Callaway Golf Announces Record Sales and More Than a 100% Increase in Earnings for 2007

Callaway Golf Company (NYSE:ELY) today announced its financial results for the fourth quarter and full year ended December 31, 2007. Highlights for the full year of 2007 included: Net sales increased 10% to a record $1.125 billion, compared to $1.018 billion for the same period in 2006. Fully diluted earnings per share of $0.81 on 67.5 million shares, an increase of 138% compared to fully diluted earnings per share of $0.34 on 68.5 million shares in 2006. Fully diluted earnings per share for 2007 included after-tax charges of $0.08 for gross margin improvement initiatives. Similarly, full year 2006 included after-tax charges of $0.04 for the integration of Top-Flite, $0.03 for restructuring, and $0.02 for gross margin improvement initiatives. Excluding these charges, the Company’s pro forma fully diluted earnings per share for 2007 would have been $0.89, an increase of 107% compared to $0.43 for 2006. Gross profit for 2007 was $493.2 million or 44% of net sales compared to $398.1 million or 39% of net sales a year ago. The increase was primarily the result of gross margin improvement initiatives announced in 2006 as well as an increased mix of higher margin drivers and X-20 irons. Operating expenses for 2007 were $403.0 million or 36% of net sales compared to $361.0 million or 35% of net sales in 2006. The increase was due primarily to higher employee annual incentive compensation expense related to the Company’s significantly improved financial performance as well as an increase in marketing expense to support the Top-Flite re-launch. Highlights for the fourth quarter included: Net sales were $174.4 million, a 3% decrease compared to $179.9 million for the same period in 2006, which included significantly more sales from new product launches. Loss per share of $0.25 on 63.8 million shares, compared to a loss per share of $0.15 on 67.0 million shares in the fourth quarter of 2006. The 2007 fourth quarter loss per share included an after-tax charge of $0.01 related to gross margin improvement initiatives announced in November 2006. The fourth quarter of 2006 also included after-tax charges of $0.01 for gross margin improvement initiatives and $0.01 for the restructuring charges announced in 2005. Excluding these charges, the Company’s pro forma loss per share for the fourth quarter of 2007 would have been $0.24, as compared to pro forma loss per share of $0.13 in the prior period. Gross profit for the fourth quarter of 2007 was $63.4 million or 36% of net sales compared to $58.8 million or 33% of net sales for the fourth quarter of 2006. Operating expenses for the fourth quarter of 2007 were $92.0 million compared to $79.9 million for the same period in 2006. "We have made significant progress improving operations and profitability in 2007,” announced George Fellows, President and CEO. "Specifically, we were able to re-gain woods market share, re-launch the Top-Flite Brand with the successful introduction of the D2 golf ball, and grow our accessories business. In addition, we made significant progress in improving profitability, increasing our gross margins by five percentage points, which contributed to a $135 million increase in cash from operations.” "While pleased with our progress so far, we continue to focus on improvement,” continued Mr. Fellows. "We have a strong line-up of 2008 products including our recently announced I-Mix driver with its state of the art technology aimed at providing the best and most flexible performance possible for our consumers. Another area we are targeting is supply chain management, where we’ve made tremendous progress in 2007 but believe there is still room to drive efficiencies. With this strong portfolio of products along with improved operations, we feel well positioned to sustain the momentum we enjoyed in 2007.” Business Outlook The Company estimates that its full year 2008 net sales will be in the range of $1.145 to $1.165 billion. The Company also estimates that its 2008 full year pro forma fully diluted earnings per share will be in the range of $1.08 to $1.18, which represents an estimated increase of 21% to 33% as compared to the Company’s pro forma fully diluted earnings per share in 2007 of $0.89 as discussed above. Estimated