Calloway Golf Co. reported a profit of $123 million, or $1.28 a share, in its fourth quarter, rebounding from a loss of $30 million, or 33 cents, a year ago.

Fourth quarter net sales grew by 7 percent, or 5 percent on a constant currency basis, resulting in full year net sales growth of 3 percent, or 2 percent on a constant currency basis.

The company’s overall market share gains in 2016, together with its new apparel joint venture in Japan, enabled it to achieve this sales growth despite softer than expected market conditions. The company’s overall U.S. hard goods market share increased in 2016 and the company sustained its #1 position in U.S. golf clubs market share. In addition to this sales growth, the company also significantly improved its profitability and cash flows for full year 2016, including a 64 percent increase in income from operations and a 154 percent increase in cash provided by operations.

“2016 was an exciting and pivotal year for Callaway Golf,” commented Chip Brewer, president and chief executive officer of Callaway Golf Company. “We demonstrated continued ability to grow market share and top line revenue throughout the year by introducing engaging product with exceptional performance, while at the same time realizing operational efficiencies and judiciously capitalizing on investment opportunities. Specifically, we demonstrated our commitment to strategically investing in the core business through the acquisition of Toulon Design and the hiring of Rock Ishii, a highly respected innovator in the golf ball category. Furthermore, we executed on our strategy of seeking growth in tangential areas with the start of our new joint venture in Japan and the recent acquisition of OGIO International, Inc., which is expected to provide a platform for future growth in the lifestyle category and create shareholder value for years to come. We accomplished this all while driving market share gains in key hard goods categories like golf balls and augmenting Callaway’s position as the world’s #1 sticks brand.”

Brewer continued, “Looking ahead to 2017, we are encouraged by the early enthusiasm surrounding the EPIC driver with Jailbreak Technology and the newest addition to our Chrome Soft platform, Chrome Soft X. On Tour, we are excited to have signed veteran Michelle Wie just last week and to have added earlier this year other young promising players such as Patrick Rodgers, Mariah Stackhouse and Daniel Berger. We will continue to thoughtfully and strategically invest in professional golfers to represent our brand on the major global golf Tours as we believe that success on Tour translates into success for our shareholders. Beyond the Tour, we will also continue to seek opportunities to invest in our core business during a period where many of our golf equipment competitors either choose to or are forced to cut back. A good example of this will be a significant capital investment at our Chicopee ball manufacturing plant in 2017. The investments are possible due to our exceptional product performance, continued brand momentum and strong balance sheet. As we move into 2017, we look forward to continuing to execute on our strategy and position ourselves to create long-term shareholder value.”

Summary Of Fourth Quarter 2016 Financial Results
The company’s 2016 fourth quarter net sales were $164 million, which represents a 7 percent increase compared to 2015 fourth quarter net sales of $153 million. On a constant currency basis, net sales increased 5 percent for the same period. The increased sales reflect increased sales in both the golf club and golf ball operating segments. Through continued market share gains, strong momentum, particularly in the U.S. green grass channel, and the company’s new joint venture in Japan, the company was able to grow its sales despite overall industry headwinds and softer than expected market conditions in Asia.

In addition to this sales growth, the company’s gross margin also significantly improved. For the fourth quarter of 2016, the company’s gross margin improved 530 basis points to 38.6 percent as compared to 33.3 percent for the comparable period in 2015. The improved gross margin is primarily due to higher average selling prices in the woods, irons and golf ball categories and a decrease in promotional activity driven by longer product lifecycles and lower inventory levels, as well as improved operational efficiencies resulting from the many initiatives the company has implemented over the last several years.

Fourth quarter 2016 earnings per share were $1.28, which includes the $141 million ($1.46 per share) net impact from the reversal of the deferred tax valuation allowance discussed above. Due to the seasonality of the company’s business, the company usually reports a loss in the fourth quarter. On a non-GAAP basis, which excludes the net impact of the reversal of the deferred tax valuation allowance, the company reported a loss per share for the fourth quarter of 2016 of 18 cents, compared to a loss per share of 33 cents for the fourth quarter of 2015. This 45 percent improvement in loss per share was due to increased sales and improved gross margin.

Summary of Full Year 2016 Financial Results
The company’s 2016 full year net sales were $871 million, which represents a 3 percent increase compared to 2015 net sales of $844 million. On a constant currency basis, net sales increased 2 percent for the same period. This increase represents growth in both the golf club and golf ball operating segments, driven primarily by increased sales in the irons, golf balls and accessories and other categories, including sales from the company’s new joint venture in Japan. Overall, net sales were favorably impacted by an increase in average selling prices and market share gains, which offset the industry headwinds and softer than expected market conditions in Asia.

