $281.1 million (or 34% of net sales) for 2006. The dollar increase is primarily due to increased annual incentive compensation associated with the improved financial results, higher marketing expenses, increased legal expenses to enforce the Company's intellectual property rights, and higher selling expenses associated with the increase in sales.
"We are very pleased with the results for the quarter and for the first nine months of 2007," commented George Fellows, President and CEO. "Year to date sales have increased 13% for a new record as a result of strong consumer demand for our 2007 products, driven by our Fusion drivers and X-series irons along with the successful launch of the Top-Flite D2 golf ball. This growth has been across all of our regions, a majority of which was driven by our international business which is up 19% for the year."
"Our gross margins as a percent of sales also continue to improve," continued Mr. Fellows, "as we successfully execute the gross margin improvement initiatives announced last November, with a majority of the third quarter improvement resulting from these efforts. We also reduced our third quarter inventory by $28 million compared to last year, in line with our expectations, due to these initiatives while maintaining and in many cases improving customer service levels. "
Business Outlook
The Company estimates that its full year 2007 net sales will be in the range of $1.095 to $1.105 billion compared to the previous estimate of $1.070 to $1.080 billion. It is also estimated that the 2007 full year pro forma fully diluted earnings per share will be in the range of $0.85 to $0.89 (on 68.0 million shares) compared to the estimate provided last quarter of $0.78 to $0.84 (on 70.0 million shares). Pro forma earnings exclude charges related to the Company's gross margin improvement initiatives, currently estimated at $0.08 per share for 2007, but include charges related to employee equity-based compensation under FAS 123R.
"We are raising our forecast to reflect the higher than expected third quarter results," commented Brad Holiday, Chief Financial Officer. "Our full year forecast continues to take into consideration that the fourth quarter, due to seasonality, is typically our smallest revenue quarter and also that unlike last year, there are very limited new product introductions planned in the quarter. Overall we are very pleased with our results to date and feel we are well on track in achieving our three year targets we set earlier this year."
The Company held a conference call on November 1, 2007. The call will be broadcast live over the Internet and can be accessed at www.callawaygolf.com. To listen to the call, please go to the website at least 15 minutes before the call to register and for instructions on how to access the broadcast. A replay of the conference call will be available approximately three hours after the call ends, and will remain available through 9:00 p.m. PST on Thursday, November 8, 2007. The replay may be accessed through the Internet at www.callawaygolf.com or by telephone by calling 1-800-475-6701 toll free for calls originating within the United States or 320-365-3844 for International calls. The replay pass code is 892455.
Disclaimer: Statements used in this press release that relate to future plans, events, financial results, performance or prospects, including statements relating to estimated future sales and earnings, are forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. These estimates and statements are based upon current information and expectations. Accurately estimating the Company's sales and therefore earnings each year is therefore based upon various unknowns including consumer acceptance and demand for the Company's current or new products as well as future consumer discretionary purchasing behavior. Actual results may differ materially from those estimated or anticipated as a result of these unknowns or other risks and uncertainties, including delays, difficulties or increased costs in the supply of components needed to manufacture the Company's products, in manufacturing the Company's products, or in connection with the implementation of the Company's planned gross margin initiatives, the re-launch of the Top-Flite brand or the implementation of future initiatives; adverse market and economic conditions; adverse weather conditions and seasonality; any rule changes or other actions taken by the USGA or other golf association that could have an adverse impact upon demand or supply of the Company's products; a decrease in participation levels in golf; and the effect of terrorist activity, armed conflict, natural disasters or pandemic diseases on the economy generally, on the level of demand for the Company's products or on the Company's ability to manage its supply and delivery logistics in such an environment. For additional information concerning these and other risks and uncertainties that could affect these statements and the Company's business, see Part I, Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2006, as well as other risks and uncertainties detailed from time to time in the Company's reports on Forms 10-K, 10-Q and 8-K subsequently filed from time to time with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to republish revised forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
Regulation G: The preliminary financial results reported in this press release have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). In addition to the GAAP results, the Company has also provided additional information concerning its results, which includes certain financial measures not prepared in accordance with GAAP. The non-GAAP financial measures included in this press release exclude charges associated with the integration of the Callaway Golf Company and Top-Flite Golf Company operations, charges related to the September 2005 restructuring initiatives, and charges related to the Company's gross margin initiatives. These non-GAAP financial measures should not be considered a substitute for any measure derived in accordance with GAAP. These non-GAAP financial measures may also be inconsistent with the manner in which similar measures are derived or used by other companies. Management believes that the presentation of such non-GAAP financial measures, when considered in conjunction with the most directly comparable GAAP financial measures, provides additional useful information concerning the Company's operations without these charges. The Company has provided reconciling information in the text of this press release and in the supplemental financial information attached to this release.
