Callaway Golf Company Announces Third Quarter 2016 Financial Results, Including A 6.9% Increase In Net Sales; Continues To Realize Benefits From Operational Improvements; And Increases 2016 Full Year Earnings Guidance

November 3, 2016 at 4:17 PM EDT
- Third quarter 2016 net sales increased 6.9% to $188 million, compared to $176 million for the same period in 2015.
- Cash provided by operating activities for the first nine months of 2016 increased by $57 million (over 200%) to $86 million compared to $28 million for the same period in 2015.
- Full year 2016 earnings per share guidance increased to $0.50 - $0.54, compared to prior guidance of $0.40 - $0.50 and compared to $0.17 in 2015. The 2016 estimate includes an $0.18 per share gain related to the sale of a portion of the Company's Topgolf investment in the second quarter of 2016.

CARLSBAD, Calif., Nov. 3, 2016 /PRNewswire/ -- Callaway Golf Company (NYSE:ELY) today announced its third quarter 2016 financial results, including a 6.9% increase in net sales, continued benefits from its operational improvements and a net loss of $0.06 per share.  The Company generally reports a net loss in the third quarter due to the seasonality of its business but the Company had expected a net loss of $0.15 - $0.10 as a result of a planned increase in operating expenses in the third quarter of 2016 compared to 2015.  The increased sales, however, offset the increased expenses.  These results reflect the Company's continued brand strength and additional hard goods market share gains, as well as the commencement of the Company's joint venture in Japan in the third quarter of 2016.  As discussed below, the third quarter financial results allowed the Company to narrow its 2016 full year net sales guidance to the high end of the range to $870 - $880 million and increase its 2016 full year earnings guidance to $0.50 - $0.54.

"We were pleased to see our continued momentum in the marketplace in the third quarter," commented Chip Brewer, President and Chief Executive Officer of Callaway Golf Company. "Despite industry headwinds and softer than expected market conditions, we grew our net sales in the third quarter. We also continued to realize benefits from the comprehensive strategic initiatives we undertook during the last three years, including working capital improvements and the extension of product life cycles, with gross margins improving 110 basis points year to date and cash generated from operating activities increasing over 200% to $86 million for the first nine months of 2016 compared to the same period in 2015."

Mr. Brewer continued, "I am confident we are on track to create long-term shareholder value through our improved core business as well as future growth from strategic ventures within golf or in areas tangential to the golf equipment business. For instance, during the third quarter, we acquired Toulon Design and hired its founder, Sean Toulon, to run our putter business. I couldn't be more excited about the opportunity to expand the Odyssey brand as we extend our reach further into the super-premium putter category through Toulon Design by Odyssey. We are also re-investing in the future of our golf ball business via further investment in R&D and today's announced hiring of Rock Ishii, former Sr. Director of Golf Ball Innovation at Nike. Looking forward, we will continue to opportunistically seek new strategic growth platforms and strategic high return investments in our core business. We will also continue to strengthen our core business through disciplined operational execution and the introduction of technologically advanced products.  We are very excited about our product line for 2017."

Summary of Third Quarter 2016 Financial Results

For the third quarter of 2016, Callaway announced the following GAAP financial results, as compared to the same period in 2015 (in millions, except eps):

GAAP RESULTS


Third Quarter

2016

Third Quarter

2015

Change

Net Sales

$188

$176

$12

Gross Profit/
% of Sales

$79

42.0%

$78

44.1%

$1

(210) b.p.