pro forma earnings for 2008 exclude estimated charges of approximately $0.08 per share related to the Company’s gross margin initiatives. The Company’s earnings per share estimates for 2008 assume a base of 67.0 million shares. The Company will be holding a conference call at 2:00 p.m. PST today. The call will be broadcast live over the Internet and can be accessed at www.callawaygolf.com. To listen to the call, please go to the website at least 15 minutes before the call to register and for instructions on how to access the broadcast. A replay of the conference call will be available approximately three hours after the call ends, and will remain available through 9:00 p.m. PST on Thursday, February 7, 2008. The replay may be accessed through the Internet at www.callawaygolf.com or by telephone by calling 1-800-475-6701 toll free for calls originating within the United States or 320-365-3844 for International calls. The replay pass code is 908304. Disclaimer: Statements used in this press release that relate to future plans, events, financial results, performance or prospects, including statements relating to estimated sales and earnings for 2008, and the estimated charges for the Company’s gross margin initiatives, are forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. These estimates and statements are based upon current information and expectations. Accurately estimating the Company’s future financial performance is based upon various unknowns including consumer acceptance and demand for the Company’s current or new products as well as future consumer discretionary purchasing behavior, which can be significantly adversely affected by unfavorable economic or market conditions. Actual results may differ materially from those estimated or anticipated as a result of these unknowns or other risks and uncertainties, including delays, difficulties or increased costs in the supply of components needed to manufacture the Company’s products, in manufacturing the Company’s products, or in connection with the implementation of the Company’s planned gross margin initiatives or the implementation of future initiatives; adverse weather conditions and seasonality; any rule changes or other actions taken by the USGA or other golf association that could have an adverse impact upon demand or supply of the Company’s products; a decrease in participation levels in golf; and the effect of terrorist activity, armed conflict, natural disasters or pandemic diseases on the economy generally, on the level of demand for the Company’s products or on the Company’s ability to manage its supply and delivery logistics in such an environment. For additional information concerning these and other risks and uncertainties that could affect these statements and the Company’s business, see Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, as well as other risks and uncertainties detailed from time to time in the Company’s reports on Forms 10-K, 10-Q and 8-K subsequently filed from time to time with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to republish revised forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Regulation G: The financial results reported in this press release have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP”). In addition to the GAAP results, the Company has also provided additional information concerning its results, which includes certain financial measures not prepared in accordance with GAAP. The non-GAAP financial measures included in this press release exclude charges associated with the integration of the Callaway Golf Company and Top-Flite Golf Company operations, charges related to the September 2005 restructuring initiatives, and charges related to the Company’s gross margin initiatives. These non-GAAP financial measures should not be considered a substitute for any measure derived in accordance with GAAP. These non-GAAP financial measures may also be inconsistent with the manner in which similar measures are derived or used by other companies. Management believes that the presentation of such non-GAAP financial measures, when considered in conjunction with the most directly comparable GAAP financial measures, provides additional useful information concerning the Company’s operations without these charges. The Company has provided