Callaway 2003 Annual Report Download - page 48

CALLAWAY GOLF COMPANY 45
Amounts billed to customers for shipping and handling are
included in net sales and costs incurred related to shipping and
handling are included in cost of sales.
Royalty income is recorded as underlying product sales occur,
subject to certain minimums, in accordance with the related
licensing arrangements (Note 15). Royalty income for 2003,
2002 and 2001 was $2,703,000, $1,155,000 and $1,909,000,
respectively. In 2003, the Company began classifying royalty
income as a component of net sales and royalty related expenses
as a component of selling expenses, rather than other income.
Prior periods have been reclassified to reflect the current period
presentation.
Warranty Policy
The Company has a stated two-year warranty policy for its golf
clubs, although the Company’s historical practice has been to
honor warranty claims well after the two-year stated warranty
period. The Company’s policy is to accrue the estimated cost of
warranty coverage at the time the sale is recorded. In estimating
its future warranty obligations the Company considers 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. The
following table provides a reconciliation of the activity related
to the Company’s reserve for warranty expense:
Years Ended December 31,
(In thousands) 2003 2002 2001
Beginning balance $ 13,464 $ 34,864 $ 39,363
Provision
(1)
11,752 (6,987) 9,527
Claims paid/costs incurred (12,589) (14,413) (14,026)
Ending balance $ 12,627 $ 13,464 $ 34,864
(1) In the third quarter of 2002, the Company changed its methodology of estimating
warranty accruals and reduced its warranty reserve by approximately $17,000,000.
The change in methodology has been accounted for as a change in accounting princi-
ple inseparable from a change in estimate (Note 4).
Fair Value of Financial Instruments
The Company’s financial instruments consist of cash and cash
equivalents, marketable securities, trade receivables and
payables, forward foreign currency exchange contracts (Note 8)
and its financing arrangements (Note 7). The carrying amounts
of these instruments approximate fair value because of their
short-term maturities and variable interest rates. During 2001,
the Company also entered into an energy contract accounted
for as a derivative instrument that has been recorded based on
estimated fair values through the effective date of termination
(Notes 8 and 13).
Advertising Costs
The Company advertises primarily through television and print
media. The Company’s policy is to expense advertising costs,
including production costs, as incurred. Advertising expenses
for 2003, 2002 and 2001 were $44,770,000, $44,001,000 and
$44,707,000, respectively.
Research and Development Costs
Research and development costs are expensed as incurred.
Foreign Currency Translation and Transactions
The Company’s foreign subsidiaries utilize their local currency
as their functional currency. The accounts of these foreign
subsidiaries have been translated into United States dollars
using the current exchange rate at the balance sheet date for
assets and liabilities and the average exchange rate for the
period for revenues and expenses. Cumulative translation
gains or losses are recorded as accumulated other comprehensive
income in shareholders’ equity. Gains or losses resulting from
transactions that are made in a currency different from the
functional currency are recognized in earnings as they occur or,
for hedging contracts, when the underlying hedged transaction
affects earnings. The Company recorded transaction gains of
$1,566,000, $2,046,000 and $2,533,000 in 2003, 2002 and
2001, respectively, in interest and other income, net.
Derivatives and Hedging
The Company enters into derivative financial instrument
contracts only for hedging purposes and accounts for them in
accordance with Statement of Financial Accounting Standards
(“SFAS”) No. 133 and its amendments SFAS No. 137,
“Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No.
133,” SFAS No. 138, “Accounting for Certain Derivative
Instruments and Certain Hedging Activities” and SFAS No. 149,
“Amendment of Statement 133 on Derivative Instruments and
Hedging Activities.” The purpose of these derivative instruments