Callaway Golf Announces Results for Third Quarter 2006

Callaway Golf Company (NYSE:ELY) today announced its financial results for the third quarter ended September 30, 2006, in line with earlier estimates. Highlights for the third quarter include: Net sales of $193.8 million, as compared to $220.6 million for the same period in 2005. As mentioned in the October 16th pre-release, this decline in sales is primarily due to the planned timing of new product introductions which adversely affected the quarter by approximately $30 million as compared to the third quarter of 2005. Loss per share of $0.18 on 67.0 million shares, as compared to a loss of $0.07 on 68.8 million shares in 2005. The loss per share includes $0.03 of after-tax charges for employee equity-based compensation associated with FAS 123R, $0.01 for the integration of Top-Flite, and $0.01 for restructuring charges. The third quarter of 2005 includes after-tax charges of $0.02 for the integration of Top-Flite and $0.06 for restructuring charges. Excluding these charges, the Company’s pro forma loss per share for the third quarter of 2006 would have been $0.13, as compared to pro forma earnings per share of $0.01 for the third quarter of 2005. Gross profit for the third quarter of 2006 was $67.7 million (or 35% of net sales) compared to $86.9 million (or 39% of net sales) for the third quarter of 2005. The decline in gross profit is primarily the result of a lower mix of higher margin woods and irons products due to the timing of new product introductions, as well as lower Top-Flite ball margins due to price reductions related to the initiatives to clear older Top-Flite golf ball inventory in preparation for the re-launch of that brand in 2007. Additional details can be found in the Company’s October 16, 2006 earnings pre-release. Operating Expenses for the third quarter of 2006 were $84.6 million, a decrease of $11.8 million compared to $96.4 million in 2005. The decrease is primarily due to the restructuring initiatives announced in September 2005. Highlights for the first nine months include: Net sales of $838.0 million, as compared to $843.6 million for the same period in 2005. Fully diluted earnings per share of $0.49 on 68.8 million shares, as compared to fully diluted earnings per share of $0.46 on 69.0 million shares in 2005. Fully diluted earnings per share includes after-tax charges of $0.07 for employee equity-based compensation associated with FAS 123R, $0.04 for the integration of Top-Flite, and $0.01 for restructuring. The third quarter of 2005 includes after-tax charges of $0.08 for integration of Top-Flite, $0.06 for restructuring, and $0.01 for employee equity-based compensation. Excluding these charges, the Company’s pro forma fully diluted earnings per share for both 2006 and 2005 would have been $0.61. Gross profit for 2006 was $339.3 million (or 40% of net sales) compared to $366.2 million (or 43% of net sales) for 2005. The decline in gross profit is primarily the result of a lower mix of higher margin irons due to the timing of new product introductions, as well as lower Top-Flite ball margins due to the initiatives to clear older Top-Flite golf ball inventory. Operating Expenses for 2006 were $281.1 million, a decrease of $35.3 million compared to $316.4 million in 2005. A majority of the decrease is due to the restructuring initiatives announced in September 2005. Total savings since September 2005 have totaled approximately $44 million, net of reinvestment, compared to original estimates of $25 to $30 million. "We continue to make progress on many fronts this year, despite the disappointing performance in our Top-Flite brand,” commented George Fellows, President and CEO. "Sales of our core brands of Callaway and Odyssey have grown significantly this year and we have materially reduced our operating expenses as a result of last September’s cost cutting initiatives. More importantly, these factors should combine to increase our full year pro forma earnings per share by more than 20% in 2006. In addition, we have strengthened the management team, made