Callaway 2001 Annual Report Download - page 31

Callaway Golf Company
29
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
The Company’s discussion and analysis of its financial condition and results of
operations are based upon the Company’s consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires the Company to make estimates and judgments that affect the report-
ed amounts of assets, liabilities, revenues and expenses, and related disclosure
of contingent assets and liabilities. On an on-going basis, the Company evalu-
ates its estimates, including those related to provisions for warranty, uncol-
lectible accounts receivable, inventory obsolescence, restructuring costs and
market value estimates of derivative instruments. The Company bases its esti-
mates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and liabili-
ties that are not readily apparent from other sources. Actual results may differ
from these estimates under different assumptions or conditions.
Years Ended December 31, 2001 and 2000
For the year ended December 31, 2001, net sales decreased $21.4 million
(3%) to $816.2 million from $837.6 million in the prior year. The decrease
is due to a decline in the sales of irons and metal woods, partially offset by an
increase in sales of golf balls, putters and accessories. This decline was also
the result of the timing of the launch of the Company’s new products. The
Company did not begin selling its 2002 products in significant quantities in
2001 and thus did not repeat the late-season launch of new products that
occurred in 2000.
The decline in iron sales of $51.0 million (17%) to $248.9 million represents a
decrease in both unit and dollar sales. A decline was expected as the Company’s
products generally sell better in their first year after introduction and 2001 was
the second year in the life cycle of the Big Bertha Steelhead X-14 Stainless Steel
Irons. Declines in other older iron models such as the Hawk Eye Tungsten
Injected Titanium Irons were partially offset by the introduction of the Hawk
Eye VFT Irons in the second half of the year.
The sales of metal woods decreased $10.1 million (2%) to $392.9 million.
Similar to the decline in iron sales, this decline represents a decrease in both
unit and dollars sales and is primarily attributable to a decline in sales of Big
Bertha Steelhead Plus Stainless Steel Metal Woods, which were introduced in
January 2000. The decline in metal woods was partially offset by net increas-
es generated by the introduction of the Big Bertha Hawk Eye VFT Metal
Woods and ERC II Forged Titanium Drivers which more than offset the
decrease in sales of their predecessors, Great Big Bertha Hawk Eye Metal
Woods and ERC Forged Titanium Drivers, respectively.
The increase in golf ball sales of $20.9 million (62%) to $54.9 million was
primarily due to the introduction of the CB1 and CTU 30 golf balls during
2001. Sales of putters, accessories and other products increased $18.8 million
(18%) to $119.5 million in 2001 due primarily to increased sales of Odyssey
putters and golf bags in 2001.
The Company believes the overall decline in net sales is primarily due to poor
weather conditions, a general decline in the number of golf rounds played
during the year, aggressive competitive pricing strategies in the industry, eco-
nomic concerns among retailers and customers in many of the Company’s key
markets around the world, the disruption in consumer spending following the
September 11th tragedy, and the United States Golf Association’s actions in
the United States against the Big Bertha ERC II Forged Titanium Driver. The
strength of the U.S. dollar in relation to other foreign currencies also had a sig-
nificant adverse effect upon the Company’s net sales during 2001 as compared
to 2000. As compared to the year ended December 31, 2000, a decline in for-
eign currency exchange rates adversely impacted net sales for the year ended
December 31, 2001 by approximately $32.9 million, as measured by applying
2000 exchange rates to 2001 net sales.
During 2001, net sales in the United States decreased $7.1 million (2%) to
$444.1 million as compared to net sales during 2000. Overall, the Company’s net
sales in regions outside the United States decreased $14.3 million (4%) to $372.1
million during 2001 as compared to 2000. Had exchange rates during 2001
been the same as exchange rates during 2000, overall net sales in regions outside
of the United States would have been approximately 9% higher than reported
in 2001. Net sales by regions outside of the United States in 2001 are as follows:
in millions, except percent data
Percent
Net Sales Dollar Growth Growth
Japan $130.7 $ 8.7 7%
Europe 118.4 (7.1) (6%)
Rest of Asia including Korea 63.9 (18.5) (22%)
Rest of World 59.1 2.6 5%
$372.1 $(14.3)
The Company acquired certain of its distribution rights in the Europe and
Rest of World regions in the first quarter of 2001 and therefore began selling
directly to retailers rather than to a third party distributor.
For the year ended December 31, 2001, gross profits increased to $404.6 mil-
lion from $397.5 million in 2000 and as a percentage of net sales increased to
50% in 2001 from 47% in 2000. This improvement in gross profit is a result
of a shift in club product mix away from lower yielding iron products to high-
er yielding wood products. Golf ball product profit margins improved during
2001 as compared to 2000, as a result of increased sales volume, plant utiliza-
tion and production yields. The profit margin was also favorably affected by
an $8.1 million reduction in the Company’s warranty expense during 2001 as
compared to 2000. The Company has observed a downward trend in actual
costs over the past two years associated with warranty claims due to improved
product engineering and manufacturing processes combined with a reduction
of costs associated with resolving claims. Accordingly, the Company reduced
its warranty accrual rate during 2001. The Company believes that its warran-
ty accrual is adequate to cover future claims and will continue to monitor the
warranty accrual rate. The Company may adjust the warranty accrual rate
from time to time based on various relevant factors, including the Company’s
stated warranty policies and practices, the historical frequency of claims, and
the cost to replace or repair its products under warranty.
Selling expenses in 2001 increased to $188.3 million from $170.5 million in
2000. As a percentage of net sales, these expenses increased to 23% in 2001
from 20% in 2000. The increase is primarily due to increases in advertising
costs and promotional expenses of $9.6 million and $5.8 million, respectively,
associated with the Company’s new product launches, the rollout of new fitting
cart systems and store-in-store project, and other demand creation initiatives.