In looking at Callaway Golf's (NYSE:ELY) earnings report for the first quarter, I'm immediately reminded of my colleague Rich Smith's description of the earnings press release game:

"Keep your eye off the ball, Joe. Remember, the company owns the ball. They show you the ball. Look for what they are not showing you. In other words, if the company says 'record revenues,' you ask 'and what about the earnings?' If they say 'record earnings,' you ask 'and did revenues grow, too? And how about free cash flow? Got any of that?'"

Or more concisely, "The cardinal rule of Press Release Baseball is to keep your eye off the ball."

Tim Beyers started the whole press release-game shenanigans with "Press Release Bingo." So, herewith is the third leg of the trilogy: Press Release Golf, starring Callaway. The object of Press Release Golf is to get the real ball, the one that matters, lost deep, deep in the woods, and to keep people from noticing by distracting them with other practice balls that sail straight down the fairway. Let's play.

First, let's hit the real ball: Earnings for the quarter were $0.59 per share, $0.63 of which came from Callaway, a penny from newly acquired Top-Flite, and negative $0.05 from costs related to the acquisition. Let's ignore the acquisition costs and focus on the $0.64 in operating earnings. That's identical to the amount from the previous year, before Top-Flite was integrated, on substantially higher sales. When we find this ball, it's resting comfortably in an unraked footprint in a deep fairway bunker.

Diversionary Ball #1: Headline on press release is "Callaway Golf Announces Record First Quarter Sales". Whew, I do believe that one was down the middle of the fairway.

Back to the real ball: It's explained well into the press release that these "record sales" are a result of organic growth at Callaway, so the Top-Flite sales are gravy. Even so, the classic Callaway revenues are higher, but there are a few signs that the recovery of golf sales may not be all that great. Most importantly, Callaway's gross margins are down from 51% to 49%, and its accounts receivable skyrocketed by nearly 200%, up to $297 million. The real ball, having clipped the bunker lip on its way out, now sits on the edge of the fairway, in some thatch. What's that buzzing sound?

Diversionary Ball #2: "We are very pleased to be hitting our major goals so early in the year, and remain on track to hit our overall growth targets for 2004." Wow! Way to fade the treeline.

Back to the real ball: Total sales targets for 2004 are $1.03 billion. This means that more than 35% of the annual sales for Callaway have already occurred. That's the reality of a seasonal business, so there's no need to take this reality out of context. But this means that even though consumers might be thinking about golf as a spring and summer seasonal sport, the reality is that the company's largest quarter for the year has just passed.

Some analysts noted that the Top-Flite business actually helps in some respects because the golf ball business skews later in the year. Far fewer balls lost in January than in, say, August. True, but those of us who live in the land of four seasons ought to remember that just because Taconic isn't open on Presidents Day doesn't mean that people aren't plunking plenty of golf balls at Doral.

There's a difference, but we're not talking about the same kind of seasonality that an Arctic Cat (NASDAQ:ACAT) or even a Tiffany (NYSE:TIF) endure. And keep this in mind, those spiraling receivables came during the company's best traditional quarter. What traditionally happens is that Callaway sends out its equipment to retailers and distributors in the winter quarter, with terms, and those channels spend the rest of the year paying down their payables to Callaway as they sell through. Nothing wrong with this, of course: It just means that Callaway's sales for this quarter are based not upon retail demand, but on wholesale. If the retail channels falter, Callaway's cash conversion cycle will look awful. The ball lie was OK, but right next to a yellow jacket nest. They don't seem pleased.

Diversionary Ball #3: "We made progress on all fronts. In our consolidated results you would find that Callaway Golf-branded golf ball sales increased $14 million, or 100%, over the prior year and delivered a profit for the quarter; sales of Callaway Golf branded woods increased $30 million dollars..." I do believe that the ball carried the green, old chap.

Back to the real ball: Both of those results are, in fact, quite good. But "all fronts" should actually include all fronts. Callaway irons and putter sales were down 4% and 18%, respectively. These are higher-margin items than irons and golf balls, and Callaway has worked hard to diversify away from dependence on its woods and into these components. Still, when you think Callaway, you think "Big Bertha," "Bigger Bertha," and oh, I don't know, "Freakishly Large Bertha." Woods have pretty rapid product cycles relative to other parts of the game, so increased dependence here is not a great thing. Also, if "progress on all fronts" includes a 47% increase in selling costs and a 65% increase in general and administrative costs, well, then I guess I agree. Our lovely golf ball, unfortunately, managed to roust the bees, and our run/swing put the real golf ball deep in the woods, dangerously close to the out-of-bounds line. But not quite close enough, there's no stroke penalties involved.

Here's the thing about Press Release Golf. No one was fooled into thinking that Callaway actually had a dynamite quarter. The stock has been shellacked today. Why in the world management can't just come out and say "this was good, this was bad, this we need to work on" is beyond me.

Came see what Bill's ace colleague Mathew Emmert has come up with next. Take a free trial of Motley Fool's Income Investor.

Bill Mann owns none of the companies mentioned in this story. He does adore Top-Flite XL golf balls, though.