several internal process improvements, and today on our earnings call, will share a series of initiatives focused on improving gross margins by an estimated $50 to $60 million over the next two years. Ultimately, these actions along with future initiatives should continue the progress we’ve made-to-date towards our three year plan and position Callaway to create additional value for shareholders.” The estimated increase in 2006 pro forma earnings excludes non-cash charges related to employee equity-based compensation, charges related to the Top-Flite integration and 2005 restructuring initiatives, as well as charges incurred related to the implementation of the gross margin initiatives. For more detailed financial information concerning current financial results, including additional pro forma information and pro forma reconciliations, see attached schedules and "Supplemental Financial Information.” 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 Wednesday, November 8, 2006. 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 846344. Disclaimer: Statements used in this press release that relate to future plans, events, financial results, performance or prospects, including statements relating to estimated earnings growth for 2006, the amount or timing of the anticipated improvement in gross margins, implementation of future initiatives, achievement of three-year plan, and creation of future shareholder value, 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. Actual results may differ materially from those anticipated as a result of certain risks and uncertainties, including but not limited to, delays, difficulties or increased costs associated with the implementation of the Company’s planned gross margin initiatives, the re-launch of the Top-Flite brand or the implementation of future initiatives; market acceptance of current and future products; adverse market and economic conditions; 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 for 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, 2005, 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 preliminary 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 employee equity based compensation and charges related to the integration of the Callaway Golf Company and Top-Flite Golf Company operations as well as the September 2005 restructuring 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. Through an unwavering commitment to innovation, Callaway Golf 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®, Top-Flite®, Odyssey® and Ben Hogan® brands. For more information visit www.callawaygolf.com. Callaway Golf Company Consolidated Condensed Balance Sheets (In thousands) (Unaudited)     September 30, December 31, 2006  2005      ASSETS Current assets: Cash and cash equivalents $ 52,501  $ 49,481  Accounts receivable, net 138,372  98,082  Inventories, net 241,683  241,577  Income taxes receivable -  2,026  Other current assets 54,589  47,424  Total current assets 487,145  438,590    Property, plant and equipment, net 134,040  127,739  Intangible assets, net 175,269  175,191  Deferred taxes 3,766  6,516  Other assets 15,288  16,462  $ 815,508  $ 764,498    LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accounts payable and accrued expenses $ 102,279  $ 102,134  Accrued employee compensation and benefits 20,480  24,783  Accrued warranty expense 14,157  13,267  Bank line of credit 60,000  -  Income taxes payable 4,850  -  Capital leases, current portion -  21  Total current liabilities 201,766  140,205    Long-term liabilities 27,023  28,245    Shareholders' equity 586,719  596,048  $ 815,508  $ 764,498  Callaway Golf Company Statements of Operations (In thousands, except per share data) (Unaudited)     Quarter Ended   September 30, 2006  2005    Net sales $ 193,763  100% $ 220,611  100% Cost of sales 126,058  65% 133,713  61% Gross profit 67,705  35% 86,898  39% Operating expenses: Selling expense 56,949  29% 69,744  32% General and administrative expense 20,901  11% 19,531  9% Research and development expense 6,788  4% 7,116  3% Total operating expenses 