Callaway 2005 Annual Report Download - page 43

The Company intends to continue the U.S. and foreign operations of the acquired golf assets, including the use of
the acquired assets in the manufacturing of golf balls and golf clubs and the commercialization of the Top-Flite
and Ben Hogan brands, patents and trademarks.
The Top-Flite Acquisition was accounted for as a purchase in accordance with SFAS No. 141. Under SFAS
No. 141, the aggregate cost of the acquired assets was $183.0 million, which includes cash paid of
$154.1 million, transaction costs of approximately $6.3 million, and assumed liabilities of approximately
$22.5 million. The estimated fair value of the assets acquired exceeded the estimated aggregate acquisition costs.
As a result, the Company was required to reduce the carrying value of the acquired long-term assets on a pro rata
basis. The allocation of the aggregate acquisition costs is as follows (in millions):
Assets Acquired:
Accounts receivable ............................................................... $ 45.3
Inventory ....................................................................... 32.8
Other assets ..................................................................... 1.1
Property and equipment ............................................................ 55.8
Intangible assets .................................................................. 48.0
Liabilities Assumed:
Current liabilities ................................................................. (17.4)
Long-term liabilities ............................................................... (5.1)
Total net assets acquired ....................................................... $160.5
In October 2005, following the Top-Flite Acquisition, the Company completed its full consolidation of the
Callaway golf ball manufacturing with the Top-Flite golf ball manufacturing at the Chicopee, Massachusetts and
Gloversville, New York locations. During December 2005, 2004 and 2003, in connection with the consolidation,
the Company incurred charges to pre-tax earnings of $12.4 million, $28.5 million and $24.1 million,
respectively. The 2005 charges included noncash charges for acceleration of depreciation on certain golf ball
manufacturing equipment and cash charges related to severance and facility consolidations. The charges incurred
during 2004 included severance, the disposition of certain long-lived assets and facility consolidations. During
2006, the Company anticipates additional charges to pre-tax earnings of $3.0 million in order to complete the
restoration of the ball manufacturing plant in Carlsbad, California.
Results of Operations
Overview
The Company’s sales improved in 2005 as compared to 2004, primarily due to favorable consumer
acceptance of the Company’s new products launched during 2005. Sales for 2005 increased 7% as compared to
2004, contributing to record sales for the Company in the current year.
The Company’s earnings for 2005 also improved to $0.19 per diluted share compared to a loss of $0.15 per
diluted share in 2004. Although earnings improved, they are still not at desired levels. The Company therefore
announced on September 29, 2005 several company-wide initiatives designed to improve the Company’s
business processes and reduce the Company’s overall expenses by an estimated $70 million over a two year
period, with between $50 and $60 million of savings expected in 2006 (the “2005 Restructuring Initiatives”).
Some of these expected savings will be reinvested back into the business to generate growth but a majority is
expected to flow through to the bottom line. The Company has already begun to see the benefits of the 2005
Restructuring Initiatives as operating expenses decreased in the fourth quarter of 2005 as compared to the fourth
quarter of 2004. The Company is also in the process of undertaking other business improvement initiatives,
including the review of manufacturing processes, automation opportunities and sourcing strategies in an effort to
improve gross margins.
27