Operating Expenses

$84

$77

$7

Pre-Tax Loss

($4)

($2)

($2)

EPS

($0.06)

($0.04)

($0.02)

Despite softer than expected market conditions, the Company's 2016 third quarter net sales increased $12 million to $188 million, as compared to $176 million in the third quarter of 2015. The higher sales were driven primarily by increased sales in the irons and golf ball categories, sales from the Company's new joint venture in Japan, and a net overall positive $5.6 million impact from changes in foreign currency rates.  The increase in net sales helped offset the 210 basis point decrease in gross margins and the $7 million year-over-year increase in operating expenses. The decrease in gross margin was primarily attributable to product launch timing resulting in sales of higher margin products for the third quarter of 2015 as compared to 2016. Full year 2016 gross margins are still expected to increase over 200 basis points compared to 2015.  The increase in operating expenses in the third quarter of 2016 was due to incremental expenses related to the Japan joint venture, a planned shift in the timing of marketing expenses, and an increase in bad debt expense.         

The Company's diluted loss per share for the third quarter of 2016 was $0.06, which was significantly better than the Company's expected loss of $0.15 - $0.10.  The diluted loss per share for the third quarter of 2015 was $0.04.  As a result of the Company's third quarter financial performance, the Company increased its full year earnings guidance as discussed below.   

Summary of First Nine Months 2016 Financial Results

For the first nine months of 2016, Callaway announced the following GAAP financial results, as compared to the same period in 2015 (in millions, except eps):

GAAP RESULTS


Q3 YTD

2016

Q3 YTD

2015

Change

Net Sales

$707

$690

$17

Gross Profit/
% of Sales

$322

45.5%

$307

44.4%

$15

110 b.p.

Operating Expenses

$261

$250

$11

Pre-Tax Income

$71

$50

$21

EPS

$0.70

$0.53

$0.17

The Company's $707 million in net sales for the first nine months of 2016 increased by 2.5% compared to the first nine months of 2015. Similar to the third quarter, this increase was driven primarily by increased sales in the irons and golf ball categories, sales from the Company's new joint venture in Japan, and a net overall positive $5.6 million impact from changes in foreign currency rates.  This increase in net sales, together with a 110 basis point improvement in gross margin, more than offset the $11 million increase in operating expenses. The increase in operating expenses was primarily attributable to a planned increase in marketing expense, an increase in bad debt expense, and incremental expense related to the new Japan joint venture.

This improved operational performance, together with an $0.18 per share gain on the sale of a small portion of the Company's Topgolf investment, resulted in a significant improvement in earnings in 2016 on a year to date basis.  More specifically, diluted earnings per share for the first nine months of 2016 increased by 32% to $0.70 from $0.53 in the first nine months of 2015.  In addition, including the $23 million in proceeds from the sale of the Topgolf investment, total cash and cash equivalents increased by $75 million for the first nine months of 2016, and as of September 30, 2016, the Company had no debt.

Business Outlook for 2016

Given the Company's financial performance during the third quarter, the Company is revising and increasing its overall guidance as follows:


Updated 2016

GAAP Estimate

Previous 2016

GAAP Estimate

2015 Actual

Net Sales

$870 - $880 million

$855 - $880 million

$844 million

Gross Margins

44.6%

44.5%

42.4%

Operating Expenses

$345 million

$348 million

$331 million

Pre-Tax Income

$54 - $58 million

$45 - $55 million

$20 million

Earnings Per Share

$0.50 - $0.54

$0.40 - $0.50

$0.17

The Company's updated guidance is based on current foreign currency exchange rates.  If the foreign currency rates were to weaken significantly against the U.S. Dollar during the fourth quarter of the year, the Company's financial results would be adversely affected. The Company's pre-tax income and earnings per share estimates for the full year 2016 include the $18 million gain ($0.18 per share) on the second quarter sale of a portion of its Topgolf investment. The Company's estimate for its full year 2016 earnings per share assumes a base of 95 million shares as compared to 85 million shares in 2015. The increased share count in 2016 is primarily the result of the conversion of the Company's convertible debt into equity in 2015. This estimate includes taxes of approximately $6 million and does not include any effect from the potential reversal of the Company's deferred tax asset valuation allowance as discussed below.

Conference Call and Webcast

The Company will be holding a conference call today at 2:00 p.m. PDT to discuss the Company's financial results, outlook and business. 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 10, 2016. The replay may be accessed through the Internet at www.callawaygolf.com.

Deferred Tax Asset Valuation Allowance

As of September 30, 2016, the Company had a valuation allowance against its U.S. deferred tax assets in the amount of $164.6 million. The Company evaluates its deferred tax assets each reporting period to determine the likelihood of the Company being able to utilize the deferred tax assets prior to their expiration and the Company will conduct such evaluation again in the fourth quarter of 2016. If following this review the Company determines that it is more likely than not that the Company will be able to utilize the deferred tax assets, the Company would reverse all or a significant portion of the valuation allowance. If this were to occur during the fourth quarter of 2016, the Company would realize a significant one-time, non-cash tax benefit in the period of reversal and the Company's effective U.S. income tax rate would be closer to the statutory rate and the new rate would apply retroactively to 2016 results and going forward.   

Non-GAAP Information

The GAAP results contained in this press release and the financial statement schedules attached to this press release have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). To supplement the GAAP results, the Company has provided certain non-GAAP financial information about its results (i) on a constant currency basis and (ii) excluding interest, taxes, depreciation and amortization expenses, and the gain on the sale of a portion of the  Topgolf investment.

Constant Currency Basis. The Company provided certain information regarding the Company's financial results or projected financial results on a "constant currency basis." This information estimates the impact of changes in foreign currency rates on the translation of the Company's current or projected future period financial results as compared to the applicable comparable period.  This impact is derived by taking the current or projected local currency results and translating them into U.S. Dollars based upon the foreign currency exchange rates for the applicable comparable period. This calculation also excludes foreign currency net gains and losses recognized in other income/expense from the translation of transactions denominated in foreign currencies and foreign currency gains and losses recognized from the Company's hedging contracts. It does not include any other effect of changes in foreign currency rates on the Company's results or business.  

In addition, the Company has included in the schedules to this release a reconciliation of certain non-GAAP information to the most directly correlated GAAP information. The non-GAAP information presented in this release and related schedules should not be considered in isolation or as a substitute for any measure derived in accordance with GAAP. The non-GAAP information may also be inconsistent with the manner in which similar measures are derived or used by other companies.  Management uses such non-GAAP information for financial and operational decision-making purposes and as a means to evaluate period over period comparisons and in forecasting the Company's business going forward. Management believes that the presentation of such non-GAAP information, when considered in conjunction with the most directly comparable GAAP information, provides additional useful comparative information for investors in their assessment of the underlying performance of the Company's business without regard to these items.

Forward-Looking Statements

Statements used in this press release that relate to future plans, events, financial results, performance or prospects, including statements relating to the estimated 2016 sales, gross margins, operating expenses, pre-tax income, taxes, and earnings per share (or related share count), as well as the Company's momentum, success of future products, including the 2017 product line, growth opportunities, the investment in corporate or business development opportunities, future market conditions, the creation of long-term shareholder value, and the potential reversal of the Company's deferred tax asset valuation allowance are forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. These statements are based upon current information and expectations. Accurately estimating the forward-looking statements is based upon various risks and unknowns including consumer acceptance of and demand for the Company's products; the level of promotional activity in the marketplace; unfavorable weather conditions; future consumer discretionary purchasing activity, which can be significantly adversely affected by unfavorable economic or market conditions; future retailer purchasing activity, which can be significantly negatively affected by adverse industry conditions and overall retail inventory levels; and future changes in foreign currency exchange rates and the degree of effectiveness of the Company's hedging programs. Actual results may differ materially from those estimated or anticipated as a result of these risks and unknowns or other risks and uncertainties, including continued compliance with the terms of the Company's credit facilities; delays, difficulties or increased costs in the supply of components or commodities needed to manufacture the Company's products or in manufacturing the Company's products; 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, the golf industry, and the Company's business, see the Company's Annual Report on Form 10-K for the year ended December 31, 2015 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 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.

