Callaway Golf Company (NYSE:ELY) has reported operating results for the third quarter and nine months ended September 30, 2002.
For the quarter ended September 30, 2002, net sales declined 18% to $160.0 million ($156.5 million in constant dollars) compared to $195.8 million for the same quarter last year. Net income was $12.4 million compared to $6.5 million last year, and fully diluted earnings per share were $0.19 compared to $0.09 in 2001.
For the nine months ended September 30, 2002 net sales declined 6% to $668.6 million ($669.8 million in constant dollars) compared to $710.9 million for the same period last year. Net income increased 19% to $80.2 million compared to $67.6 million in 2001, and fully diluted earnings per share increased 29% to $1.19 from $0.92 last year.
In reporting these results, the Company believes it is important for investors and potential investors to be aware of the following additional information:
Earnings for the three and nine months ended September 30, 2001, were negatively affected by non-cash pre-tax charges associated with a long-term electricity supply agreement of $12.2 million and $19.9 million, respectively. Accounting rules mandated the Company adjust the value of this contract each quarter based on current market rates, and record the resulting gain or loss as either income or expense in that quarter. Although the contract was terminated in the fourth quarter of 2001, current accounting rules require the Company to retain the non-cash valuation account on its balance sheet, subject to periodic review, without future adjustments for changes in market rates. In reaching this conclusion, the Company consulted with its then outside independent auditors and the SEC.
Earnings for the third quarter of 2002 and the nine month period ended September 30, 2002, were positively affected by a $17.0 million non-cash pre-tax reversal in the Company’s warranty reserve. As previously announced, the Company completed a review of its warranty commitments during the quarter, which resulted in a refinement of its process for estimating potential claims. The Company elected to reflect this reversal entirely in the third quarter of 2002. The Company has also concluded that it would be prudent to voluntarily seek a review of the timing of this adjustment with the staff of the SEC, which could result in a decision to shift some or all of the non-cash adjustment to prior periods.
Excluding the effects of these non-cash items, earnings per diluted share were $0.03 for the third quarter of 2002 compared to $0.20 in the comparable quarter in 2001, and $1.03 versus $1.12 for the nine month periods ended September 30, 2002 and 2001, respectively.
“Despite a solid first half of the year, the softness in the U.S. and Japanese economies and the reversal of the USGA’s proposal regarding high COR drivers negatively impacted sell-through and re-orders from our customers in the third quarter,” said Ron Drapeau, chairman, president and CEO. “Moreover, titanium driver and fairway wood sales continue trailing last year due to normal product cycles as both our ERC II and Hawk Eye VFT titanium wood models are in their second year of production. Partially offsetting this has been sales growth in Europe, Canada, and Australia, as well as year-over-year increases in irons, putters, wedges and golf balls. We have reduced operating expenses compared to 2001 despite advertising and promotional investments we made to attract consumers. We remain focused on developing superior products, and are confident we will be positioned to take advantage of marketplace opportunities when conditions improve.”
Brad Holiday, executive vice-president and chief financial officer, stated, “The economic conditions in the third quarter were challenging with sales falling below last year. We remain focused on those factors within our control to improve our financial results, namely our expense management initiatives implemented over the past year. Through these initiatives our year to date gross margins of 51%, excluding the warranty adjustment, are on par with last year, and total operating expenses have declined 5%. Our balance sheet remains strong with $104.3 million in cash and marketable securities, virtually no debt, and $251.9 million in net working capital as of September 30.”
During the third quarter, the Company repurchased 746,000 of its shares at an average cost of $14.50 per share. In accordance with the Company’s dividend practice, the board of directors will determine the next dividend at its November 2002 meeting.
“We were pleased to finish the third quarter with earnings that exceeded our September 26, 2002 guidance,” Mr. Holiday added. “While encouraged by the initial demand for our new products, including our new Great Big Bertha II Titanium Driver, it would be premature to upgrade our full year expectations at this time. If interest in our new products can sustain the current trends, and there is no further negative news in our key markets, there is a chance we will exceed our current full year guidance of $750 to $760 million in revenues and $0.85 – $0.90 in EPS. Moreover, actions that we might take as a part of our ongoing structural and competitive reviews may impact fourth quarter and full year results in material ways. We expect to provide further guidance on 2002 and 2003 by year-end.”
A replay of the conference call hosted by Ron Drapeau, chairman, CEO and president, and Brad Holiday, executive vice president and chief financial officer may be accessed through the Internet at www.callawaygolf.com or by telephone by calling (800) 642-1687 toll free for calls originating within the United States or (706) 645-9291 for International calls. The replay pass code is 5952425 and the replay will be available until 5:00 p.m. PDT, on Thursday, October 24, 2002.
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