reconciling information in the text of this press release and in the accompanying schedules. About Callaway Golf Through an unwavering commitment to innovation, Callaway Golf Company (NYSE:ELY) creates products and services designed to make every golfer a better golfer. Callaway Golf Company manufactures and sells golf clubs and golf balls, and sells golf accessories, under the Callaway Golf®, Odyssey®, Top-Flite®, and Ben Hogan® brands in more than 110 countries worldwide. For more information please visit www.callawaygolf.com or www.shop.callawaygolf.com. Callaway Golf Company Consolidated Condensed Balance Sheets (In thousands) (Unaudited)       December 31, 2007 2006     ASSETS Current assets: Cash and cash equivalents $ 49,875 $ 46,362 Accounts receivable, net 112,064 118,133 Inventories, net 253,001 265,110 Deferred taxes 42,219 32,813 Income taxes receivable 9,232 9,094 Other current assets   30,190   21,688 Total current assets 496,581 493,200   Property, plant and equipment, net 128,036 131,224 Intangible assets, net 173,045 175,159 Deferred taxes 27,028 18,821 Other assets   32,273   27,543 $ 856,963 $ 845,947   LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accounts payable and accrued expenses $ 130,410 $ 111,360 Accrued employee compensation and benefits 44,245 18,731 Accrued warranty expense 12,386 13,364 Credit facilities   36,507   80,000 Total current liabilities 223,548 223,455   Long-term liabilities 63,207 43,388   Minority interest 1,978 1,987   Shareholders' equity   568,230   577,117 $ 856,963 $ 845,947 Callaway Golf Company Statements of Operations (In thousands, except per share data) (Unaudited)             Quarter Ended December 31, 2007 2006   Net sales $ 174,418 100 % $ 179,884 100 % Cost of sales   111,047   64 %   121,112   67 % Gross profit 63,371 36 % 58,772 33 % Operating expenses: Selling 59,951 34 % 52,404 29 % General and administrative 23,921 14 % 20,483 11 % Research and development   8,169   5 %   6,999   4 % Total operating expenses 92,041 53 % 79,886 44 % Loss from operations (28,670 ) -16 % (21,114 ) -12 % Other income (expense), net   98     (28 ) Loss before income taxes (28,572 ) -16 % (21,142 ) -12 % Income tax benefit   (12,415 )   (10,948 ) Net loss $ (16,157 ) -9 % $ (10,194 ) -6 %   Loss per common share: Basic ($0.25 ) ($0.15 ) Diluted ($0.25 ) ($0.15 ) Weighted-average shares outstanding: Basic 63,765 66,993 Diluted 63,765 66,993     Year Ended December 31, 2007 2006   Net sales $ 1,124,591 100 % $ 1,017,907 100 % Cost of sales   631,368   56 %   619,832   61 % Gross profit 493,223 44 % 398,075 39 % Operating expenses: Selling 281,960 25 % 254,526 25 % General and administrative 89,060 8 % 79,709 8 % Research and development   32,020   3 %   26,785   3 % Total operating expenses 403,040 36 % 361,020 35 % Income from operations 90,183 8 % 37,055 4 % Other expense, net   (1,908 )   (2,057 ) Income before income taxes 88,275 8 % 34,998 3 % Income tax provision   33,688   3 %   11,708   Net income $ 54,587   5 % $ 23,290   2 %   Earnings per common share: Basic $ 0.82 $ 0.34 Diluted $ 0.81 $ 0.34 Weighted-average shares outstanding: Basic 66,371 67,732 Diluted 67,484 68,503 Callaway Golf Company Consolidated Condensed Statements of Cash Flows (In thousands) (Unaudited)         Year Ended December 31, 2007 2006 Cash flows from operating activities: Net income $ 54,587 $ 23,290 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 35,326 32,274 Non-cash share-based compensation 10,851 11,921 Deferred taxes 904 673 Loss (gain) on disposal of assets (4,731 ) 1,135 Changes in assets and liabilities, net of effects from acquisitions   55,045     (52,312 ) Net cash provided by operating activities   151,982     16,981     Cash flows from investing activities: Capital expenditures (32,930 ) (32,453 ) Proceeds from sale of capital assets 11,460 469 Investment in golf related ventures (3,698 ) (10,008 ) Business acquisitions, net of cash acquired   -     374   Net cash used in investing activities   (25,168 )   (41,618 )   Cash flows from financing activities: Issuance of common stock 48,035 9,606 Dividends paid, net (18,755 ) (19,212 ) Acquisition of treasury stock (114,795 ) (52,872 ) Tax benefit from exercise of stock option 6,031 884 Proceeds from (payments on) credit facilities, net (43,493 ) 80,000 Other