Through an unwavering commitment to innovation, Callaway Golf creates products and services designed to make every golfer a better golfer. Callaway Golf Company manufactures and sells golf clubs and golf balls, and sells golf accessories, under the Callaway Golf(R), Top-Flite(R), Odyssey(R) and Ben Hogan(R) brands. For more information visit www.callawaygolf.com.
Callaway Golf Company
Consolidated Condensed Balance Sheets
(In thousands)
(Unaudited)
September 30, December 31,
2007 2006
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 31,640 $ 46,362
Accounts receivable, net 165,002 118,133
Inventories, net 213,902 265,110
Deferred taxes 39,488 32,813
Income taxes receivable - 9,094
Other current assets 21,217 21,688
------------- ------------
Total current assets 471,249 493,200
Property, plant and equipment, net 127,103 131,224
Intangible assets, net 173,948 175,159
Deferred taxes 28,193 18,821
Other assets 30,604 27,543
------------- ------------
$ 831,097 $ 845,947
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 113,553 $ 111,360
Accrued employee compensation and
benefits 37,776 18,731
Accrued warranty expense 13,067 13,364
Credit facilities 932 80,000
Other current liabilities 4,436 -
------------- ------------
Total current liabilities 169,764 223,455
Long-term liabilities 61,593 43,388
Minority interest 1,865 1,987
Shareholders' equity 597,875 577,117
------------- ------------
$ 831,097 $ 845,947
============= ============
Callaway Golf Company
Statements of Operations
(In thousands, except per share data)
(Unaudited)
Quarter Ended
September 30,
-----------------------
2007 2006
--------- ---------
Net sales $235,549 100% $193,763 100%
Cost of sales 141,543 60% 126,058 65%
--------- ---------
Gross profit 94,006 40% 67,705 35%
Operating expenses:
Selling 65,808 28% 56,949 29%
General and administrative 19,394 8% 20,901 11%
Research and development 7,928 3% 6,788 4%
--------- ---------
Total operating expenses 93,130 40% 84,638 44%
Income (loss) from operations 876 (16,933) -9%
Other income (expense), net 1,223 1% (1,058)
--------- ---------
Income (loss) before income taxes 2,099 1% (17,991) -9%
Income tax provision (benefit) 830 (6,075)
--------- ---------
Net income (loss) $ 1,269 1% $(11,916) -6%
========= =========
Earnings (loss) per common share:
Basic $ 0.02 ($0.18)
Diluted $ 0.02 ($0.18)
Weighted-average shares outstanding:
Basic 66,516 67,000
Diluted 67,639 67,000
Nine Months Ended
September 30,
-----------------------
2007 2006
--------- ---------
Net sales $950,173 100% $838,023 100%
Cost of sales 520,321 55% 498,720 60%
--------- ---------
Gross profit 429,852 45% 339,303 40%
Operating expenses:
Selling 222,009 23% 202,122 24%
General and administrative 65,139 7% 59,226 7%
Research and development 23,851 3% 19,786 2%
--------- ---------
Total operating expenses 310,999 33% 281,134 34%
Income from operations 118,853 13% 58,169 7%
Other expense, net (2,006) (2,029)
--------- ---------
Income before income taxes 116,847 12% 56,140 7%
Income tax provision 46,103 22,656
