Callaway Golf Company reported net sales of $176 million for the third quarter ended Sept. 30, 2010, a decrease of 8% compared to $191 million for the third quarter of 2009. 


On a currency neutral basis, net sales would have been $172 million, a decrease of 10% compared to the third quarter of 2009. 

 

“Global economic conditions continue to be challenging and the golf industry has not recovered as we had anticipated coming into this year,” commented George Fellows, President and CEO.  “In fact, overall consumer spending on golf equipment in the United States is down approximately 3% compared to 2009, which was down approximately 14% compared to 2008. Although some sectors of the economy have begun to recover, it appears the golf industry recovery will be delayed into 2011, which is consistent with the golf industry having felt the initial effects of the economic crisis later than other sectors.  Despite the decline in the golf industry this year, our worldwide golf equipment sales and market share on a year to date basis are flat to up slightly without the significant sales promotional activity that occurred in 2009.”

“Our third quarter 2010 net sales reflect these unfavorable conditions, particularly in the United States and Europe, two of our largest markets, and also reflect our reduction in sales promotion activity, which was higher in the third quarter of 2009,” continued Mr. Fellows. “The third quarter net sales also reflect the quarter to quarter fluctuations inherent in our business as the timing of sales and sales promotions between quarters can have a significant effect on the results of a particular quarter.”


“Our third quarter 2010 results were also affected by a temporary decrease in gross margins due to an increase in charges over 2009 related to the Company’s global operations strategy, negative fixed cost absorption resulting from lower volumes, and some non-cash inventory related charges,” explained Mr. Fellows. “On a year to date basis, however, where the timing of sales and charges tends to have less effect, both our sales and gross margins have improved compared to 2009 due to improved foreign currency rates, higher overall average selling prices, and positive results from our accessories and apparel businesses and emerging markets in China, India and Southeast Asia, as well as the benefits from our global operations strategy.”


Gross profit for Golfsmith was $49 million (28% of net sales) compared to gross profit of $60 million (31% of net sales) in the third quarter of 2009.


Operating expenses were $87 million (50% of net sales) compared to $85 million (45% of net sales) for the same period in 2009.  

The company reported a loss of 33 cents per share (on 64.0 million shares outstanding), compared to a loss of 25 cents per share (on 63.2 million shares outstanding) in 2009.  The loss per share for the third quarter includes after-tax charges for the company’s global operations strategy of 5 cents per share in 2010 and 1 penny per share in 2009. 

 

“When the economic crisis began in 2008, we made the decision to maintain a balanced approach to our business, balancing cost management of our base business while at the same time continuing to invest in growth opportunities and our global operations strategy,” explained Mr. Fellows. “Since that time, we have reduced the operating costs of our base business sufficiently to fund these investments, and we are beginning to see the benefits of these investments as gross margins have improved over 2009, our apparel and accessories business has increased, and our emerging markets have grown. While we still intend to invest prudently in these opportunities and initiatives, given the uncertainty as to when the golf industry will recover, we are taking additional action to realign our base business costs to be profitable next year regardless of the degree to which economic and industry conditions improve in 2011.”

“As we look forward, we believe there are some encouraging signs for 2011,” continued Mr. Fellows. “Even without any improvement in economic and industry conditions, we expect additional growth in our emerging markets and in our accessories and apparel businesses and expect that our global operations strategy initiatives will continue to yield significant benefits.  Additionally, based on initial customer feedback, we believe that we have a very strong product line for 2011, strengthened by the strategic partnership recently announced with Lamborghini on forged composite technologies, an important element of our new drivers planned for introduction during the fourth quarter and early next year. We believe that these factors, together with the actions we are taking to realign our costs, will allow us once again to drive long-term shareholder value. We will provide a more detailed view of 2011 on our conference call in January.” 


Business Outlook


The company reiterated its guidance that full year 2010 gross margins and pro forma earnings are expected to be better than in 2009. Pro forma earnings exclude charges related to the Company’s global operations strategy.  These charges are estimated to be $0.17 per share for 2010 and were $0.06 per share for 2009.  The Company also refined its prior guidance on full year operating expenses from flat to an increase of approximately 2% over 2009 depending upon foreign currency rates.  Because of the uncertain economic environment and the lack of visibility into sales, the Company did not provide more specific financial guidance for the balance of the year.  The Company did note, however, that sales from new product introductions in the fourth quarter are expected to be less than in the fourth quarter of 2009 as fewer new products will be released during the fourth quarter of 2010.


For the first nine months, the company reported:


•Net sales of $782 million, an increase of 2% compared to $765 million for the same period last year. On a currency neutral basis, net sales would have been $758 million, a decrease of 1% compared to the first nine months of 2009.
•Gross profit of $310 million (40% of net sales) compared to $286 million (37% of net sales) for 2009.
•Operating expenses of $294 million (38% of net sales) compared to $287 million (38% of net sales) for 2009. 
•Earnings per share of $0.09 (on 64.3 million shares outstanding) compared to a loss per share of 4 cents (on 63.1 million shares outstanding) for 2009.  Results for the period include after-tax charges for the company’s global operations strategy of 7 cents per share in 2010 and 4 cents per share in 2009. 







































































































































































































































Callaway Golf Company

Statements of Operations

(In thousands, except per share data)

(Unaudited)



















Quarter Ended





September 30,





2010

2009








Net sales

$ 175,644

$ 190,864

Cost of sales

126,593

131,287

Gross profit

49,051

59,577

Operating expenses:





Selling



56,307

56,972


General and administrative



21,447

20,452


Research and development



9,265

7,727



Total operating expenses

87,019

85,151

Loss from operations

(37,968)

(25,574)

Other income (expense), net

(2,449)

837

Loss before income taxes



(40,417)

(24,737)

Income tax benefit

(22,100)

(11,308)

Net loss

(18,317)

(13,429)

Dividends on convertible preferred stock

2,625

2,625

Net loss allocable to common shareholders

$ (20,942)

$ (16,054)








Earnings (loss) per common share:





Basic

($0.33)

($0.25)


Diluted

($0.33)

($0.25)

Weighted-average common shares outstanding:





Basic

63,989

63,240


Diluted

63,989

63,240