First Quarter Highlights
- First quarter 2017 net sales of $309 million, a 13 percent increase compared to the first quarter of 2016.
- First quarter 2017 non-GAAP pre-tax income (which excludes non-recurring OGIO transaction and transition expenses) of $43 million, an increase of 8 percent compared to the first quarter of 2016. On a GAAP basis, pre-tax income was $39 million for the first quarter of 2017.
- Full year 2017 sales guidance increased by $45 million – $50 million to $960 million – $980 million, compared to prior guidance of $910 million – $935 million.
- Full year 2017 non-GAAP earnings per share guidance increased 10 centsper share to 31 – 37 cents a share, compared to prior guidance of 21 – 27 cents. The non-GAAP guidance excludes the non-recurring OGIO expenses.
In the first quarter of 2017, as compared to the same period in 2016, the company’s net sales increased $35 million (13 percent) to $309 million and non-GAAP pre-tax income (which excludes $4 million in non-recurring transaction and transition costs related to the OGIO acquisition) increased $3 million (8 percent) to $43 million. These results reflect the company’s continued brand momentum and continued execution of its strategy to grow market share in its core golf equipment business and in tangential areas. As a result of this better than expected first quarter, the company increased its full year sales guidance by $45 million – $50 million to $960 million – $980 million as compared to its prior guidance of $910 million – $935 million. The company also increased its full year non-GAAP earnings per share guidance by 10 cents to 31 to 37 cents compared to prior guidance of 21 – 27 cents. The full year non-GAAP guidance excludes an estimated $7 million of non-recurring OGIO transaction and transition expenses.
“It has been a very strong start to 2017,” commented Chip Brewer, president and chief executive officer of Callaway Golf Company. “Sales of our new products, including the EPIC driver and new Chrome Soft X golf ball, have exceeded our expectations. Business around the globe remains very strong with all major regions reporting sales growth and market share gains. And our new business ventures, namely the apparel joint venture in Japan and the recently acquired OGIO business, are performing ahead of plan. Furthermore, our liquidity and financial flexibility remain strong even with the cash outlay earlier this year for the purchase of OGIO. Overall, I am very pleased with how our business is performing and am cautiously optimistic for the balance of the year.”
GAAP And Non-GAAP Results
In addition to the company’s results prepared in accordance with GAAP, the company provided information on a non-GAAP basis. The purpose of this non-GAAP presentation is to provide additional information to investors regarding the underlying performance of the company’s business without these non-recurring items and on a more comparable tax basis.
This non-GAAP information presents the company’s financial results for the first quarter of 2017 excluding the non-recurring transaction and transition expenses related to the OGIO acquisition. In addition, because of the company’s prior deferred tax valuation allowance, the company did not recognize U.S. income tax during the first quarter of 2016 and its income tax provision and after-tax income and earnings are therefore not calculated on the same basis as in the first quarter of 2017. In order to make 2016 more comparable to 2017, the company has presented 2016 results on a non-GAAP basis by applying an assumed statutory income tax rate of 38.5 percent as compared to the actual first quarter 2016 effective tax rate of 3.5 percent. The valuation allowance was reversed in the fourth quarter of 2016. Excluding the reversal, the company’s full year 2016 effective tax rate was 41.1 percent.
The manner in which this non-GAAP information is derived is discussed in more detail toward the end of this release, and the company has provided in the tables to this release a reconciliation of the non-GAAP information to the most directly comparable GAAP information.
Summary Of First Quarter 2017 Financial Results
For the first quarter of 2017, the company’s net sales increased $35 million to $309 million compared to $274 million for the same period in 2016. The increase in net sales is attributable to the strength of the company’s 2017 product line, including an exceptionally strong launch of the EPIC driver and fairway woods as well as increased golf ball sales, including the new Chrome Soft X ball, which has also exceeded expectations. In addition, net sales of gear and accessories increased significantly as a result of the company’s acquisition of OGIO in the first quarter of 2017 and the new apparel joint venture in Japan, which was formed in the third quarter of 2016. Net sales increased in all major regions and reflected market share gains in those regions.
For the first quarter of 2017, the company’s gross margin of 47.8 percent was better than the company expected as a result of better pricing and mix of products sold. The 50 basis point decrease compared to 2016 gross margins of 48.3 percent reflects the different economics of the apparel joint venture and the OGIO business, which have lower gross margins and lower relative operating expenses (with overall higher operating margins) as compared to the company’s golf equipment business.
