Callaway Golf Company today reported net sales of $206.6 million for the first quarter ended March 31, 2000, an increase of 11% over net sales of $185.7 million reported in the first quarter of 1999 and a new record level of sales for any first quarter in the history of the Company. Net income increased 26% to $16.2 million in the first quarter of 2000 from $12.8 million in the first quarter of 1999, and diluted earnings per share increased 22% to $0.22 in the first quarter of 2000 from $0.18 in the first quarter of 1999.
“The beginning of 2000 has been an exciting time for all of us at Callaway Golf,” said Ely Callaway, Founder, Chairman and CEO. “There has been solid demand for all our golf club products, and exceptional market interest in the introduction of our new products, the Steelhead Plus™ Stainless Steel Metal Woods, the Steelhead™ X-14™ Stainless Steel Irons and the Odyssey® White Hot™ Putters. The new golf ball, Rule 35™, has enjoyed a very successful introduction. Golf club sales have exceeded our initial expectations in our major markets, including the United States and Japan.
Mr. Callaway continued, “By producing record numbers of golf clubs – we made more golf clubs than we have in any previous quarter – we were able to meet much of this early season demand. Our net sales, not including golf balls, increased by 8%, from $185.7 million in the first quarter of 1999 to $200.6 million in the first quarter of 2000 – a new record first quarter sales level for our golf club business. At the same time, we were able to achieve higher production and operating efficiencies in golf club manufacturing, leading to a significant improvement of 22% in our overall earnings per diluted share over the comparable quarter last year. We’re very enthusiastic about these results, which we think reflect our hard work, our attention to managing our core businesses, and a little good fortune.”
“Demand for our new Rule 35™ golf ball has also been very strong,” said Chuck Yash, President of Callaway Golf Company and President and CEO of its wholly-owned subsidiary, Callaway Golf Ball Company. “Early reports coming from retailers and consumers, as well as the enthusiasm of our staff professionals, continue to reinforce our conclusion that we have developed a superior ball – one which many golfers of all skill levels will play and enjoy. Our first quarter golf ball net sales of $6.0 million, the majority of which came in the month of March, was about what we expected. However, we had higher than expected costs in the quarter, including the write-off of some early production that did not meet our quality standards. This resulted in a pre-tax loss for the quarter on our golf ball business of $14.6 million. Overall, the trial and initial sell-through of the product has been excellent, and we are on track to meet our sales expectations of $50 to $70 million for the year. Even the lower figure would represent, to our knowledge, by far the largest dollar amount of first-year sales ever achieved by any new entrant in the golf ball industry. Thus, on the whole we are very pleased with the launch of our golf ball business.”
Net sales of $206.6 million were comprised of: $50.1 million of Great Big Bertha® Hawk Eye® Titanium Metal Woods; $49.9 million of Steelhead Plus Stainless Steel Metal Woods; $51.8 million of Steelhead™ X-14™ Stainless Steel Irons; $26.5 million of Great Big Bertha® Hawk Eye® Tungsten Injected™ Titanium Irons; $11.0 million of Odyssey® and Callaway Golf® putters; $6.0 million of golf balls, and $11.3 million of other sales. For the first quarter of 2000 vs. the first quarter of 1999, the Company’s U.S. sales increased 17% to $118.2 million from $100.9 million, and international sales increased 4% to $88.4 million from $84.8 million.
Cost of goods sold as a percentage of net sales was 54% in the first quarter of 2000, versus 55% in the comparable period of 1999. The decrease was primarily attributable to a reduction in golf club manufacturing labor and overhead expenses, offset by higher than expected golf ball manufacturing costs, including the unplanned write-off of certain golf ball inventory.
Selling expenses in the first quarter increased to $43.8 million from $31.3 million in the first quarter of 1999. The increase was primarily due to additional expenses associated with the start up expenses for golf ball sales and expanded golf club sales activity in our new sales subsidiary in Japan.
General and Administrative expenses for the first quarter of 2000 decreased 19% to $17.5 million from $21.7 million in the comparable quarter of 1999. This decrease is mainly attributable to the shifting of costs associated with the Company’s golf ball pre-production period. Those costs are now included in cost of goods sold, in conjunction with the commencement of production and the sale of golf balls during the first quarter.
“Production costs for the year for our golf ball will be greater than our initial expectations, due to the unique nature of our new golf ball design, the commencement of operations at a state-of-the-art manufacturing facility built from scratch, and our absolute requirement to produce and ship only a quality product worthy of the Callaway Golf brand name,” continued Mr. Yash. “Thus, even though we are successfully working through our start-up issues and expect our future output to improve over current levels, we don’t expect our current production ramp-up schedule to achieve operational efficiencies as fast as we had originally estimated. In addition, normal seasonality later in the year will constrain sales and therefore limit the positive impact of our operational improvements in the remainder of the year. As a result, our golf ball operations could generate approximately $18 to $22 million in additional pre-tax losses in the remaining three quarters of the year.”
“We currently expect that in the second quarter our golf club manufacturing operations will continue to satisfy the exceptional early season demand we have seen for our golf clubs,” continued Mr. Callaway. “Thus, we may report better than expected earnings for the second quarter as well. While these strong early season sales will cannibalize expected third and fourth quarter sales somewhat, we also think a significant amount of this business will be additional revenue for the year. Thus, even with some greater than expected losses from our golf ball business, we feel comfortable at this time with estimates that our earnings per diluted share in 2000 will be approximately 50% higher than last year’s earnings of $0.78 per diluted share.”