About Callaway Golf
Through an unwavering commitment to innovation, Callaway Golf Company (NYSE: ELY) creates products 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® and Odyssey® brands worldwide. For more information please visit www.callawaygolf.com.

Contacts: 

Robert Julian


Patrick Burke


(760) 931-1771

 

CALLAWAY GOLF COMPANY

CONSOLIDATED CONDENSED BALANCE SHEETS

(Unaudited)

(In thousands)






September 30,
2016


December 31,
2015

ASSETS












Current assets:






Cash and cash equivalents


$

124,628




$

49,801


Accounts receivable, net


158,262




115,607


Inventories


157,002




208,883


Other current assets


12,063




17,196


Total current assets


451,955




391,487








Property, plant and equipment, net


55,775




55,808


Intangible assets, net


114,978




115,282


Investment in golf-related ventures


49,108




53,315


Other assets


16,321




15,332


Total assets


$

688,137




$

631,224








LIABILITIES AND SHAREHOLDERS' EQUITY












Current liabilities:






Accounts payable and accrued expenses


$

118,264




$

122,620


Accrued employee compensation and benefits


30,280




33,518


Asset-based credit facilities





14,969


Accrued warranty expense


5,515




5,706


Income tax liability


1,747




1,823


Total current liabilities


155,806




178,636








Long-term liabilities


39,439




39,643


Total Callaway Golf Company shareholders' equity


483,303




412,945


Non-controlling interest in consolidated entity


9,589





Total liabilities and shareholders' equity


$

688,137




$

631,224


 

CALLAWAY GOLF COMPANY

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share data)




Three Months Ended
September 30,


2016


2015

Net sales

$

187,850



$

175,780


Cost of sales

108,975



98,178


Gross profit

78,875



77,602


Operating expenses:




Selling

55,869



52,390


General and administrative

19,851



15,772


Research and development

8,420



8,673


Total operating expenses

84,140



76,835


Income (loss) from operations

(5,265)



767


Other income (expense), net

820



(2,837)


Loss before income taxes

(4,445)



(2,070)


Income tax provision

1,294



1,547


Net loss

(5,739)



(3,617)


Less: Net income attributable to non-controlling interests

127




Net loss attributable to Callaway Golf Company

$

(5,866)



$

(3,617)






Loss per common share:




Basic

$

(0.06)



$

(0.04)


Diluted

$

(0.06)



$

(0.04)


Weighted-average common shares outstanding:




Basic

94,081



83,875


Diluted

94,081



83,875







Nine Months Ended
September 30,


2016


2015

Net sales

$

707,497



$

690,463


Cost of sales

385,597



383,898


Gross profit

321,900



306,565


Operating expenses:




Selling

183,543



178,675


General and administrative

52,484



47,407


Research and development

24,942



24,192


Total operating expenses

260,969



250,274


Income from operations

60,931



56,291


Gain on sale of golf-related ventures

17,662




Other expense, net

(7,205)



(6,269)


Income before income taxes

71,388



50,022


Income tax provision

4,632



5,002


Net income

66,756



45,020


Less: Net income attributable to non-controlling interests

127




Net income attributable to Callaway Golf Company

$

66,629



$

45,020






Earnings per common share:




Basic

$

0.71



$

0.56


Diluted

$

0.70



$

0.53


Weighted-average common shares outstanding:




Basic

94,021



80,030


Diluted

95,687



94,614


 

CALLAWAY GOLF COMPANY

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOW

(Unaudited)

(In thousands)




Nine Months Ended
September 30,


2016


2015

Cash flows from operating activities:




Net income

$

66,629



$

45,020


Adjustments to reconcile net income to net cash provided by operating activities:




Depreciation and amortization

12,541



13,350


Deferred taxes, net

(370)



(184)


Share-based compensation

6,465



5,535


Gain on disposal of long-lived assets and deferred gain amortization

(117)



(772)


