Adams Golf rode the strength of its Irons division during the first quarter to overcome weak sales in the driver segment. However, shrinking margins caused the top-line gains to run astray before reaching the bottom-line, where the company posted a mid-single-digits decrease. Another worry for Adams Golf is pending litigation involving a patent infringement claim brought against it in March by TaylorMade.

Adams Golf attributed the sales gain to the “successful product introductions of the Idea A2 and A2 OS Irons.” The overall decrease in driver net revenue resulted from lower sales as models progress farther in their life cycle. The increase in irons sales was primarily generated from the net sales of Idea A2 and A2 OS irons and integrated iron sets.

International increased to 16.8% of total net sales, from 13.2% of total net sales in the year-ago quarter. Excluding Canada, international sales increased to 6.9% of sales compared to 3.0% last year.

The decrease in gross margin as a percentage of total net sales was primarily due to changes in the product mix, coupled with decreases in fairway wood net pricing, and increases in some component pricing and other inventory-related costs.

In March, the company was notifiied of a lawsuit filed by TaylorMade, but had yet to be formally served by April 25. The lawsuit alleges that Adams Golf violated one design and two utility patents held by TaylorMade in the manufacture of recent drivers. The design patent relates to ornamental aspects of the skirt and sole of certain TaylorMade clubs. The utility patents relate to shallow grooves in a circular pattern on the face of certain TaylorMade metal woods and a metal wood construction method attaching a composite crown to a club head body containing multiple ledges, a surface veil, and a face plate. ADGO is reviewing the allegations, but does not believe it has infringed any valid claims of TaylorMade and intends to “strongly defend its technology and market positions.”

Adams Golf, Inc.
First Quarter Results
(in $ mm) 2006 2005 Change
Total Sales $22.3 $16.8 32.5%
U.S. Sales $18.5 $14.6 27.1%
International $3.7 $2.2 68.5%
Drivers $2.4 $5.0 -52.0%
Irons $13.8 $5.7 142%
Fairway  $5.9 $5.2 13.5%
GM % 46.9% 52.7% -200 bps
Net Income $3.3  $3.5  -4.0%
Diluted EPS 12¢ 13¢ -7.7%
Inventory* $17.2  $16.2  +6.5%
Accts Rec* $25.2  $14.2  +77.5%
* at quarter-end