84,638  44% 96,391  44% Loss from operations (16,933) -9% (9,493) -4% Other income (expense), net (1,058) 735  Income (loss) before income taxes (17,991) -9% (8,758) -4% Income tax provision (benefit) (6,075) (3,954) Net income (loss) $ (11,916) -6% $ (4,804) -2%   Earnings (loss) per common share: Basic ($0.18) ($0.07) Diluted ($0.18) ($0.07) Weighted-average shares outstanding: Basic 67,000  68,849  Diluted 67,000  68,849    Nine Months Ended   September 30, 2006  2005    Net sales $ 838,023  100% $ 843,600  100% Cost of goods sold 498,720  60% 477,363  57% Gross profit 339,303  40% 366,237  43% Operating expenses: Selling expense 202,122  24% 236,129  28% General and administrative expense 59,226  7% 59,855  7% Research and development expense 19,786  2% 20,439  2% Total operating expenses 281,134  34% 316,423  38% Income from operations 58,169  7% 49,814  6% Other expense, net (2,029) (2,252) Income before income taxes 56,140  7% 47,562  6% Provision for income taxes 22,656  15,614  Net income $ 33,484  4% $ 31,948  4%   Earnings per common share: Basic $0.49  $0.47  Diluted $0.49  $0.46  Weighted-average shares outstanding: Basic 67,980  68,436  Diluted 68,777  69,028  Callaway Golf Company Consolidated Condensed Statements of Cash Flows (In thousands) (Unaudited)     Nine Months Ended September 30, 2006  2005  Cash flows from operating activities: Net income $ 33,484  $ 31,948  Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 23,961  30,942  Non-cash compensation 9,611  5,733  Loss on disposal of assets 1,047  1,109  Deferred taxes (3,240) (2,110) Changes in assets and liabilities, net of effects of acquisitions (35,969) (10,473) Net cash provided by operating activities 28,894  57,149    Cash flows from investing activities: Capital expenditures and other (28,551) (24,896) Business acquisition, net of cash acquired (5,911) -  Proceeds from sale of capital assets 468  71  Net cash used in investing activities (33,994) (24,825)   Cash flows from financing activities: Issuance of Common Stock 9,053  13,589  Dividends paid, net (9,695) (9,706) Acquisition of Treasury Stock (52,872) (39) Tax benefit from exercise of stock options 472  951  Proceeds from (payments on) Line of Credit, net 60,000  (13,000) Payments on financing arrangements (16) (39) Net cash provided by (used in) financing activities 6,942  (8,244)   Effect of exchange rate changes on cash and cash equivalents 1,178  (1,141) Net increase in cash and cash equivalents 3,020  22,939  Cash and cash equivalents at beginning of period 49,481  31,657  Cash and cash equivalents at end of period $ 52,501  $ 54,596  Callaway Golf Company Consolidated Net Sales and Operating Segment Information (In thousands) (Unaudited)       Net Sales by Product Category Quarter Ended Nine Months Ended September 30, Growth/(Decline) September 30, Growth/(Decline) 2006  2005  Dollars Percent 2006  2005  Dollars Percent Net sales: Woods $ 43,718  $ 62,881  $ (19,163) -30% $ 227,157  $ 197,928  $ 29,229  15% Irons 53,911  60,258  (6,347) -11% 249,681  279,892  (30,211) -11% Putters 22,954  22,374  580  3% 85,145  88,198  (3,053) -3% Golf balls 42,700  50,384  (7,684) -15% 167,533  180,176  (12,643) -7% Accessories and other 30,480  24,714  5,766  23% 108,507  97,406  11,101  11% $ 193,763  $ 220,611  $ (26,848) -12% $ 838,023  $ 843,600  $ (5,577) -1%   Net Sales by Region Quarter Ended Nine Months Ended September 30, Growth/(Decline) September 30, Growth/(Decline) 2006  2005  Dollars Percent 2006  2005  Dollars Percent Net sales: United States $ 103,196  $ 119,051  $ (15,855) -13% $ 470,828  $ 485,605  $ (14,777) -3% Europe 29,201  36,428  (7,227) -20% 133,622  144,159  (10,537) -7% Japan 23,236  25,729  (2,493) -10% 83,392  80,856  2,536  3% Rest of Asia 18,279  18,874  (595) -3% 60,828  52,603  8,225  16% Other foreign countries 19,851  20,529  (678) -3% 89,353  80,377  8,976  11% $ 193,763  $ 220,611  $ (26,848) -12% $ 838,023  $ 843,600  $ (5,577) -1%   Operating Segment Information Quarter Ended Nine Months Ended September 30, Growth/(Decline)   September 30, Growth/(Decline) 2006  2005  