Operating expenses increased $17 million to $104 million in the first quarter of 2017 compared to $87 million for the same period in 2016. This increase is primarily due to the addition in 2017 of operating expenses from the Japan joint venture and the consolidation of OGIO, as well as $4 million in non-recurring OGIO transaction and transition expenses.
First quarter 2017 earnings per share was 27 cents, compared to 40 cents for the first quarter of 2016. The decrease on a GAAP basis was caused by the $4 million (3 cents per share) OGIO transaction and transition expenses in the first quarter of 2017 and the difference in effective tax rates. In the first quarter of 2016, the company did not recognize U.S. income taxes due to the company’s deferred tax valuation allowance that existed at that time. The valuation allowance was reversed in the fourth quarter of 2016 and the company therefore recognized U.S. income taxes in the first quarter of 2017. On a non-GAAP basis, which excludes the impact of the non-recurring OGIO transaction and transition expenses and applies a statutory tax rate of 38.5 percent to 2016 pre-tax income as discussed above, the company would have reported earnings per share for the first quarter of 2017 of 30 cents, compared to earnings per share of 26 cents for the first quarter of 2016.
Business Outlook For 2017
Basis For 2017 Non-GAAP Estimates
The company’s 2017 non-GAAP estimates exclude non-recurring transaction and transition expenses related to the OGIO acquisition, which are estimated to be approximately $7 million for full year 2017. The amount incurred in the first quarter of 2017 was $4 million, which was in line with the company’s expectations.
Basis For 2016 Pro Forma Results
In order to make the 2017 guidance more comparable to 2016, as discussed above, the company has presented 2016 results on a pro forma basis by excluding from 2016 the prior 11 cents per share gain from the sale of a small portion of the company’s Topgolf investment. Furthermore, the company excluded from full year 2016 the $1.63 per share non-recurring benefit from the reversal of the deferred tax valuation allowance and calculated 2016 pro forma second quarter earnings based upon an assumed statutory tax rate of 38.5 percent.
Full Year 2017
Given the company’s financial performance during the first quarter of 2017, the company is increasing its full year financial guidance as follows:
The company’s revised 2017 net sales estimate of $960 million – $980 million represents an increase of $45 million – $50 million over its prior estimate. This would result in net sales growth of 10 percent to 13 percent in 2017 compared to 2016. Incremental sales growth versus previous estimates is expected to be driven by market share gains related to the company’s 2017 product line, including the EPIC driver and fairway woods, and incremental sales from the OGIO business and the Japan apparel joint venture. In addition, the company is currently estimating that year-over-year changes in foreign currency exchange rates will have less of a negative impact than originally estimated. The company currently estimates that changes in foreign currency rates will adversely affect projected 2017 net sales by approximately $16 million as compared to its prior estimate of $28 million.
The company currently estimates that its 2017 non-GAAP gross margin will improve 100 basis points from the prior estimate. This increase is expected to be driven by continued favorable pricing, mix and operational efficiencies.
The company estimates that its 2017 non-GAAP operating expenses will increase $16 million compared to prior estimates. This increase in operating expenses reflects increased variable costs related to higher sales and performance, the impact of changes in foreign currency exchange rates, as well as targeted investments in the core business.
The company increased its non-GAAP earnings per share guidance by 10 cents to 31 – 37 cents primarily due to the projected increase in net sales and improved gross margins. The company’s 2017 earnings per share estimates assume a tax rate of approximately 36 percent and a base of 96 million shares.
Second Quarter 2017
The company currently estimates the following results for the second quarter of 2017.
The company expects sales growth of 18 percent – 22 percent in the second quarter of 2017 compared to the same period in 2016.
This projected sales growth reflects anticipated growth in the core business as well as growth from the Japan apparel joint venture and the OGIO business. It is anticipated that this growth will be partially offset by weaker foreign currencies in the second quarter of 2017 compared to the same period in 2016.
The company’s non-GAAP earnings per share for the second quarter of 2017 is estimated to increase 16 – 19 cents per share to 28 – 31 cents compared to 12 cents for the second quarter of 2016. This projected increase is due to higher sales and stronger gross margins. The company’s 2017 second quarter earnings per share estimates assume approximately 96 million shares, which is consistent with the second quarter of 2016.
Photo courtesy Callaway Golf
