Callaway Golf Company Announces Second Quarter 2017 Financial Results Including A 24% Increase In Net Sales; Callaway Increases Full Year Net Sales And Earnings Guidance

CARLSBAD, Calif., Aug. 3, 2017 /PRNewswire/ -- Callaway Golf Company (NYSE:ELY) announced today its second quarter 2017 financial results and increased its full year 2017 net sales and earnings guidance.

In the second quarter of 2017, as compared to the same period in 2016, the Company's net sales increased $59 million (24%) to $305 million. This increase was led by a 64% increase in sales of woods, primarily due to strong sales of the EPIC line of woods, and a 74% increase in gear, accessories and other, primarily due to the addition of the new business ventures, OGIO and the Japan apparel joint venture. The overall increase in net sales reflects the Company's continued brand momentum and increased hard goods market share, as well as increased sales in all operating segments and in all reporting geographic regions.

In addition to the sales increase, the Company also recognized a significant increase in operating income. The Company's 2017 second quarter operating income increased 135% to $49 million as compared to the second quarter of 2016. The Company's diluted earnings per share was $0.33 for the second quarter of 2017 compared to $0.36 for the comparable period in 2016 (which included a $17.7 million gain on the sale of a small portion of the Company's Topgolf investment). In addition, as a result of the Company's prior deferred tax valuation allowance, the Company did not recognize U.S. income tax expense in the second quarter of 2016. On a non-GAAP basis (which excludes from 2017 the $2.3 million of OGIO non-recurring transaction and transition expenses and from 2016 the Topgolf gain, and which applies an estimated non-GAAP tax rate of 38.5% for the second quarter of 2016), the Company's earnings per share for the second quarter of 2017 increased to $0.34 as compared to $0.12 for the comparable period in 2016.     

As a result of this better than expected second quarter performance and expectations for continued brand momentum for the second half of the year, the Company increased its full year sales guidance to $980 - $995 million as compared to its prior guidance of $960 - $980 million. The Company also increased its full year non-GAAP earnings per share guidance to $0.40 - $0.45 compared to prior guidance of $0.31 - $0.37. The full year non-GAAP guidance excludes an estimated $7 million ($0.05 per share) of non-recurring OGIO transaction and transition expenses but does not include any effect from the pending acquisition announced earlier today.

"We are very pleased with our 2017 first half performance," commented Chip Brewer, President and Chief Executive Officer of Callaway Golf Company. "This year's product line-up, including the EPIC driver and Chrome Soft golf ball franchise, has resonated strongly with golfers. As a result, our brand momentum has increased and our hard goods market share has increased in every major region, resulting in double-digit net sales growth and double-digit EBITDA growth. Furthermore, our new ventures, namely the apparel joint venture in Japan and the OGIO business, continue to perform well. We are also very pleased to announce our agreement to acquire TravisMathew. It is an exceptional high-growth golf and lifestyle apparel company that fits extremely well with our business, growth strategy, brands and culture. Moving into the second half of the year, we are cautiously optimistic about the golf industry overall and very excited about TravisMathew becoming a part of Callaway."  

GAAP and Non-GAAP Results

In addition to the Company's results prepared in accordance with GAAP, the Company provided information on a non-GAAP basis. The purpose of this non-GAAP presentation is to provide additional information to investors regarding the underlying performance of the Company's business without these non-recurring items and on a more comparable tax basis.  