For full year 2016, the company significantly improved its gross margin by 180 basis points due to higher average selling prices in all major hard goods categories and improved operational efficiencies resulting from the many initiatives the company has implemented over the last several years.

The company’s earnings per share for full year 2016 were $1.98, which includes the $141 million ($1.47 per share) net impact from the reversal of the deferred tax valuation allowance discussed above. Excluding this item, the company’s non-GAAP earnings per share were 51 cents compared to 17 cents for 2015. This increase included the $17.7 million (18 cents per share) gain from the 2016 second quarter sale of a small portion of the company’s Topgolf investment. If both the reversal of the valuation allowance and the Topgolf gain were excluded, the company’s non-GAAP earnings per share would have been 33 cents, compared to 17 cents for full year 2015. This 94 percent increase was due to the increased full year sales and gross margin, which more than offset the 3 percent increase in operating expenses. As a result of this performance, the company’s net cash provided by operating activities increased $47 million (154 percent) to $78 million for full year 2016 as compared to $31 million in 2015.

Business Outlook For 2017

OGIO acquisition
The acquisition of OGIO International, Inc., which was completed in January 2017, is expected to contribute to the company approximately $45 million in revenue for full year 2017. After absorbing non-recurring transaction and transition expenses of approximately $7 million, OGIO is expected to be dilutive by approximately 2 cents to Callaway’s 2017 earnings per share, but is expected to be accretive thereafter.

Basis for 2017 Pro Forma Estimates
The company’s 2017 pro forma 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 will be affected by the timing of the various transition initiatives planned for OGIO which is still in the process of being finalized. The pro forma estimates are generally based upon a blend of current foreign currency exchange rates and the exchange rates at which the company entered into hedging transactions. The manner in which the constant currency information is derived is discussed in more detail toward the end of this release. Future changes in the applicable foreign currency exchange rates will affect these pro forma estimates.

Basis for 2017 Pro Forma Constant Currency Estimates
Given the significant effect that changes in foreign currencies are expected to have on the company’s financial results in 2017, the company has provided guidance on a constant currency pro forma basis for 2017 in addition to the pro forma estimates described above (which excludes the OGIO transaction and transition expenses). The 2017 pro forma constant currency estimates are derived by taking the 2017 pro forma estimates and restating them based upon applicable 2016 foreign currency exchange rates.

Basis for 2016 Pro Forma Results
In order to make the 2017 guidance more comparable to 2016 with regard to the underlying performance of the company’s business, the company has recast the 2016 results on a pro forma basis. The 2016 pro forma results exclude (i) the $157 million ($1.63 per share) benefit from the reversal of the deferred tax valuation allowance and (ii) the $10 million (11 cents per share) after-tax Topgolf gain. It should be noted that the manner in which this pro forma information is derived differs from the manner in which the 2016 non-GAAP information provided above is derived. The purpose of this presentation is to make 2016 more comparable to 2017.

The pro forma constant currency net sales growth of 8 percent – 11 percent is expected to be driven by the strength of the company’s 2017 product line, growth from the OGIO acquisition and the full year impact of the Japan apparel joint venture.

The company estimates that its 2017 pro-forma gross margin will improve approximately 120 basis points from last year on a constant currency basis. This increase is expected to be driven by higher pricing, a lower mix of closeout products as well as continued operational improvements.

The company estimates that its 2017 pro forma constant currency operating expenses will increase compared to 2016 due to investment related to the OGIO acquisition, the full year impact of the Japan joint venture, and continued opportunistic investment in the core business and other new strategic investment activities, as well as cost of living and inflationary increases.

The company estimates that its fully diluted pro forma constant currency earnings per share will increase 7 cents to 13 cents from 2016. The company’s 2017 earnings per share estimates assume a base of 96 million shares, which is consistent with 2016.

First Quarter 2017
The anticipated pro forma constant currency sales growth compared to 2016 is expected to be due to continued market share gains and incremental sales resulting from the OGIO acquisition and the Japan joint venture. This sales growth is expected to be partially offset by a reduction in sell-in launch quantities at the beginning of the new golf season resulting from a decrease in retail doors and retailer inventory rationalization. The company anticipates that this reduction in initial sell-in quantities will not significantly impact the company’s full year results.

The company’s pro forma constant currency earnings per share is estimated to decrease compared to the first quarter of 2016 due to the seasonality of OGIO and the Japan joint venture as well as the reduction in sell-in launch quantities discussed above. The company’s 2017 first quarter earnings per share estimates assume approximately 96 million shares as compared to 95 million shares in 2016.

Photo courtesy Callaway Golf