--------- ---------
Net income $ 70,744 7% $ 33,484 4%
========= =========
Earnings per common share:
Basic $ 1.05 $ 0.49
Diluted $ 1.03 $ 0.49
Weighted-average shares outstanding:
Basic 67,250 67,980
Diluted 68,407 68,777
Callaway Golf Company
Consolidated Condensed Statements of Cash Flows
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
--------------------
2007 2006
---------- ---------
Cash flows from operating activities:
Net income $ 70,744 $ 33,484
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 27,464 23,961
Non-cash share-based compensation 8,207 9,611
Deferred taxes 1,444 (3,573)
(Gain) loss on disposal of assets (3,425) 1,047
Changes in assets and liabilities, net of
effects from acquisition 41,408 (35,969)
---------- ---------
Net cash provided by operating activities 145,842 28,561
---------- ---------
Cash flows from investing activities:
Capital expenditures (24,130) (28,551)
Proceeds from sale of capital assets 5,491 468
Investment in golf related venture (1,310) -
Business acquisition, net of cash acquired - (5,911)
---------- ---------
Net cash used in investing activities (19,949) (33,994)
---------- ---------
Cash flows from financing activities:
Issuance of common stock 47,672 9,053
Dividends paid, net (14,241) (9,695)
Acquisition of treasury stock (101,387) (52,872)
Tax benefit from exercise of stock option 4,537 805
(Payments on) proceeds from credit facilities,
net (79,068) 60,000
Other financing activities (122) (16)
---------- ---------
Net cash (used in) provided by financing
activities (142,609) 7,275
---------- ---------
Effect of exchange rate changes on cash and cash
equivalents 1,994 1,178
---------- ---------
Net (decrease) increase in cash and cash
equivalents (14,722) 3,020
Cash and cash equivalents at beginning of period 46,362 49,481
---------- ---------
Cash and cash equivalents at end of period $ 31,640 $ 52,501
========== =========
Callaway Golf Company
Consolidated Net Sales and Operating Segment Information
(In thousands)
(Unaudited)
Net Sales by Product Category
--------------------------------------
Quarter Ended
September 30, Growth/(Decline)
----------------- ----------------
2007 2006 Dollars Percent
-------- -------- -------- -------
Net sales:
Woods $ 56,207 $ 43,718 $12,489 29%
Irons (1) 65,391 52,966 12,425 23%
Putters 21,590 22,954 (1,364) -6%
Golf balls 49,045 42,700 6,345 15%
Accessories and other (1) 43,316 31,425 11,891 38%
-------- -------- --------
$235,549 $193,763 $41,786 22%
======== ======== ========
------------------------------------
Nine Months Ended
September 30, Growth/(Decline)
----------------- ----------------
2007 2006 Dollars Percent
-------- -------- -------- -------
Net sales:
Woods $271,201 $227,157 $ 44,044 19%
Irons (1) 260,809 242,674 18,135 7%
Putters 88,122 85,145 2,977 3%
Golf balls 174,705 167,533 7,172 4%
Accessories and other (1) 155,336 115,514 39,822 34%
-------- -------- --------
$950,173 $838,023 $112,150 13%
======== ======== ========
(1) Prior periods have been restated to reflect current period
classification.