This non-GAAP information presents the Company's financial results for the second quarter and first half of 2017 excluding the non-recurring transaction and transition expenses related to the OGIO acquisition. Additionally, during the second quarter of 2016, the Company sold a small portion of its Topgolf investment and recognized a gain of $18 million, which is excluded from the non-GAAP presentation. Lastly, because of the Company's prior deferred tax valuation allowance, the Company did not recognize U.S. income tax expense during the second quarter of 2016 and its income tax provision and after-tax income and earnings are therefore not calculated on the same basis as in the second quarter of 2017. In order to make 2016 more comparable to 2017 for evaluation purposes, the Company has presented 2016 results on a non-GAAP basis by applying an estimated income tax rate of 38.5% as compared to the actual second quarter and first half 2016 effective tax rates of 5.4% and 4.4%, respectively. The valuation allowance was reversed in the fourth quarter of 2016. Excluding the reversal, the Company's full year 2016 effective tax rate was 41.1%. The Company also provided information concerning its earnings before interest, taxes, depreciation and amortization expense, the non-recurring OGIO costs and the Topgolf gain ("Adjusted EBITDA").

The manner in which this non-GAAP information is derived is discussed in more detail toward the end of this release, and the Company has provided in the tables to this release a reconciliation of the non-GAAP information to the most directly comparable GAAP information. 

Summary of Second Quarter 2017 Financial Results

The Company announced the following GAAP and non-GAAP financial results for the second quarter of 2017 (in millions, except gross margin and EPS):

For the second quarter of 2017, the Company's net sales increased $59 million to $305 million compared to $246 million for the same period in 2016. The 24% increase in net sales is attributable to the strength of the Company's 2017 product line, including continued success of the current year EPIC driver and fairway woods, increased golf ball sales, including the new Chrome Soft X ball, and increased net sales of gear, accessories and other as a result of the Company's acquisition of OGIO in the first quarter of 2017 and the new apparel joint venture in Japan, which was formed in the third quarter of 2016. For the second consecutive quarter, net sales increased in all major regions and reflected market share gains in those regions.

For the second quarter of 2017, the Company's gross margin was 48.7% compared to second quarter 2016 gross margin of 45.0%. The 370 basis point increase was primarily due to a favorable shift in product mix toward the higher margin EPIC woods and irons combined with overall higher average selling prices, less discounting and lower promotional activity. The increases were partially offset by the different economics of the apparel joint venture and the OGIO business, which have lower gross margins and lower relative operating expenses as compared to the Company's golf equipment business. 

Operating expenses increased $9 million to $99 million in the second quarter of 2017 compared to $90 million for the same period in 2016. This increase is due to the addition in 2017 of operating expenses from the Japan joint venture and the consolidation of OGIO, as well as $2 million in non-recurring OGIO transaction and transition expenses. 

Second quarter 2017 earnings per share was $0.33, compared to $0.36 for the second quarter of 2016.  The decrease on a GAAP basis was caused by the $2 million OGIO transaction and transition expenses in the second quarter of 2017, the $18 million Topgolf gain in 2016 and the difference in effective tax rates. On a non-GAAP basis, which excludes the impact of the non-recurring OGIO transaction and transition expenses, excludes the Topgolf gain in 2016 and applies an estimated tax rate of 38.5% to 2016 pre-tax income as discussed above, the Company would have reported earnings per share for the second quarter of 2017 of $0.34, compared to earnings per share of $0.12 for the second quarter of 2016. 

Summary of First Half 2017 Financial Results

The Company announced the following GAAP and non-GAAP financial results for the first half of 2017 (in millions, except gross margin and EPS):

For the first half of 2017, the Company's net sales increased $93 million to $613 million compared to $520 million for the same period in 2016. The 18% increase in net sales is attributable to the strength of the Company's 2017 product line, including continued success of the current year EPIC driver and fairway woods, increased golf ball sales, including the new Chrome Soft X ball, and increased gear, accessories and other as a result of the Company's acquisition of OGIO in the first quarter of 2017 and the new apparel joint venture in Japan, which was formed in the third quarter of 2016. In the first half of 2017, net sales increased in all major regions and reflected market share gains in those regions.

For the first half of 2017, the Company's gross margin increased to 48.2% compared to first half 2016 gross margin of 46.8%. The 140 basis point increase was primarily due to a favorable shift in product mix toward the higher margin EPIC woods and irons combined with overall higher average selling prices, less discounting and lower promotional activity. The increases were partially offset by the different economics of the Japan apparel joint venture and the OGIO business discussed above. 