Dollars Percent 2006  2005  Dollars Percent Net sales: Golf clubs $ 151,063  $ 170,227  $ (19,164) -11% $ 670,490  $ 663,424  $ 7,066  1% Golf balls 42,700  50,384  (7,684) -15% 167,533  180,176  (12,643) -7% $ 193,763  $ 220,611  $ (26,848) -12% $ 838,023  $ 843,600  $ (5,577) -1%   Income before provision for income taxes:   Golf clubs $ 6,570  $ 8,685  $ (2,115) -24% $ 101,931  $ 82,429  $ 19,502  24% Golf balls (8,717) (7,700) (1,017) -13% (1,781) 43  (1,824) -4242% Reconciling items (15,844) (9,743) (6,101) -63% (44,010) (34,910) (9,100) -26% $ (17,991) $ (8,758) $ (9,233) -105% $ 56,140  $ 47,562  $ 8,578  18% Callaway Golf Company Supplemental Financial Information (In thousands, except per share data) (Unaudited)     Quarter Ended September 30, 2006    Pro Forma Callaway Golf   Integration Charges   Restructuring Charges   Employee Stock Compensation   Total as Reported Net sales $ 193,763  $ -  $ -  $ -  $ 193,763  Gross profit 69,064  (1,195) (46) (118) 67,705  % of sales 36% n/a  n/a  n/a  35% Operating expenses 81,294  79  995  2,270  84,638  Income (loss) from operations (12,230) (1,274) (1,041) (2,388) (16,933) Other expense, net (1,058) -  -  -  (1,058) Income (loss) before income taxes (13,288) (1,274) (1,041) (2,388) (17,991) Provision (benefit) for income taxes (4,487) (430) (351) (807) (6,075) Net income (loss) $ (8,801) $ (844) $ (690) $ (1,581) $ (11,916)   Diluted earnings (loss) per share: $ (0.13) $ (0.01) $ (0.01) $ (0.03) $ (0.18) Weighted-average shares outstanding: 67,000  67,000  67,000  67,000  67,000    Quarter Ended September 30, 2005    Pro Forma Callaway Golf   Integration Charges   Restructuring Charges   Employee Stock Compensation   Total as Reported Net sales $ 220,611  $ -  $ -  $ -  $ 220,611  Gross profit 90,283  (1,248) (2,137) -  86,898  % of sales 41% n/a  n/a  n/a  39% Operating expenses 91,130  985  4,107  169  96,391  Income (loss) from operations (847) (2,233) (6,244) (169) (9,493) Other expense, net 735  -  -  -  735  Income (loss) before income taxes (112) (2,233) (6,244) (169) (8,758) Provision (benefit) for income taxes (668) (848) (2,373) (65) (3,954) Net income (loss) $ 556  $ (1,385) $ (3,871) $ (104) $ (4,804)   Diluted earnings (loss) per share: $ 0.01  $ (0.02) $ (0.06) $ -  $ (0.07) Weighted-average shares outstanding: 68,849  68,849  68,849  68,849  68,849  Callaway Golf Company Supplemental Financial Information (In thousands, except per share data) (Unaudited)     Nine Months Ended September 30, 2006    Pro Forma Callaway Golf   Integration Charges   Restructuring Charges   Employee Stock Compensation   Total as Reported Net sales $ 838,023  $ -  $ -  $ -  $ 838,023  Gross profit 343,205  (3,366) (156) (380) 339,303  % of sales 41% n/a  n/a  n/a  40% Operating expenses 272,077  672  1,445  6,940  281,134  Income (loss) from operations 71,128  (4,038) (1,601) (7,320) 58,169  Other expense, net (2,029) -  -  -  (2,029) Income (loss) before income taxes 69,099  (4,038) (1,601) (7,320) 56,140  Provision for income taxes 27,141  (1,491) (560) (2,434) 22,656  Net income (loss) $ 41,958  $ (2,547) $ (1,041) $ (4,886) $ 33,484    Diluted earnings (loss) per share: $ 0.61  $ (0.04) $ (0.01) $ (0.07) $ 0.49  Weighted-average shares outstanding: 68,777  68,777  68,777  68,777  68,777    Nine Months Ended September 30, 2005    Pro Forma Callaway Golf   Integration Charges   Restructuring Charges   Employee Stock Compensation   Total as Reported Net sales $ 843,600  $ -  $ -  $ -  $ 843,600  Gross profit 373,999  (5,625) (2,137) -  366,237  % of sales 44% n/a  n/a  n/a  43% Operating expenses 308,238  3,695  4,107  383  316,423  Income (loss) from operations 65,761  (9,320) (6,244) (383) 49,814  Other expense, net (2,252) -  -  -  (2,252) Income (loss) before income taxes 63,509  (9,320) (6,244) (383) 47,562  Provision for income taxes 21,674  (3,541) (2,373) (146) 15,614  Net income (loss) $ 41,835  $ (5,779) $ (3,871) $ (237) $ 31,948    Diluted earnings (loss) per share: $ 0.61  $ (0.08) $ (0.06) $ (0.01) $ 0.46  Weighted-average shares outstanding: 69,028  69,028  69,028  69,028  69,028