Net Sales by Region
---------------------------------------
Quarter Ended
September 30, Growth/(Decline)
------------------ ----------------
2007 2006 Dollars Percent
--------- -------- -------- -------
Net sales:
United States $124,321 $103,196 $21,125 20%
Europe 40,983 29,201 11,782 40%
Japan 25,154 23,236 1,918 8%
Rest of Asia 20,540 18,279 2,261 12%
Other foreign countries 24,551 19,851 4,700 24%
--------- -------- --------
$235,549 $193,763 $41,786 22%
========= ======== ========
----------------------------------
Nine Months Ended
September 30, Growth/(Decline)
----------------- ----------------
2007 2006 Dollars Percent
-------- -------- -------- -------
Net sales:
United States $512,516 $470,828 $ 41,688 9%
Europe 167,290 133,622 33,668 25%
Japan 96,941 83,392 13,549 16%
Rest of Asia 69,006 60,828 8,178 13%
Other foreign countries 104,420 89,353 15,067 17%
-------- -------- --------
$950,173 $838,023 $112,150 13%
======== ======== ========
Operating Segment Information
--------------------------------------------
Quarter Ended
September 30, Growth/(Decline)
------------------- -----------------------
2007 2006 Dollars Percent
--------- --------- --------------------
Net sales:
Golf clubs $186,504 $151,063 $ 35,441 23%
Golf balls 49,045 42,700 6,345 15%
--------- --------- ----------
$235,549 $193,763 $ 41,786 22%
========= ========= ==========
Income (loss) before provision for income taxes:
Golf clubs $ 16,689 $ 6,570 $ 10,119 154%
Golf balls (2,757) (8,717) 5,960 68%
Reconciling items (2) (11,833) (15,844) 4,011 25%
--------- --------- ----------
$ 2,099 $(17,991) $ 20,090 112%
========= ========= ==========
----------------------------------------------
Nine Months Ended
September 30, Growth/(Decline)
-------------------- -------------------------
2007 2006 Dollars Percent
---------- --------- -------------------------
Net sales:
Golf clubs $775,468 $670,490 $104,978 16%
Golf balls 174,705 167,533 7,172 4%
---------- --------- ---------
$950,173 $838,023 $112,150 13%
========== ========= =========
Income (loss) before provision
for income taxes:
Golf clubs $156,213 $101,931 $ 54,282 53%
Golf balls 8,244 (1,781) 10,025 563%
Reconciling items
(2) (47,610) (44,010) (3,600) -8%
---------- --------- ---------
$116,847 $ 56,140 $ 60,707 108%
========== ========= =========
(2) Represents corporate general and administrative expenses and
other income (expense) not utilized by management in determining
segment profitability.
Callaway Golf Company
Supplemental Financial Information
(In thousands, except per share data)
(Unaudited)
Quarter Ended September 30,
---------------------------------
2007
---------------------------------
Pro Forma Gross Margin Total as
Callaway Improvement Reported
Golf Initiatives
---------------------------------
Net sales $235,549 $ - $235,549
Gross profit 98,125 (4,119) 94,006
% of sales 42% n/a 40%
Operating expenses 93,130 - 93,130
--------- ----------- ---------
Income (loss) from operations 4,995 (4,119) 876
Other expense, net 1,223 - 1,223
--------- ----------- ---------
Income (loss) before income taxes 6,218 (4,119) 2,099
Income tax provision (benefit) 2,429 (1,599) 830
--------- ----------- ---------
Net income (loss) $ 3,789 $(2,520) $ 1,269
========= =========== =========
Diluted earnings (loss) per share: $ 0.06 $ (0.04) $ 0.02
Weighted-average shares
outstanding: 67,639 67,639 67,639
Quarter Ended September 30,
--------------------------------------------------
2006
--------------------------------------------------
Pro Forma Gross Integra- Restruc- Total
Callaway Margin tion turing as
Golf Improvement Charges Charges Reported
Initiatives
--------------------------------------------------
Net sales $193,763 $ - $ - $ - $193,763
Gross profit 69,295 (349) (1,195) (46) 67,705
% of sales 36% - n/a n/a 35%
Operating expenses 83,564 - 79 995 84,638
---------- ----------- -------- -------- ---------
Income (loss) from
operations (14,269) (349) (1,274) (1,041) (16,933)