Operating expenses increased $26 million to $203 million in the first half of 2017 compared to $177 million for the same period in 2016. This increase is due to the addition in 2017 of operating expenses from the Japan apparel joint venture and the consolidation of OGIO, as well as $6 million in non-recurring OGIO transaction and transition expenses. 

First half 2017 earnings per share was $0.59, compared to $0.76 for the first half of 2016.  The decrease on a GAAP basis was caused by the $6 million OGIO transaction and transition expenses in the first half of 2017, the $18 million Topgolf gain in the first half of 2016 and the difference in effective tax rates. On a non-GAAP basis, which excludes the impact of the non-recurring OGIO expenses, excludes the Topgolf gain and applies an estimated tax rate of 38.5% to 2016 pre-tax income as discussed above, the Company would have reported earnings per share for the second quarter of 2017 of $0.64, compared to earnings per share of $0.37 for the first half of 2016.  

Business Outlook for 2017

Basis for 2017 GAAP Estimates. The Company's 2017 GAAP estimates exclude the financial impact of the recently announced pending acquisition of TravisMathew, LLC, which is estimated to be approximately $10-15 million in net sales assuming the transaction closes in the third quarter of 2017. Including approximately $5 million of estimated transaction expenses and incremental non-cash expense resulting from the acquisition purchase accounting adjustments, TravisMathew is expected to be $0.04 dilutive to the Company's earnings per share for 2017.

Basis for 2017 Non-GAAP Estimates. The Company's 2017 non-GAAP estimates exclude non-recurring transaction and transition expenses related to the OGIO acquisition, which are estimated to be approximately $7 million for full year 2017. The amount incurred in the first half of 2017 was $6 million, which was in line with the Company's expectations.

Basis for 2016 Pro Forma Results.  In order to make the 2017 guidance more comparable to 2016, as discussed above, the Company has presented 2016 results on a pro forma basis by excluding from 2016 the prior $0.11 per share after-tax Topgolf gain. Furthermore, the Company excluded from full year 2016 the $1.63 per share non-recurring benefit from the reversal of the deferred tax valuation allowance. 

Given the Company's financial performance during the second quarter of 2017, the Company is increasing its full year financial guidance as follows (in millions, except gross margin and EPS):

The Company currently estimates full year 2017 net sales of $980 - $995 million. This would result in net sales growth of 13% - 14% in 2017 compared to 2016. Incremental sales growth versus previous estimates is expected to be driven primarily by market share gains related to the Company's 2017 product line. The Company currently estimates that changes in foreign currency rates will adversely affect projected 2017 net sales by approximately $12 million as compared to 2016 rates. The Company previously estimated that changes in foreign currency would adversely affect projected 2017 net sales by $16 million.  

The Company currently estimates that its 2017 gross margin will improve 60 basis points from the prior estimate. This increase is expected to be driven by continued favorable pricing, mix and operational efficiencies. The Company estimates that its 2017 non-GAAP operating expenses will decrease $2 million compared to prior estimates.

The Company increased its non-GAAP earnings per share to $0.40 - $0.45 due to the projected increase in net sales, improved gross margin and decrease in estimated operating expenses. The Company's 2017 earnings per share estimates assume a tax rate of approximately 34.5% and a base of 96 million shares.

Based on the current planned product launches for the remainder of 2017 and the year-over-year fourth quarter comparison with the 2016 Steelhead irons launch, the majority of the expected increase in net sales in the second half of 2017 is anticipated to occur in the third quarter.

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 http://ir.callawaygolf.com/. To listen to the call, and to access the Company's presentation materials, 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 Thursday, August 10, 2017.  The replay may be accessed through the Internet at http://ir.callawaygolf.com/.

