Callaway 2006 Annual Report Download - page 40

Download and view the complete annual report

Please find page 40 of the 2006 Callaway annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 112

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the Consolidated Financial Statements, the
related notes and the “Important Notice to Investors” that appear elsewhere in this report.
Critical Accounting Policies and Estimates
The Company’s discussion and analysis of its results of operations, financial condition and liquidity 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 reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. The Company bases its estimates on historical experience
and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may
materially differ from these estimates under different assumptions or conditions. On an ongoing basis, the
Company reviews its estimates to ensure that the estimates appropriately reflect changes in its business or as new
information becomes available.
Management believes the following critical accounting policies affect its more significant estimates and
assumptions used in the preparation of its consolidated financial statements:
Revenue Recognition
Sales are recognized in accordance with Staff Accounting Bulletin No. 104, “Revenue Recognition in
Financial Statements,” as products are shipped to customers, net of an allowance for sales returns and sales
programs. The criteria for recognition of revenue are when persuasive evidence that an arrangement exists and
both title and risk of loss have passed to the customer, the price is fixed or determinable and collectibility is
reasonably assured. Sales returns are estimated based upon historical returns, current economic trends, changes in
customer demands and sell-through of products. The Company also records estimated reductions to revenue for
sales programs such as incentive offerings. Sales program accruals are estimated based upon the attributes of the
sales program, management’s forecast of future product demand, and historical customer participation in similar
programs. If the actual costs of sales returns and sales programs significantly exceed the recorded estimated
allowance, the Company’s sales would be significantly adversely affected.
Allowance for Doubtful Accounts
The Company maintains an allowance for estimated losses resulting from the failure of its customers to
make required payments. An estimate of uncollectible amounts is made by management based upon historical
bad debts, current customer receivable balances, age of customer receivable balances, the customer’s financial
condition and current economic trends, all of which are subject to change. If the actual uncollected amounts
significantly exceed the estimated allowance, the Company’s operating results would be significantly adversely
affected.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO)
method. The inventory balance, which includes material, labor and manufacturing overhead costs, is recorded net
of an estimated allowance for obsolete or unmarketable inventory. The estimated allowance for obsolete or
unmarketable inventory is based upon management’s understanding of market conditions and forecasts of future
product demand, all of which are subject to change. If the actual amount of obsolete or unmarketable inventory
significantly exceeds the estimated allowance, the Company’s operating results would be significantly adversely
affected.
Long-Lived Assets
In the normal course of business, the Company acquires tangible and intangible assets. The Company
periodically evaluates the recoverability of the carrying amount of its long-lived assets (including property, plant
and equipment, goodwill and other intangible assets) whenever events or changes in circumstances indicate that
24