financing activities   (9 )   1,971   Net cash (used in) provided by financing activities   (122,986 )   20,377     Effect of exchange rate changes on cash and cash equivalents   (315 )   1,141   Net increase (decrease) in cash and cash equivalents 3,513 (3,119 ) Cash and cash equivalents at beginning of period   46,362     49,481   Cash and cash equivalents at end of period $ 49,875   $ 46,362     Callaway Golf Company Consolidated Net Sales and Operating Segment Information (In thousands) (Unaudited)                           Net Sales by Product Category Quarter Ended Year Ended December 31, Growth/(Decline) December 31, Growth/(Decline) 2007 2006 Dollars Percent 2007 2006 Dollars Percent Net sales: Net sales: Woods $ 32,291 $ 39,321 $ (7,030 ) -18 % Woods $ 305,880 $ 266,478 $ 39,402 15 % Irons (1) 45,811 45,286 525 1 % Irons 309,594 287,960 21,634 8 % Putters 20,542 17,569 2,973 17 % Putters 109,068 102,714 6,354 6 % Golf balls 37,724 47,250 (9,526 ) -20 % Golf balls 213,064 214,783 (1,719 ) -1 % Accessories and other (1)   38,050   30,458   7,592   25 % Accessories and other   186,985   145,972   41,013   28 % $ 174,418 $ 179,884 $ (5,466 ) -3 % $ 1,124,591 $ 1,017,907 $ 106,684   10 %   (1) Prior periods have been restated to reflect current period classification.         Net Sales by Region Quarter Ended             Year Ended     December 31, Growth/(Decline) December 31, Growth/(Decline) 2007   2006 Dollars Percent 2007   2006 Dollars Percent Net sales: Net sales: United States $ 85,053 $ 95,772 $ (10,719 ) -11 % United States $ 597,569 $ 566,600 $ 30,969 5 % Europe 26,046 26,264 (218 ) -1 % Europe 193,336 159,886 33,450 21 % Japan 23,207 22,313 894 4 % Japan 120,148 105,705 14,443 14 % Rest of Asia 17,127 14,741 2,386 16 % Rest of Asia 86,133 75,569 10,564 14 % Other foreign countries   22,985   20,794   2,191   11 % Other foreign countries   127,405   110,147   17,258 16 % $ 174,418 $ 179,884 $ (5,466 ) -3 % $ 1,124,591 $ 1,017,907 $ 106,684 10 %           Operating Segment Information Quarter Ended               Year Ended       December 31, Growth/(Decline) December 31, Growth/(Decline) 2007   2006 Dollars Percent 2007   2006 Dollars Percent Net sales: Net sales: Golf clubs $ 136,694 $ 132,634 $ 4,060 3 % Golf clubs $ 911,527 $ 803,124 $ 108,403 13 % Golf balls   37,724     47,250     (9,526 ) -20 % Golf balls   213,064     214,783     (1,719 ) -1 % $ 174,418   $ 179,884   $ (5,466 ) -3 % $ 1,124,591   $ 1,017,907   $ 106,684   10 %   Income before provision for income taxes: Golf clubs $ (4,096 ) $ (94 ) $ (4,002 ) -4257 % Golf clubs $ 151,759 $ 101,837 $ 49,922 49 % Golf balls (7,699 ) (4,615 ) (3,084 ) -67 % Golf balls 902 (6,396 ) 7,298 114 % Reconciling items (2)   (16,777 )   (16,433 )   (344 ) -2 % Reconciling items (2)   (64,386 )   (60,443 )   (3,943 ) -7 % $ (28,572 ) $ (21,142 ) $ (7,430 ) -35 % $ 88,275   $ 34,998   $ 53,277   152 %   (2) Represents corporate general and administrative expenses and other income (expense) not utilized by management in determining segment profitability. Callaway Golf Company Supplemental Financial Information (In thousands, except per share data) (Unaudited)                 Quarter Ended December 31, Quarter Ended December 31, 2007 2006   Pro Forma Callaway Golf   Gross Margin Improvement Initiatives   Total as Reported Pro Forma Callaway Golf Gross Margin Initiatives Integration Charges Restructur-ing Charges Total as Reported Net sales $ 174,418 $ - $ 174,418 $ 179,884 $ - $ - $ - $ 179,884 Gross profit 64,797 (1,426 ) 63,371 60,496 (1,504 ) (85 ) (135 ) 58,772 % of sales 37 % n/a 36 % 34 % n/a n/a n/a 33 % Operating expenses   92,041     -     92,041     78,683     -     (84 )   1,287     79,886   Loss from operations (27,244 ) (1,426 ) (28,670 ) (18,187 ) (1,504 ) (1 ) (1,422 ) (21,114 ) Other income (expense), net   98     -     98     (28 )   -     -     -     (28 ) Loss before income taxes (27,146 ) (1,426 ) (28,572 ) (18,215 ) (1,504 ) (1 ) (1,422 ) (21,142 ) Income tax benefit   (11,900 )   (515 )   (12,415 )   (9,685 )   (595 )   (64 )   (604 )   (10,948 ) Net income (loss) $ (15,246 ) $ (911 ) $ (16,157 ) $ (8,530 ) $ (909 ) $ 63   $ (818 ) $ (10,194 )   Diluted earnings (loss) per share: $ (0.24 ) $ (0.01 ) $ (0.25 ) $ (0.13 ) $ (0.01 ) $ 0.00 $ (0.01 ) $ (0.15 ) Weighted-average shares