Callaway 2003 Annual Report Download - page 23

20 CALLAWAY GOLF COMPANY
with close-out pricing for discontinued Rule 35 golf ball
products and a price reduction on all golf ball products
implemented in August 2002, additional inventory reserves
established on ERC II Drivers and Big Bertha C4 Drivers, a
customs and duty assessment in Korea, and the $2.3 million
charge related to the purchase of the Company’s golf ball
manufacturing equipment.
Selling expenses increased $11.9 million (6%) in 2002 to
$200.3 million from $188.4 million in 2001, and were 25%
and 23% of net sales, respectively. This increase was primarily
due to increases in professional golf tour expenses of
$6.4
million, depreciation expense of $3.9 million, commission
expenses of $2.0 million and other promotional expenses of
$1.9 million. These increases were partially offset by decreases
in travel costs of $1.4 million.
General and administrative expenses decreased $14.5 million
(20%) in 2002 to $56.6 million from $71.1 million in 2001,
and were 7% and 9% of net sales, respectively. This decrease
is mainly attributable to a decrease of $8.7 million in employee
costs, a $6.0 million decrease in depreciation and amortization
expenses (primarily due to the implementation of SFAS No.
142 — see Note 6 to the Consolidated Financial Statements)
and reduced facility costs of $2.6 million. The decrease in
employee costs is due to a reduction in personnel combined
with higher severance expense of $2.9 million recorded
in 2001.
Research and development expenses decreased $0.5 million
(2%) in 2002 to $32.2 million from $32.7 million in 2001. As
a percentage of net sales, the expenses remained constant at
4%. The decrease is primarily due to a decrease in depreciation
expense of $0.6 million.
Interest and other income, net decreased $3.0 million (58%)
in 2002 to $2.3 million from $5.3 million in 2001. The
decrease is primarily attributable to a $1.5 million decrease in
gains on sales of securities, a $1.4 million decline in licensing
income, a $0.8 million decline in interest income, a $0.5 million
decline in gains on investments to fund the deferred-
compensation plan, a $0.5 million decline in foreign currency
transaction gains and a $0.4 million decline in other income.
These decreases were partially offset by $2.1 million of losses
recorded in 2001 generated from the sale of the Company’s
excess energy supply related to an energy contract that was
terminated in November of 2001.
Interest expense remained relatively constant in 2002 at
$1.7 million, compared to $1.6 million in 2001.
Unrealized energy derivative losses totaled $19.9 million in
2001 as a result of the Company’s long-term energy supply
contract which was entered into during 2001. The unrealized
losses were generated by the decline in electricity rates
through November 2001. The Company did not have a similar
contract in 2002. See “Supply of Electricity and Energy
Contracts” below.
During 2002, the Company recorded a provision for income
taxes of $42.2 million and realized $5.5 million in tax benefits
related to the exercise of stock options. The provision for
income tax as a percentage of income before taxes was 38%
in 2002 as compared to 41% in 2001. The effective tax rate
was lower in 2002 as compared to 2001 primarily as a result
of the unrealized energy derivative losses recognized during
2001 and the elimination of non-deductible goodwill beginning
in 2002 due to the implementation of SFAS No. 142.
Net income for the year ended December 31, 2002 increased
19% to $69.4 million from $58.4 million in 2001. Earnings
per diluted share increased 26% to $1.03 in 2002 as compared
to $0.82 in 2001. Net income in 2002 was positively impacted
by the $17.0 million reduction in the warranty reserve (see
above “Change in Accounting Estimate”). Net income in 2001
was negatively impacted by the $19.9 million energy derivative
charge (see below “Supply of Electricity and Energy
Contracts”). Excluding the $17.0 million non-cash warranty
reserve adjustment recorded in 2002 and the $19.9 million
non-cash energy derivative charge recorded in 2001, the
Company’s net income for 2002 as compared to 2001 would
have decreased 19% to $58.9 million in 2002 from $72.6
million in 2001 and diluted earnings per share would have
decreased 15% to $0.87 from $1.02.