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Callaway Golf Company Reports Operating Results (10-Q)

July 30, 2010 | About:
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10qk

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Callaway Golf Company (ELY) filed Quarterly Report for the period ended 2010-06-30.

Callaway Golf Company has a market cap of $444.3 million; its shares were traded at around $6.9 with and P/S ratio of 0.5. The dividend yield of Callaway Golf Company stocks is 0.6%.ELY is in the portfolios of Diamond Hill Capital of Diamond Hill Capital Management Inc, Chuck Royce of Royce& Associates, Kenneth Fisher of Fisher Asset Management, LLC, Paul Tudor Jones of The Tudor Group, Steven Cohen of SAC Capital Advisors, George Soros of Soros Fund Management LLC.

Highlight of Business Operations:

The Companys other income/expense was unfavorably impacted in the second quarter and first six months of 2010 by net foreign currency losses. Primarily as a result of these losses, the Company recorded for the second quarter of 2010 other expense of $4.7 million compared to other income of $0.5 million for the same period in 2009, and the Company recorded for the first six months of 2010 other expense of $3.1 million as compared to other expense of $1.9 million for the same period in 2009.

The Companys net income increased by $4.6 million (11%) and $18.0 million (131%), for the second quarter and first six months of 2010, respectively. The Companys prior preferred stock offering had a more significant effect on the Companys earnings per share in 2010 than in 2009 as the offering was not completed until June 15, 2009. Despite the effect of the preferred stock offering, the Companys fully diluted earnings per share increased $0.04 (40%) to $0.14 per share and $0.17 (81%) to $0.38 per share for the second quarter and first six months of 2010, respectively.

For the second quarter of 2010, gross profit increased $13.8 million to $123.6 million from $109.8 million in the second quarter of 2009. Gross profit as a percentage of net sales (gross margin) increased to 41% in the second quarter of 2010 compared to 36% in the same period in 2009. The increase in gross margin was primarily attributable to cost reductions on golf club components in addition to a favorable shift in golf ball production to more cost efficient regions outside the United States. These increases were partially offset by lower average selling prices on new driver products combined with price reductions taken on older golf club products. See Segment Profitability below for further discussion of gross margins. Gross profit for the second quarter of 2010 was negatively affected by charges of $1.2 million related to the Companys Global Operations Strategy Initiatives compared to $1.8 million in the second quarter of 2009. Gross profit for the second quarter of 2009 was negatively impacted by charges of $1.1 million in connection with the work force reductions announced in April 2009.

Net income for the second quarter of 2010 increased to $11.5 million from $6.9 million in the comparable period of 2009. Net income allocable to common shareholders for the second quarter of 2010 includes a reduction of $2.6 million for dividends on preferred stock (as defined in Sources of Liquidity below) compared to $0.4 million in the comparable period of 2009 as the preferred offering was completed late in the second quarter of 2009. Diluted earnings per share increased to $0.14 per share on 84.3 million weighted average shares outstanding in the second quarter of 2010 compared to $0.10 per share on 66.8 million weighted average shares outstanding in the second quarter of 2009 (see share count reconciliation at Note 3 to the Consolidated Condensed Financial StatementsPreferred Stock Offering in this Form 10-Q). Diluted earnings per share for the second quarter of 2010 and 2009 were negatively affected by $0.01 and $0.02 per share, respectively, related to after-tax costs incurred in connection with the Companys Global Operations Strategy Initiatives. In addition, net income and earnings per share were negatively affected by after tax charges of $1.7 million ($0.03 per share) incurred during the second quarter of 2009 as a result of the workforce reductions announced in April 2009.

The Company has continued to actively implement its Global Operations Strategy Initiatives. As a result of these initiatives, the Companys golf clubs operating segment absorbed pre-tax charges of $1.3 million during the second quarter of 2010. Pre-tax charges absorbed by the golf balls operating segment during the second quarter of 2010 were nominal. During the second quarter of 2009, the Companys golf clubs and golf balls operating segments absorbed pre-tax charges of $1.4 million and $0.4 million, respectively. In addition, in connection with the workforce reductions announced in April 2009, the Company recorded pre-tax charges of $2.8 million in the second quarter of 2009, of which $2.2 million and $0.6 million were absorbed by the Companys golf clubs and golf balls operating segments, respectively.

Net sales for the six months ended June 30, 2010 increased by $32.4 million (6%) to $606.5 million compared to $574.1 million in the same period in 2009. The Companys net sales for the first six months of 2010 were favorably impacted by foreign currency exchange rates and by increased sales of the Companys woods, golf balls, putters and accessories products. This increase was partially offset by an overall decline in average selling prices in the golf club business due to challenging market conditions, a slowdown in the global economic recovery, as well as a delay in the opening of the golf season due to poor weather conditions in certain key regions during 2010. This increase reflects a $28.9 million increase in net sales of the Companys golf clubs segment and a $3.5 million increase in net sales of the Companys golf balls segment as presented below (dollars in millions):

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