Callaway 2001 Annual Report Download - page 32

Callaway Golf Company
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General and administrative expenses increased to $71.1 million in 2001 from
$70.3 million in 2000. As a percentage of net sales, these expenses increased to
9% in 2001 from 8% in 2000. The increase is primarily attributed to $4.0 mil-
lion of higher employee compensation costs including severance charges, $3.7
million of increased costs due primarily to the consolidation of facilities and
$2.9 million of increased legal expenses, partially offset by decreases in depre-
ciation and bad debt expenses of $3.5 million and $5.1 million, respectively.
Research and development expenses in 2001 decreased to $32.7 million from
$34.6 million in 2000. As a percentage of net sales, these expenses remained
constant at 4% of net sales. The dollar decrease is due to a decrease in depre-
ciation expense and employee costs.
Interest and other income decreased to $7.1 million in 2001 from $8.8 mil-
lion in 2000. This decrease is primarily attributable to a decrease in interest
income of $4.7 million associated with lower average cash balances, and
lower interest rates, in 2001 as compared with 2000, and realized losses of
$2.1 million generated from the sale of the Company’s excess energy supply,
partially offset by a $2.7 million increase in foreign currency transaction
gains, a $1.5 million increase in realized marketable securities gains, and a
$0.6 million increase in royalty income. Interest expense remained relatively
constant in 2001 at $1.6 million compared to $1.5 million in 2000.
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 dur-
ing 2001. The unrealized losses were generated by the decline in electricity rates
through November, 2001. The Company did not have a similar contract in
2000. See “Supply of Electricity and Energy Contracts” below.
During 2001, the Company recorded a provision for income taxes of $39.8
million and recognized a decrease in deferred taxes of $5.1 million. During
2001, the Company realized $14.5 million in tax benefits related to the exer-
cise of stock options. The provision for income tax as a percentage of income
before taxes was 41% in 2001 as compared with 37% in 2000. The effective
tax rate was higher in 2001 as compared to 2000 primarily as a result of the
increased utilization of tax credits in 2000 and the unrealized energy deriva-
tive losses recognized during 2001.
Net income for 2001 decreased 28% to $58.4 million from $81.0 million in
2000. Earnings per diluted share during the year decreased 27% to $0.82 in
2001 as compared to $1.13 in 2000. During 2001, the Company recorded a
non-cash charge of $14.2 million after-tax or $0.20 per diluted share, as a result
of the change in estimated market value of the Company’s energy supply con-
tract. Excluding this non-cash energy supply contract charge, the Company’s
net income for 2001 as compared to 2000 would have decreased 10% to $72.6
million and diluted earnings per share would have decreased 10% to $1.02.
Years Ended December 31, 2000 and 1999
For the year ended December 31, 2000, net sales increased $118.6 million, or
16%, to $837.6 million from $719.0 million in the prior year. The increase is
attributable to an increase in sales of irons, golf balls and other products,
including putters and accessories, partially offset by a decrease in sales of
metal woods. The increase in sales of irons of 40% to $299.9 million repre-
sents an increase in both unit and dollar sales and is primarily attributable to
sales of Great Big Bertha Hawk Eye Tungsten Injected Titanium Irons, which
were not sold in significant quantities during 1999. Also contributing to the
increase in sales of irons were sales of Big Bertha Steelhead X-14 Stainless
Steel Irons, which were introduced in January 2000, and which generated
higher revenues during 2000 than its predecessor, Big Bertha X-12 Stainless
Steel Irons, did in 1999. This increase includes sales of $34.0 million of its
Rule 35 golf balls during 2000. This product was not sold during 1999. The
overall decrease in sales of metal woods of 3% to $403.0 million represents a
decrease in both unit and dollar sales of titanium and non-current metal
woods, partially offset by an increase in unit and dollar sales of stainless steel
metal woods. The overall decrease in sales of metal woods is primarily attrib-
utable to sales of non-current products during 1999, which did not occur in
significant quantities during the comparable period of 2000, and to a
decrease in sales of Great Big Bertha Hawk Eye Titanium Metal Woods dur-
ing 2000 as compared with 1999, the year in which they were introduced.
However, sales of ERC Forged Titanium Drivers, which began shipping in
significant quantities in the second quarter of 2000, and initial shipments of
the Company’s newly-introduced ERC II Forged Titanium Drivers and Big
Bertha Hawk Eye VFT Titanium Metal Woods, which began shipping in lim-
ited quantities in December 2000, partially offset the decrease in sales of tita-
nium metal woods. Also partially offsetting the decrease in sales of titanium
metal woods was an increase in sales of stainless steel metal woods attribut-
able to the January 2000 introduction of Big Bertha Steelhead Plus Stainless
Steel Metal Woods, which generated higher revenue in 2000 than their pred-
ecessor, Big Bertha Steelhead Stainless Steel Metal Woods, did in 1999.
Net sales reflect the effect of a reclassification of shipping revenues from sell-
ing expenses. This reclassification, which added $5.5 million to net sales in
2000 and $4.6 million in 1999 was required by Emerging Issues Task Force
Issue No. 00-10 (“EITF 00-10”), and did not result in a change in the
Company’s earnings or earnings per share for any period.
During 2000, sales in the United States increased $32.8 million (8%) to
$451.2 million as compared to net sales during 1999. Overall, the
Company’s sales in regions outside the United States increased $85.8 mil-
lion (29%) to $386.4 million during 2000 as compared to 1999. Overall
sales in regions outside of the U.S. in 2000 as compared to 1999 were not
significantly impacted by fluctuations in foreign currency exchange rates.
Net sales by regions outside of the United States are as follows:
in millions, except percent data
Percent
Net Sales Dollar Growth Growth
Japan $122.0 $66.1 118%
Europe 125.5 9.8 9%
Rest of Asia including Korea 82.4 9.3 13%
Rest of World 56.5 0.6 1%
$386.4 $85.8
Net sales in Japan increased significantly because the Company began selling
directly to customers in 2000 rather than through a distributor, as in prior years.
For the year ended December 31, 2000, gross profits increased to $397.5
million from $334.8 million in 2000 and as a percentage of net sales
remained constant at 47%. Overall gross profit was adversely affected in
2000 by lower margins associated with manufacturing the Company’s new
golf balls which resulted primarily from low plant utilization and produc-
tion yields. This effect was offset by improvements in golf club product
margins. This improvement is primarily attributable to reductions in man-
ufacturing labor and overhead expenses, favorable product mix primarily
related to sales of ERC Forged Titanium Drivers and the negative effect on
1999 gross profits that resulted from close-out sales at substantially
reduced prices.
Selling expense in 2000 increased to $170.5 million from $128.6 million in
1999, and as a percentage of net sales increased to 20% from 18%. These
amounts include the reclassification of shipping revenue and expense, which