Callaway Golf Company (NYSE:ELY) has reported results for the fourth quarter and full year ended 31st December announcing net sales for the full year of $792.1 million, versus $816.2 million for the prior year (a decrease of 3%), and earnings per diluted share of $1.03, versus $0.82 (an increase of 26%). Net income for the full year was $69.4 million, versus $58.4 million last year (an increase of 19%). Currency fluctuations had no significant impact on year over year comparisons.
Net sales for the quarter ended 31st December 2002 were $122.5 million, versus $105.3 million the prior year (an increase of 16%), and loss per share was $0.08, versus $0.14 (an improvement of 43%). Net loss for the quarter was $5.6 million, versus $9.2 million for the prior period (an improvement of 39%).
Net sales for the quarter were positively affected by currency fluctuations and the introduction of the Company’s new Great Big Bertha II Titanium Driver, with net income negatively impacted by increased spending on professional tours and severance costs. In addition, fourth quarter net income was favourably impacted by several charges that normally would have been taken in the fourth quarter, but were reflected in the Company’s third quarter results as filed with the SEC on 16th January 2003. This shifting of charges negatively affected reported net income for the third quarter ended September 30, 2002 and positively affected reported net income for the fourth quarter, and was caused by the timing of the Company’s third quarter 10-Q filing.
As previously discussed, the Company’s full year results in 2002 and in 2001 were each affected by non-cash adjustments. In 2001, the Company recorded a $14.2 million after-tax charge associated with its long-term energy supply agreement. In 2002, the Company recorded an after-tax gain of $10.5 million associated with an adjustment to its warranty reserves. Excluding the effects of these adjustments, net income would have been $58.9 million for 2002 compared to $72.6 million for 2001, a decrease of 19%. Fully diluted earnings per share adjusted for the same periods would have been $0.87 and $1.02, respectively, a decline of 15%.
“We delivered better results than expected for the quarter and the year,” said Ron Drapeau, chairman, president, and CEO. “ We have maintained our market share leadership in woods, irons, and putters, and managed our costs effectively, and, with our continued commitment to R&D, developed a strong product line for 2003. It is our intention to continue to provide accurate guidance regarding our business outlook and absent unforeseen disruptions beyond those currently known to us, we think we can do this.”
Gross profit for the year, excluding the non-cash adjustment to warranty reserves, was $382.0 million (48% of net sales), versus $404.6 million (50% of net sales) in 2001. The decline in gross margin was primarily the result of higher inventory obsolescence charges, the close out of ERC II drivers at reduced prices, and an across the board price reduction on golf balls that was implemented in August.
Selling and tour expenses for the year were $200.2 million (25% of net sales), a 6% increase compared to $188.3 million (23% of net sales) in 2001. This increase was primarily due to higher pro endorsement expense associated with the Company’s strategic moves to support both its drivers and its golf balls on tour, and depreciation expense.
General and administrative expenses for 2002 were $56.6 million (7% of net sales), a 20% decline compared to $71.1 million (9% of net sales) in 2001. This decrease was the result of lower employee expense and a reduction in amortization expense associated with the adoption of SFAS No. 142.
Research and development expenses for the year were $32.2 million (4% of net sales), a 2% reduction when compared to $32.7 million (4% of net sales) in 2001.
Commenting on the results, Brad Holiday, executive vice president and chief financial officer stated, “Managing costs has been a critical part of running the business in these challenging times, and we are pleased that we have held costs as a percentage of net sales at or below prior year levels in all areas except tour, where we made the strategic decision to invest to drive sales growth in the driver and ball categories. Moreover, the reductions in headcount and the inventory adjustments, while negatively affecting full year 2002 results, will benefit operating results going forward.”
During the fourth quarter, the Company repurchased 0.2 million of its shares at an average cost of $12.38 per share under the $50 million repurchase authorization approved by the Board in May 2002. For the entire year, the Company repurchased 2.8 million shares at an average cost of $16.40 per share.
In accordance with the Company’s dividend practice, the next dividend will be determined by the Board of Directors at its meeting on 27th February 27 2003.
“At this time,” commented Drapeau, “we reiterate our mid-December guidance of net sales for the first quarter of approximately $270 million, a 5% increase compared to 2002, with annual net sales for 2003 estimated to be essentially flat year over year. Fully diluted earnings per share are estimated to be $0.54 for the quarter, and $0.88 for the full year.
“Based on the Company’s long-term strategic plan, and assuming some improvement in the global economies, we are targeting to achieve net sales growth, on average, in the low single digits overall and earnings per share in the low double digits. We expect 2003 to be a year of funding investments aimed at achieving this longer range growth expectation.”
Callaway Golf Company www.callawaygolf.com