On the surface, Callaway Golf Company’s results for the fourth quarter and full year 2003 looked like the company was heading in the right direction on the top-line and in the wrong direction in the bottom line.

On closer inspection, the realities appear to be the opposite as ELY lost significant ground in their Woods business in posting a sales decline for the fourth quarter and the full year after backing out the recent Top-Flite Golf Company numbers. But they also see an improving bottom-line picture when looking at the base Callaway business.

The company did gain some benefit from the weaker dollar as well, with roughly 44% of total year sales coming from the International business and approximately 41% of the fourth quarter business coming from the non-U.S. business. On a currency-neutral basis, total sales would have risen 14.6% for the quarter including the Top-Flite business and was flat for the year with Top-Flite included.

For the year, the Europe business increased 4.0% to $142 million, but dipped 5.0% in constant dollars. Japan was off 1.0% to $1.1 million, but decreased 9.0% in constant currency while the Rest of Asia was flat to last year’s sales and down 2.0% on a currency-neutral basis.

Looking at the business without Top-Flite’s sales volume or the cost of integration shows a bit different picture as the company laid out a more “apples-to-apples” comparison that also backed out a pre-tax adjustment of $17 million to decrease the company's warranty reserve in the year-ago period.

In this pro forma scenario, Callaway saw sales for 2003 decline 2.5% to $773.5 million while fourth quarter sales fell 9.2% to $111.5 million. Pro forma net income for the stand-alone Callaway business for 2003 would have been $70.5 million, or $1.06 per share, representing a net income gain of 19.7% versus full year 2002. For Q4, the pro forma net loss fro the Callaway business would have increased 62.5% to $9.1 million, or 14 cents a share, from $5.6 million in Q4 2002.

Gross margins for the core Callaway business in 2003 actually picked up 100 basis points to approximately 49% versus 45.3% with the Top-Flite business included.

The company was able to conduct a final analysis of the Top-Flite acquisition and reported they purchased $160.3 million in net assets, including $44.0 million in A/R and $32.8 million in Inventory, for $154.1 million in cash.

ELY generated $119 million in cash flow from operations during the year, which along with cash reserves provided enough cash to fund operations and the acquisition of the Top-Flite assets without taking on any debt.

The company also reiterated its mid-December guidance for 2004 that estimates diluted earnings per share of 82 cents to 97 cents on sales of approximately $1.03 billion. Excluding additional charges associated with the Top-Flite deal, EPS would be in the $1.15 to $1.30 per share range. All integration efforts and charges are expected to be completed before 2005.

ELY sees opportunity in growing market share in Woods, which would have a “positive impact on total margins for the company”, and also sees improved margins as the company completes the integration of its Callaway golf ball operations into the Top-Flite operation.

“We have expanded our Woods line for 2004, covering multiple price points,” said CEO Ron Drapeau said in call with analysts. “These offerings position us to take advantage of the recovering economy, which we hope will continue to gain momentum.”

Analysts are pointing out that ELY is trading “essentially for what it was fetching nine years ago”, which reflects the golf business as a whole that is not growing much, if any at all.

“I have not finalized my forecast, but I think their guidance is challenging,” said Casey Alexander, an analyst with Gilford Securities in a published report. “It's a rough business, and it's going to be a rough business this coming year.”

>>> Well, this does match up with the flat industry forecast for Golf for next year…