outstanding: 63,765 63,765 63,765 66,993 66,993 66,993 66,993 66,993     Year Ended December 31,   Year Ended December 31, 2007 2006             Pro Forma Callaway Golf Gross Margin Improvement Initiatives Total as Reported Pro Forma Callaway Golf Gross Margin Initia-tives Integra-tion Charges Restructur-ing Charges Total as Reported Net sales $ 1,124,591 $ - $ 1,124,591 $ 1,017,907 $ - $ - $ - $ 1,017,907 Gross profit 502,124 (8,901 ) 493,223 403,670 (1,853 ) (3,451 ) (291 ) 398,075 % of sales 45 % n/a 44 % 40 % n/a n/a n/a 39 % Operating expenses   403,040     -     403,040     357,700     -     588     2,732     361,020   Income (loss) from operations 99,084 (8,901 ) 90,183 45,970 (1,853 ) (4,039 ) (3,023 ) 37,055 Other expense, net   (1,908 )   -     (1,908 )   (2,057 )   -     -     -     (2,057 ) Income (loss) before income taxes 97,176 (8,901 ) 88,275 43,913 (1,853 ) (4,039 ) (3,023 ) 34,998 Income tax provision   37,115     (3,427 )   33,688     15,140     (713 )   (1,555 )   (1,164 )   11,708   Net income (loss) $ 60,061   $ (5,474 ) $ 54,587   $ 28,773   $ (1,140 ) $ (2,484 ) $ (1,859 ) $ 23,290     Diluted earnings (loss) per share: $ 0.89 $ (0.08 ) $ 0.81 $ 0.43 $ (0.02 ) $ (0.04 ) $ (0.03 ) $ 0.34   Weighted-average shares outstanding: 67,484 67,484 67,484 68,503 68,503 68,503 68,503 68,503   Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA):                     2007 Trailing Twelve Months EBITDA 2006 Trailing Twelve Months EBITDA Quarter Ended Quarter Ended March 31, June 30, September 30, December 31, March 31, June 30, September 30, December 31, 2007 2007 2007 2007 Total 2006 2006 2006 2006 Total Net income (loss) $ 32,836 $ 36,639 $ 1,269 $ (16,157 ) $ 54,587 $ 22,861 $ 22,539 $ (11,916 ) $ (10,194 ) $ 23,290 Interest expense (income), net 1,677 1,672 29 (216 ) 3,162 533 1,522 1,132 905 4,092 Income tax provision (benefit) 21,682 23,591 830 (12,415 ) 33,688 13,797 14,934 (6,075 ) (10,948 ) 11,708 Depreciation and amortization expense   9,009   8,591   9,864   7,862     35,326   7,290   7,935   8,736     8,313     32,274 EBITDA $ 65,204 $ 70,493   $ 11,992 $ (20,926 ) $ 126,763 $ 44,481 $ 46,930 $ (8,123 ) $ (11,924 ) $ 71,364   Callaway Golf Product Launch Schedule       2007 2008 Major First Half Launches: Drivers: Drivers: • Big Bertha 460 Drivers Feb-2007 • Hyper X Drivers Jan-2008 • FT-5 Drivers Feb-2007 (Phased sell-in early Q2) • Big Bertha Womens Drivers Jan-2008 • FT-I Drivers Feb-2007 (Phased sell-in early Q2) • FT-I (Low Trajectory) Feb-2008 • Hyper ERC Drivers (Japan Only) Feb-2007 • Legacy Driver (Asia Only) Feb-2008 • IMIX Drivers Mar-2008   Fairway Woods: Fairway Woods: • X Hot Fwy Woods Jan-2007 • Big Bertha Womens Fwy Woods Jan-2008 • Big Bertha Fwy Woods Feb-2007 • Hyper X Fwy Woods Jan-2008 • Fusion Fwy Woods Jan-2008 • FT-I Fwy Woods Mar-2008   Hybrids: Hybrids: • X Hybrids Jan-2007 • FT Hybrids Feb-2008   Irons/Wedges: Irons/Wedges: • X-20 Irons Jan-2007 • Big Bertha Irons Jan-2008 • X Forged Irons Mar-2007 • Fusion Irons Jan-2008 • Big Bertha Womens Irons Jan-2008 • X Forged Wedges Jan-2008 • FI i-brid Irons Apr-2008   Putters: Putters: • Whitehot XG TwoBall SRT Putters Feb-2007 • Black Series Insert Putters Jan-2008 • Black Series Putters Mar-2007 • Sabertooth Putters Mar-2008 • Whitehot XG Marksman Putters Apr-2007 • Whitehot Tour Putters Apr-2008   Balls: Balls: • Top-Flite D2 Balls Jan-2007 • Top-Flite Gamer Balls Jan-2008 • HX Hot Balls Jan-2007 • Top-Flite Freak Balls Jan-2008 • Big Bertha Balls Jan-2007 • Top-Flite XL '08 Balls Jan-2008 • Warbird Balls Jan-2007 • Top-Flite XL 5000 Balls Jan-2008 • Tour ix Balls Feb-2008 • HX Hot Bite Balls Feb-2008 • Legacy Balls (Asia Only) Mar-2008   Other: Other: • None • GEM Sets Jan-2008   Callaway Golf Product Launch Schedule       2007 2008 Major Second Half Launches: Drivers: Drivers: • None • No public information available   Fairway Woods: Fairway Woods: • None • No public information available   Hybrids: Hybrids: • None • No public information available   Irons/Wedges: Irons/Wedges: • Marxman Chipper Oct-2007 • No public information available   Putters: Putters: • Divine Line Nov-2007 • No public information available • Black Series Insert Nov-2007   Balls: Balls: • None • Tour i Balls Jul-2008   Other: Other: • TF Packaged Sets Dec-2007 • No public information available