The following information was excerpted from a press release announcing Callaway’s first quarter fiscal 2014 results. Note that the information presented below comes from various sections of the company’s press release. The entire press release should be consulted for a complete discussion. To view the entire press release… click here.
Callaway Golf Company (NYSE:ELY) today announced its first quarter 2014 financial results, including a 22% increase in sales driven by double digit growth in woods (+33%), irons (+29%), and golf balls (+24%). Additionally, income from operations increased 54% to $62 million and fully diluted earnings per share increased 30% to $0.61, both driven by the increased sales and improvements in gross margins of 160 basis points, which more than offset an increase of $13 million in operating expenses and a $9 million decrease in other income. The 2014 results benefitted from a $4 million decrease in pre-tax charges related to the cost reduction initiatives that were completed in 2013. The Company was able to achieve these significantly improved financial results despite adverse changes in foreign currency rates, which negatively impacted 2014 sales by $6 million, a $9 million dollar decrease in other income/expense resulting primarily from adverse changes in foreign currency contract values, and a $4 million increase in stock compensation expense as a result of increases in the Company’s stock price.
For the first quarter of 2014, the Company reported the following results, as compared to the same period in 2013:
The Company’s net sales for the first quarter of 2014 increased to $352 million or up 22%, as compared to $288 million for the same period in 2013. The strength of the Company’s 2014 product line more than offset the negative impact of foreign currency movements. As compared to 2013, the Company’s first quarter 2014 net sales were negatively impacted by $6 million due to adverse changes in foreign currency exchange rates.
In addition to the increase in sales, gross margins improved 160 basis points compared to last year due to improved pricing and sales mix, the completion of the cost-reduction initiatives in 2013, and productivity improvements resulting from several initiatives implemented last year, all of which more than offset the negative impact of foreign currency exchange rates and increased product costs associated with additional technology in several new products.
Operating expenses increased $13 million due to increases in marketing support for new products launched during the quarter, an increase in stock compensation expense associated with a 54% increase in the stock price compared to March 31, 2013, and planned incremental tour investment.
Other income/expense decreased by $9 million to other expense of $5 million in the first quarter of 2014 compared to other income of $4 million in the first quarter of 2013. This decrease is primarily attributable to changes in foreign currency contract valuations. These contracts, which are used to hedge the Company’s exposure to changes in foreign currency exchange rates, are required to be marked to market at the end of each quarter and changes in the contract values are reported in other income/expense. The Company recorded contract valuation losses of $3 million in the first quarter of 2014 compared to $8 million of contract valuation gains in the first quarter of 2013.
As a result of the increase in net sales and improved gross margins, which more than offset the increase in operating expenses and foreign currency contract losses, earnings per share for the first quarter of 2014 increased 30% to $0.61compared to $0.47 in 2013.
“We are pleased with our results for the first quarter,” commented Chip Brewer, President and Chief Executive Officer. “These results reflect our continued brand momentum and the success of the first stage of our multi-year turnaround plan. In particular, our renewed focus on more consumer-oriented products has resulted in double digit sales increases in our woods, irons and golf ball product categories, resulting in a 22% increase in net sales for the quarter and market share gains in each of our key markets around the world.”
“As evidenced by our recent results, we are now clearly seeing the benefits of the many changes we have made at the Company as part of our turnaround plan,” continued Mr. Brewer. “We believe that our turnaround plan is firmly on track and that we are laying the proper foundation for a sustained recovery over the long-term. With that said, in the short term, we are anticipating very challenging market conditions for the second quarter and possibly the balance of the year. The golf market has been slow to open in many regions where we conduct business, including our largest region, the United States, which continues to have unfavorable weather in many parts of the country. In addition, overall retail inventory levels are high and we anticipate a heavy promotional environment while the industry works through the excess inventory. We are maintaining our full year guidance, but if the golf market does not open shortly or the promotional activity is heavier than we anticipate, we would expect to be at the low end of our earnings guidance.”
