Callaway’s third-quarter double whammy: energy, economy

Callaway Golf Co. Oct. 18 reported a 6 percent decline in sales and a 67 percent drop in net income for the third quarter, citing difficult market conditions and a noncash charge related to a long-term energy contract.

For the three-month period ending Sept. 30, the Carlsbad, Calif.-based equipment company posted sales of $195.8 million, down from $208.1 million in the same period a year ago. Net income fell to $6.5 million from $20.1 million in the third quarter of 2000.

However, excluding a $7.8 million after-tax, noncash energy supply contract charge, Callaway’s drop in net income was less severe: It decreased 28 percent to $14.3 million.

During the second quarter of 2001, Callaway entered into a long-term energy supply contract as part of a comprehensive strategy to ensure the uninterrupted supply of power while capping electricity costs in the volatile California energy market. Accounting rules mandate companies adjust the book value of such contracts based on current market rates and record any resulting gain or loss as either income or expense. During the quarter, Callaway recorded a noncash expense of $7.8 million after-tax, as a result of falling electricity rates.

Even with the third-quarter slide, Callaway posted sales of $710.9 million for the first nine months of the year – a company record. That figure was up 2 percent from $695.4 million during the same period a year ago. Net income for the nine-month period fell 12 percent to $67.6 million. (Excluding the energy charge, net income increased 7 percent to $81.8 million.)

“We are pleased with our year-to-date results in light of industry and economic challenges,” said Ron Drapeau, Callaway’s chairman, president and chief executive officer.

“. . . Our golf ball products have shown good increases in market share as well. . . . In particular, our CB1 golf ball line captured considerable U.S. market share in its price segment (16 percent) after just four months.”

Nevertheless, Callaway’s ball operation faces tough challenges ahead. Though company officials have been projecting 2001 balls sales to reach $50 million, they restated during an Oct. 18 conference call with Wall Street analysts that operating losses for the ball business likely will be $20 million.

Asked by one analyst if the ball operation would become profitable next year, Drapeau answered: “Getting to break-even next year would be a wonderful achievement for us.”

Tim Conder, who follows Callaway for A.G. Edwards & Sons Inc., said, “I interpreted Drapeau’s comment to mean that achieving profitability (in 2002) would be a stretch.”

Company officials also said they were lowering sales and earnings expectations for the remainder of the year. In a statement about its third-quarter results, Callaway officials said they now expected net sales for the year of $800 million to $820 million. By comparison, the company reported net sales of $837.6 million in 2000.

“We are re-evaluating our 2002 expectations in light of market conditions and expect to offer guidance after we collect feedback from our planned product introductions,” said Brad Holiday, Callaway’s executive vice president and chief financial officer.

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