Other expense, net (1,058) - - (1,058)
---------- ----------- -------- -------- ---------
Income (loss) before
income taxes (15,327) (349) (1,274) (1,041) (17,991)
Income tax provision
(benefit) (5,176) (118) (430) (351) (6,075)
---------- ----------- -------- -------- ---------
Net income (loss) $(10,151) $ (231) $ (844) $ (690) $(11,916)
========== =========== ======== ======== =========
Diluted earnings
(loss) per share: $ (0.16) $ (0.00) $ (0.01) $ (0.01) $ (0.18)
Weighted-average shares
outstanding: 67,000 67,000 67,000 67,000 67,000
Nine Months Ended September 30,
---------------------------------
2007
---------------------------------
Pro Forma Gross Margin Total as
Callaway Improvement Reported
Golf Initiatives
---------------------------------
Net sales $950,173 $ - $950,173
Gross profit 437,327 (7,475) 429,852
% of sales 46% n/a 45%
Operating expenses 310,999 - 310,999
--------- ----------- ---------
Income (loss) from operations 126,328 (7,475) 118,853
Other expense, net (2,006) - (2,006)
--------- ----------- ---------
Income (loss) before income taxes 124,322 (7,475) 116,847
Income tax provision (benefit) 49,015 (2,912) 46,103
--------- ----------- ---------
Net income (loss) $ 75,307 $(4,563) $ 70,744
========= =========== =========
Diluted earnings (loss) per share: $ 1.10 $ (0.07) $ 1.03
Weighted-average shares
outstanding: 68,407 68,407 68,407
Nine Months Ended September 30,
--------------------------------------------------
2006
--------------------------------------------------
Pro Forma Gross Integra- Restruc- Total
Callaway Margin tion turing as
Golf Improvement Charges Charges Reported
Initiatives
--------------------------------------------------
Net sales $838,023 $ - $ - $838,023
Gross profit 343,174 (349) (3,366) (156) 339,303
% of sales 41% n/a n/a 40%
Operating expenses 279,017 672 1,445 281,134
---------- ----------- -------- -------- ---------
Income (loss) from
operations 64,157 (349) (4,038) (1,601) 58,169
Other expense, net (2,029) - - (2,029)
---------- ----------- -------- -------- ---------
Income (loss) before
income taxes 62,128 (349) (4,038) (1,601) 56,140
Income tax provision
(benefit) 24,825 (118) (1,491) (560) 22,656
---------- ----------- -------- -------- ---------
Net income (loss) $ 37,303 $ (231) $(2,547) $(1,041) $ 33,484
========== =========== ======== ======== =========
Diluted earnings
(loss) per share: $ 0.54 $ (0.00) $ (0.04) $ (0.01) $ 0.49
Weighted-average shares
outstanding: 68,777 68,777 68,777 68,777 68,777
Earnings Before Interest, Taxes, Depreciation and
Amortization (EBITDA):
2007 Trailing Twelve Months EBITDA
--------------------------------------------
Quarter Ended
--------------------------------------------
December March June September
31, 31, 30, 30,
2006 2007 2007 2007 Total
--------- ------- ------- --------- --------
Net income (loss) $(10,194) $32,836 $36,639 $ 1,269 $ 60,550
Interest expense
(income), net 905 1,677 1,672 29 4,283
Income tax provision
(benefit) (10,948) 21,682 23,591 830 35,155
Depreciation and
amortization expense 8,313 9,009 8,591 9,864 35,777
--------- ------- ------- --------- --------
EBITDA $(11,924) $65,204 $70,493 $11,992 $135,765
========= ======= ======= ========= ========
2006 Trailing Twelve Months EBITDA
-------------------------------------------
Quarter Ended
-------------------------------------------
December March June September
31, 31, 30, 30,
2005 2006 2006 2006 Total
--------- ------- ------- --------- -------
Net income (loss) $(18,664) $22,861 $22,539 $(11,916) $14,820
Interest expense (income),
net (165) 533 1,522 1,132 3,022
Income tax provision
(benefit) (14,361) 13,797 14,934 (6,075) 8,295
Depreciation and
amortization expense 7,318 7,290 7,935 8,736 31,279
--------- ------- ------- --------- -------
EBITDA $(25,872) $44,481 $46,930 $ (8,123) $57,416
========= ======= ======= ========= =======
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