Business Outlook for 2014
The Company has reported that it expects challenging market conditions in the second quarter because of a late start to the 2014 golf season as well as high retail inventory levels and anticipated promotional activity. Due to these conditions, as well as the successful retail sell-in during the first quarter, the Company estimates for the second quarter of 2014 (compared to the second quarter of 2013) that its sales will be flat to down 5% percent and that its earnings per share will be breakeven to slightly profitable.
The Company is maintaining its financial guidance for the full year 2014, but notes that if the golf market does not open shortly or if promotional activity is heavier than anticipated the Company would expect to be at the low end of the earnings guidance. The guidance previously provided is as follows:
Conference Call and Webcast
The Company will be holding a conference call at 2:00 p.m. PDT today to discuss the Company’s financial results, outlook and business. 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. PDT on Wednesday, April 30, 2014. The replay may be accessed through the Internet atwww.callawaygolf.com.
The GAAP results contained in this press release and the financial statement schedules attached to this press release have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). To supplement the GAAP results, the Company has provided certain non-GAAP financial information as follows:
Constant Currency Basis. The Company provided certain information regarding the Company’s net sales or projected net sales on a “constant currency basis.” This information estimates the impact of changes in foreign currency rates on the translation of the Company’s current or projected future period net sales as compared to the applicable comparable prior period. This impact is derived by taking the current or projected local currency results and translating them into U.S. Dollars based upon the foreign currency exchange rates for the applicable comparable prior period. It does not include any other effect of changes in foreign currency rates on the Company’s results or business.
Excluded Items. The Company presented certain of the Company’s financial results excluding sales related to the Top-Flite and Ben Hogan brands or the products that were transitioned to a third party model, including apparel and footwear in certain regions.
Adjusted EBITDA. The Company provided information about its results, excluding interest, taxes, depreciation and amortization expenses, and impairment charges (“Adjusted EBITDA”).
In addition, because the Company previously reported its 2013 results on a GAAP and Non-GAAP basis, the Company has included in the schedules to this release a reconciliation of such information for 2013. The non-GAAP information presented in this release and related schedules should not be considered in isolation or as a substitute for any measure derived in accordance with GAAP. The non-GAAP information may also be inconsistent with the manner in which similar measures are derived or used by other companies. Management uses such non-GAAP information for financial and operational decision-making purposes and as a means to evaluate period over period comparisons and in forecasting the Company’s business going forward. Management believes that the presentation of such non-GAAP information, when considered in conjunction with the most directly comparable GAAP information, provides additional useful comparative information for investors in their assessment of the underlying performance of the Company’s business without regard to these items. The Company has provided reconciling information in the attached schedules.
Forward-Looking Statements: Statements used in this press release that relate to future plans, events, financial results, performance or prospects, including statements relating to the estimated 2014 second quarter or full year sales, sales growth, gross margins, operating expenses, pre-tax income, and earnings per share, as well as the Company’s recovery, the creation of shareholder value, future market share gains, market conditions, improved financial performance and the level of promotional activity in the marketplace, are forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. These statements are based upon current information and expectations. Accurately estimating the forward-looking statements is based upon various risks and unknowns including delays, difficulties, or increased costs in implementing the Company’s turnaround strategy; consumer acceptance of and demand for the Company’s products; the level of promotional activity in the marketplace; unfavorable weather conditions, future consumer discretionary purchasing activity, which can be significantly adversely affected by unfavorable economic or market conditions; and future changes in foreign currency exchange rates and the degree of effectiveness of the Company’s hedging programs. Actual results may differ materially from those estimated or anticipated as a result of these risks and unknowns or other risks and uncertainties, including continued compliance with the terms of the Company’s credit facility; delays, difficulties or increased costs in the supply of components needed to manufacture the Company’s products or in manufacturing the Company’s products; 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, the golf industry, and the Company’s business, see the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 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 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.
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