Callaway Golf Co. on Wednesday reported record third quarter 2019 net sales and strong earnings growth while also reiterating full year net sales and adjusted EBITDA guidance and increasing full year 2019 earnings per share guidance.

“I am very pleased to announce yet another record quarter in revenue and strong earnings growth for our company,” said Chip Brewer, president and CEO of Callaway. “Our portfolio of brands continues to deliver strong financial results while positioning us for attractive long-term prospects.”

Brewer continued, “Our golf equipment business continues to deliver attractive revenue growth, now up 5 percent year to date on a constant currency basis, as a result of a strong 2019 product lineup and the recently launched Epic Forged irons and MD5 Jaws wedges, which have been received well by the market. Our soft goods portfolio continues to experience even stronger growth rates. These increases were led by robust growth in our direct-to-consumer channel, including Jack Wolfskin and TravisMathew. The direct-to-consumer channel continues to be an area of focus and investment.”

Summary of Third Quarter 2019 Financial Results

The company announced the following GAAP and non-GAAP financial results for the third quarter of 2019 (in millions, except EPS):

Net sales increased 62 percent to $426 million, a new record for the company, and on a constant currency basis, net sales would have increased by 65 percent. The increase reflects the acquisition of Jack Wolfskin in January 2019, which contributed $134 million in net sales in the third quarter of 2019. Excluding the Jack Wolfskin acquisition, net sales increased 11 percent in the third quarter of 2019 driven by product launch timing in the golf clubs segment (up 18 percent on a constant currency basis) related to the third quarter launches of Epic Forged irons, Epic Forged Star irons, and MD5 Jaw wedges, as well as continued brand momentum in the TravisMathew business.

Gross margin increased 100 basis points to 44.9 percent, driven by favorable mix impact of the Jack Wolfskin and TravisMathew businesses, which were both accretive to gross margin in the third quarter, as well as favorable golf club launch timing, all offset slightly by the negative impact of foreign currency exchange rates.

Operating expenses increased 44 percent to $151 million in the third quarter of 2019 compared to $105 million for the same period in 2018. Excluding non-recurring and acquisition-related expenses, operating expenses increased $44 million, or 43 percent, to $147 million when compared to $103 million in the third quarter of 2018. This increase is primarily due to the addition in 2019 of operating expenses from the Jack Wolfskin business, which added an incremental $37 million excluding the acquisition-related expenses. The remainder of the increase was related to investments in the TravisMathew and golf equipment businesses to support the sales growth.

Earnings per share increased 220 percent to $0.32, compared to $0.10 for the third quarter of 2018. On a non-GAAP basis, 2019 third quarter earnings per share was $0.36, which excludes $0.04 per share related to the non-cash purchase accounting adjustments and the non-recurring transition expenses related to the Jack Wolfskin, TravisMathew and OGIO acquisitions. The non-GAAP earnings per share in 2019 includes a $8 million ($0.07 per share) increase in other expense primarily related to interest expense on the new term loan entered into in January 2019 to fund the purchase of Jack Wolfskin. This increase in other expense was slightly offset by a lower tax rate.

Summary of First Nine Months 2019 Financial Results

The company announced the following GAAP and non-GAAP financial results for the first nine months of 2019 (in millions, except EPS).

Net sales increased 31 percent to $1,389 million, a new record for the company. On a constant currency basis, net sales would have increased by 34 percent. The increase reflects the acquisition of Jack Wolfskin completed in January 2019, which contributed $275 million in net sales in the first nine months of 2019. Excluding the Jack Wolfskin acquisition, net sales increased 6 percent in the first nine months of 2019 driven by increases in all operating segments and all major product categories. This increase is attributable to the continued strength of the company’s 2019 golf product line and continued brand momentum of the TravisMathew business.

Gross margin decreased 210 basis points to 45.8 percent for the first nine months of 2019 compared to 47.9 percent for the first nine months of 2018. Excluding a non-cash purchase accounting adjustment related to the Jack Wolfskin acquisition, gross margins were 46.6 percent, a decrease of 130 basis points. The decrease is primarily attributable to foreign currency headwinds and the current year golf equipment product mix of premium products, which typically have higher product costs due to more advanced technology resulting in lower gross margins. The decrease is partially offset by the TravisMathew business, which is accretive on a gross margin basis through the first nine months of the year.

Operating expenses increased 43 percent to $481 million in the first nine months of 2019 compared to $337 million for the same period in 2018. Excluding non-recurring and acquisition-related expenses, operating expenses increased $133 million, or 40 percent, to $468 million when compared to $335 million in the first nine months of 2018. This increase is primarily due to the addition in 2019 of operating expenses from the Jack Wolfskin business, which added an incremental $113 million excluding the acquisition-related expenses. The remainder of the increase was related to investments in the TravisMathew and golf equipment businesses to support the sales growth.

Earnings per share decreased 18 percent to $1.13, compared to $1.37 for the first nine months of 2018. On a non-GAAP basis, the first nine months of 2019 earnings per share was $1.35, which excludes $0.22 per share related to the non-cash purchase accounting adjustments and the non-recurring transaction and transition expenses related to the Jack Wolfskin, TravisMathew and OGIO acquisitions. The non-GAAP earnings per share in 2019 includes a $26 million ($0.23 per share) increase in other expense primarily related to the new term loan entered into in January 2019 to fund the purchase of Jack Wolfskin. This increase in other expense was slightly offset by a lower tax rate.

Business Outlook for 2019

Basis for Full Year 2019 Non-GAAP Estimates. The company currently estimates that non-cash purchase accounting adjustments related to Jack Wolfskin will have a negative impact on 2019 earnings per share in the amount of approximately $0.12. The non-cash purchase accounting adjustments for the OGIO and TravisMathew acquisitions will have a $0.01 negative impact on earnings per share in 2019, consistent with 2018. Both of these estimates are unchanged from the company’s prior estimates.

In addition to these purchase accounting adjustments, the company’s non-GAAP guidance for 2019 excludes $0.13 per share of non-recurring transaction and transition expenses related to the Jack Wolfskin transaction, and non-recurring advisory fees. The 2018 non-GAAP adjusted results presented below exclude the $0.01 per share of non-recurring transaction income related to the Jack Wolfskin acquisition. Reconciliation is provided in the attached schedules.

Full Year 2019 Guidance

The purpose of the non-GAAP presentation is to provide additional information to investors regarding the underlying performance of the company’s business without certain non-recurring items and non-cash purchase accounting adjustments related to our acquisitions. The manner in which this non-GAAP information is derived is discussed further toward the end of this release, and the company has provided in the tables to this release a reconciliation of the non-GAAP information to the most directly comparable GAAP information.

The company reiterates the previous 2019 net sales estimate of $1,685 million – $1,700 million representing net sales growth of approximately 35 percent – 37 percent in 2019 compared to 2018. The company currently estimates that changes in foreign currency rates will have a negative impact of $33 million on 2019 full year net sales when compared to 2018.

The company reiterates the previous 2019 gross margin estimate of approximately 46.7 percent.

The company reiterates the previous 2019 operating expense estimate of approximately $628 million.

The company increased its non-GAAP earnings per share guidance to $1.06 – $1.12 primarily driven by a revised estimated tax rate of approximately 19.0 percent when compared to a prior estimated tax rate of 20.5 percent on a base of 96.5 million fully diluted shares.