Gain on sale of golf-related investments

(17,662)




Net income attributable to non-controlling interests

127




Debt discount amortization on convertible notes



515


Unrealized loss on foreign currency forward contracts

2,880




Changes in assets and liabilities

15,128



(35,074)


Net cash provided by operating activities

85,621



28,390






Cash flows from investing activities:




Proceeds from sale of investments in golf-related ventures

23,429




Proceeds from note receivable

3,104




Capital expenditures

(12,163)



(8,513)


Investment in golf-related ventures

(1,560)




Proceeds from sale of property, plant and equipment

20



2


Net cash provided by (used in) investing activities

12,830



(8,511)






Cash flows from financing activities:




Repayments of asset-based credit facilities, net

(14,969)



(15,235)


Acquisition of treasury stock

(5,133)



(1,942)


Dividends paid

(2,822)



(2,454)


Exercise of stock options

2,625



5,330


Net cash used in financing activities

(20,299)



(14,301)






Effect of exchange rate changes on cash and cash equivalents

(3,325)



(1,621)


Net increase in cash and cash equivalents

74,827



3,957


Cash and cash equivalents at beginning of period

49,801



37,635


Cash and cash equivalents at end of period

$

124,628



$

41,592


 

CALLAWAY GOLF COMPANY

Consolidated Net Sales and Operating Segment Information

(Unaudited)

(In thousands)










Net Sales by Product Category




Net Sales by Product Category




Three Months Ended
September 30,


Growth/(Decline)




Nine Months Ended
September 30,


Growth/(Decline)




2016


2015


Dollars


Percent




2016


2015


Dollars


Percent



Net sales:




















Woods

$

35,733



$

48,408



$

(12,675)



(26.2)

%




$

172,281



$

187,278



$

(14,997)



(8.0)

%



Irons

50,272



42,459



7,813



18.4

%




172,920



163,272



9,648



5.9

%



Putters

17,290



17,221



69



0.4

%




72,053



72,586



(533)



(0.7)

%



Gear/Accessories/Other

51,915



38,434



13,481



35.1

%




169,191



154,158



15,033



9.8

%



Golf balls

32,640



29,258



3,382



11.6

%




121,052



113,169



7,883



7.0

%




$

187,850



$

175,780



$

12,070



6.9

%




$

707,497



$

690,463



$

17,034



2.5

%












































Net Sales by Region


Net Sales by Region


Three Months Ended
September 30,


Growth/(Decline)


Non-GAAP

Constant

Currency

vs. 2015(1)


Nine Months Ended
September 30,


Growth/(Decline)


Non-GAAP

Constant

Currency

vs. 2015(1)


2016


2015


Dollars


Percent


Percent


2016


2015


Dollars


Percent


Percent

Net Sales




















United States

$

92,943



$

86,980



$

5,963



6.9

%


6.9%


$

380,173



$

377,577



$

2,596



0.7

%


0.7%

Europe

26,347



26,699



(352)



(1.3)

%


6.1%


101,171



103,637



(2,466)



(2.4)

%


1.0%

Japan

41,358



33,623



7,735



23.0

%


2.9%


121,187



103,250



17,937



17.4

%


4.6%

Rest of Asia

15,897



16,855



(958)



(5.7)

%


(8.7)%


51,843



52,340



(497)



(0.9)

%


2.3%

Other foreign countries

11,305



11,623



(318)



(2.7)

%


(5.0)%


53,123



53,659



(536)



(1.0)

%


3.5%


$

187,850



$

175,780



$

12,070



6.9

%


3.7%


$

707,497



$

690,463



$

17,034



2.5

%


1.7%





















(1) Calculated by applying 2015 exchange rates to 2016 reported sales in regions outside the U.S






















Operating Segment Information




Operating Segment Information




Three Months Ended
September 30,


Growth/(Decline)




Nine Months Ended
September 30,


Growth




2016


2015


Dollars


Percent




2016


2015


Dollars


Percent



Net Sales




















Golf Club

$

155,210



$

146,522



$

8,688



5.9

%




$

586,445



$

577,294



$

9,151



1.6

%



Golf Ball

32,640



29,258



3,382



11.6

%




121,052



113,169



7,883



7.0

%




$

187,850



$

175,780



$

12,070



6.9

%




$

707,497



$

690,463



$

17,034



2.5

%























Income (loss) before income taxes:



















Golf clubs

$

2,818



$

6,564



$

(3,746)



(57.1)

%




$

71,166



$

69,555



$

1,611



2.3

%



Golf balls

3,846



3,511



335



9.5

%




23,210



17,559



5,651



32.2

%



Reconciling items(2)

(11,109)



(12,145)



1,036



(8.5)

%




(22,988)



(37,092)



14,104



(38.0)

%




$

(4,445)



$

(2,070)



$

(2,375)



114.7

%




$

71,388



$

50,022



$

21,366



42.7

%























(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 and Non-GAAP Reconciliation

(Unaudited)

(In thousands)








Three Months Ended September 30,



Nine Months Ended September 30,



2016


2015



2016


2016


2016


2015



As Reported


As Reported



As Reported


Topgolf Gain


Pro Forma


As Reported


Net sales

$

187,850



$

175,780




$

707,497



$



$

707,497



$

690,463



Gross profit

78,875



77,602




321,900





321,900



306,565



% of sales

42.0

%


44.1

%



45.5

%




45.5

%


44.4

%


Operating expenses

84,140



76,835




260,969





260,969



250,274



Income (loss) from operations

(5,265)



767




60,931





60,931



56,291



Other income (expense), net

820



(2,837)




10,457



17,662



(7,205)



(6,269)



Income (loss) before income taxes

(4,445)



(2,070)




71,388



17,662



53,726



50,022



Income tax provision

1,294



1,547




4,632





4,632



5,002



Net income (loss)

(5,739)



(3,617)




66,756



17,662



49,094



45,020



Less: Net income attributable to non-controlling interests

127






127





127





Net income (loss) attributable to Callaway Golf Company

$

(5,866)



$

(3,617)




$

66,629



$

17,662



$

48,967



$

45,020

















Diluted earnings per share:

$

(0.06)



$

(0.04)




$

0.70



$

0.18



$

0.52



$

0.53



Weighted-average shares outstanding:

94,081



83,875




95,687



95,687



95,687



94,614


























2016 Trailing Twelve Month Adjusted EBITDA


2015 Trailing Twelve Month Adjusted EBITDA


Quarter Ended


Quarter Ended


December 31,


March 31,


June 30,


September 30,




December 31,


March 31,


June 30,


September 30,




2015


2016


2016


2016


Total


2014


2015


2015


2015


Total

Net income (loss)

$

(30,452)



$

38,390



$

34,105



$

(5,866)



$

36,177



$

(41,539)



$

35,819



$

12,818



$

(3,617)



$

3,481


Interest expense, net

868



621



347



431



2,267



1,764



2,021



1,936



3,520



9,241


Income tax provision

493



1,401



1,937



1,294



5,125



1,980



1,638



1,817



1,547



6,982


Depreciation and amortization expense

4,029



4,157



4,180



4,204



16,570



4,857



4,703



4,454



4,193



18,207


EBITDA

$

(25,062)



$

44,569



$

40,569



$

63



$

60,139



$

(32,938)



$

44,181



$

21,025



$

5,643



$

37,911


Gain on sale of Topgolf investments





17,662





17,662












Adjusted EBITDA

$

(25,062)



$

44,569



$

22,907



$

63



$

42,477



$

(32,938)



$

44,181



$

21,025



$

5,643



$

37,911






















 

 

Callaway Golf Company Logo.

Logo - http://photos.prnewswire.com/prnh/20091203/CGLOGO

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SOURCE Callaway Golf Company