Non-GAAP Information

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 financial results or projected financial results 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 financial results as compared to the applicable comparable 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 period. It does not include any other effect of changes in foreign currency rates on the Company's results or business.  

Adjusted EBITDA.  The Company provides information about its results excluding interest, taxes, and depreciation and amortization expenses, as well as non-recurring OGIO transaction and transition expenses and the second quarter 2016 gain realized from the sale of a small portion of the Company's Topgolf investment.

Other Adjustments. The Company presents certain of its financial results (i) excluding tax benefits received from the reversal of a significant portion of its deferred tax valuation allowance, (ii) excluding gains from the sale of a small portion of its Topgolf investment, (iii) excluding the non-recurring OGIO expenses and (iv) by applying an assumed estimated statutory tax rate of 38.5%.

In addition, the Company has included in the schedules to this release a reconciliation of certain non-GAAP information to the most directly correlated GAAP information.  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 Company's estimated 2017 sales, gross margins, operating expenses, and earnings per share (or related tax rate and share count), the estimated impact from changes in foreign currency rates, the estimated timing and amount of expenses related to the integration of the OGIO acquisition, and the estimated timing and financial impact of the pending TravisMathew transaction, 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 the risk that the TravisMathew transaction may not close on the terms or timing described, or at all; unanticipated difficulties or expenditures relating to the TravisMathew transaction or the realization of the anticipated synergies and other benefits; the response of customers, suppliers or others to the announcement of the transaction; potential difficulties in employee retention as a result of the transaction; any unfavorable changes in U.S. trade, tax or other policies, including restrictions on imports or an increase in import tariffs; delays, difficulties, or increased costs in integrating the acquired OGIO business or implementing the Company's growth strategy generally; 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; future retailer purchasing activity, which can be significantly negatively affected by adverse industry conditions and overall retail inventory levels; 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 facilities; delays, difficulties or increased costs in the supply of components or commodities needed to manufacture the Company's products or in manufacturing the Company's products; the ability to secure professional tour player endorsements at reasonable costs; 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, 2016 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.

About Callaway Golf
Through an unwavering commitment to innovation, Callaway Golf Company (NYSE:ELY) creates products designed to make every golfer a better golfer. Callaway Golf Company manufactures and sells golf clubs and golf balls, and sells bags, accessories and apparel in the golf and lifestyle categories, under the Callaway Golf®, Odyssey®, and OGIO brands worldwide. For more information please visit www.callawaygolf.com, www.odysseygolf.com and www.ogio.com.

CALLAWAY GOLF COMPANY
Consolidated Net Sales by Product Category Reclassified For New Segment Presentation
(Unaudited)
(In thousands)

Effective January 1, 2017, the Company changed its operating segments and established a new operating segment, Gear, Accessories and Other. As a result of this change, the Golf Clubs operating segment is now comprised of the woods, irons and putters product categories, and the Golf Ball operating segment is comprised of golf balls. The accessories and other product category, which was previously reported within the Golf Clubs operating segment, is now included in the new Gear, Accessories and Other operating segment. Accordingly, as a result of this change, net sales by product category for 2016 and all interim periods therein were reclassified to conform with the new operating segment presentation as follows: (i) sales of pre-owned clubs, which were previously in accessories and other, are now reported by product type within woods, irons and putters; (ii) sales of packaged sets, which were previously reported in accessories and other, are now reported within irons; and (iii) sales of golf apparel and footwear, golf bags, golf gloves, travel gear, headwear and other golf-related accessories, OGIO branded gear and accessories, retail apparel sales from the Company's joint venture in Japan, in addition to royalties from licensing of the Company's trademarks and service marks for various soft goods, which were previously reported in accessories and other, are now reported in the Gear, Accessories and Other operating segment.

The table below represents the Company's 2016 consolidated net sales by product category as previously reported.

The table below represents the Company's 2016 consolidated net sales by product category reclassified to conform with the new segment presentation in the comparable periods of 2017.

SOURCE Callaway Golf Company