Callaway Golf Company announced that during the second quarter and first half of 2011, the company’s financial results were significantly affected by the establishment of a $57 million (approximately 89 cents per share) non-cash deferred tax valuation allowance related to the Company’s U.S. deferred tax assets.
This valuation allowance had a significant effect on the company’s income tax provision and earnings. The company expects to be able to reverse the valuation allowance once the company’s U.S. business returns to sustained profitability.
The company’s 2011 and 2010 financial results also include charges related to its global operations strategy; a non-cash impairment charge related to its TopFlite intangible assets; and charges related to the recently announced restructuring.
Additionally, 2011 results include a gain on the sale of three buildings sold during the first quarter of 2011. Details concerning these charges are included in the attachments to this release. The company’s pro forma financial results exclude these items for comparability purposes.
The company also announced details of its finalized restructuring plan and confirmed that it expects the plan to yield estimated gross annualized savings of approximately $50 million. The company intends to invest up to half of the savings in brand and demand creation initiatives. The company also announced that it has entered into a new $210 million, five-year asset-based credit facility to replace its current facility, which was scheduled to expire in approximately six months.
“Our second quarter results confirm that the company’s recovery from the global economic recession is lagging the golf industry recovery,” commented Tony Thornley, a member of the Board of Directors who was appointed interim President and Chief Executive Officer in June 2011.
“We are seeing the effects of insufficient investment in brand marketing and product demand creation initiatives over the last three years, which has resulted in a decline in sales despite having products that from a performance standpoint are outstanding. We fully appreciate the need for swift and immediate action to return the Company to profitability. As a first step, we have begun implementing a restructuring plan that is expected to result in estimated gross savings of $50 million on an annualized basis and will better align our cost structure with sales levels. We intend to reinvest up to half of the savings in our brand and in more effective demand creation initiatives. We expect to begin to see benefits from these actions during the second half of 2011 with a much greater benefit in 2012.”
Restructuring Plan
The company’s restructuring plan is expected to result in annualized gross pre-tax savings of approximately $50 million. The company will reinvest up to half of the savings in incremental brand and demand creation initiatives.
Although there will be some incremental investment in these initiatives in 2011, the bulk of the incremental investment will occur in 2012. Pre-tax charges related to the restructuring plan are estimated to be approximately $15-$20 million, including the $5 million recognized in the second quarter of 2011.
A majority of the remaining restructuring charges are expected to be recognized in the second half of 2011.
The company’s restructuring plan involves (1) streamlining the organization to reduce costs, simplify internal processes, and increase the focus on the company’s consumer and retail partners, (2) realigning the organization to place greater emphasis on global brand management and to drive the company’s key global initiatives, and (3) incremental investment in the brand and demand creation initiatives to drive sales growth. The company has already begun its restructuring plan, including the elimination last week of approximately 7% of its positions globally across all levels of the company, and has taken other actions to lower costs going forward.
The company also began its structural realignment with the consolidation of the company’s various sales and marketing organizations into four sales and marketing regions and with the creation of a separate global brand group to oversee global brand development and more coordinated messaging across all regions.
“The financial results this year are disappointing, and we wanted to waste no time in beginning the process of reversing that trend,” stated Mr. Thornley. “I am pleased with how quickly we have been able to develop and begin implementing our restructuring plan.”
Business Outlook
The company expects to report a loss for the full year 2011, but does not intend to provide further specific financial guidance for the balance of the year as it works through its restructuring.
“Despite the lack of adequate investment in brand marketing and product demand creation in recent years, the foundation on which the Company’s prior success was built is clearly very much alive,” continued Thornley. “The Callaway brand is one of the leading brands in the golf industry and our products are among the best performing in the marketplace. Furthermore, as we look forward, we see many positives, including full implementation of our restructuring plan, completion in 2011 of the previously announced transition of our North American manufacturing and distribution operations, the recovery of our business in Japan to more normal levels in 2012, and continued growth in our emerging markets. These factors, along with additional and more effective demand creation initiatives, should set the stage for the company’s return to profitability and growth in 2012.”
GAAP Results
For the second quarter of 2011, the company reported the following results:
Dollars in millions except per share amounts
2011
% of Sales
2010
% of Sales
Increase / (Decrease)
Net Sales
$274
–
$304
–
($30)
Gross Profit
$103
37%
$124
41%
($21)
Operating Expenses
$113
41%
$99
32%
$14
Operating Income/(Loss)
($10)
(-4%)
$25
8%
($35)
Earnings/(Loss) per share
($1.03)
–
$0.14
–
($1.17)
For the first half of 2011, the Company reported the following results:
Non-GAAP Pro Forma Financial Results
For the second quarter of 2011, the Company reported the following pro forma results:
Dollars in millions except per share amounts
2011
% of Sales
2010
% of Sales
Increase / (Decrease)
Net Sales
$274
–
$304
–
($30)
Gross Profit
$109
40%
$125
41%
($16)
Operating Expenses
$103
38%
$98
32%
$5
Operating Income/(Loss)
$6
2%
$26
9%
($20)
Earnings/(Loss) per share
($0.01)
–
$0.15
–
($0.16)
For the first half of 2011, the Company reported the following pro forma results:
