Callaway 2006 Annual Report Download - page 44

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Results of Operations
Overview
The Company’s sales improved in 2006 as compared to 2005, primarily due to favorable consumer
acceptance of the Company’s new Callaway Golf and Odyssey branded products launched during 2006. Sales for
2006 increased 2% as compared to 2005, contributing to record sales for the Company in the current year.
The Company’s core brands remained strong during 2006. Net sales of the Company’s Callaway Golf and
Odyssey brands, increased 9% as compared to 2005. This follows double digit growth in sales of these brands in
2005. These gains were offset by a 31% decline in sales of Top-Flite and Ben Hogan products during 2006. As
previously announced, the Company is implementing initiatives to restore the Top-Flite and Ben Hogan brands,
including a re-launch of the Top-Flite brand in 2007. The Company believes that restoring these brands will have
a positive impact on the Company’s future net sales.
In addition to improving sales, the Company is also committed to improving profitability. In September
2005, the Company announced a two-staged approach to reducing expenses and improving profitability (the
“2005 Restructuring Initiatives”). The first stage targeted operating expenses. The Company has implemented
various initiatives to improve operating expenses and as a result of those initiatives has realized approximately
$36 million in operating expense savings, net of amounts reinvested in the Company’s business during 2006. A
portion of these savings are expected to be reinvested in the Company’s business during 2007. The Company is
currently in the process of implementing the second stage of these cost reduction initiatives. The second stage
will target gross margin improvement and the Company expects that these gross margin initiatives will
significantly improve the Company’s gross margins by $50 to $60 million over the next two years (the “Gross
Margin Initiatives”).
The Company’s earnings for 2006 also improved to $0.34 per diluted share compared to $0.19 per diluted
share in 2005. This increase in 2006 earnings was primarily due to the increase in sales as well as a decline in
operating expenses resulting from the 2005 Restructuring Initiatives. These improvements were partially offset
by a decline in gross margins in 2006 compared to the prior year. The Company’s earnings in 2006 were
adversely affected by after-tax charges of $0.08 per share associated with the Company’s adoption of FAS 123R,
$0.04 per share associated with the Top-Flite integration, $0.03 per share for the 2005 restructuring initiatives
and $0.02 per share for the gross margin improvement initiatives announced in November 2006. By comparison,
the Company’s earnings in 2005 were adversely affected by after-tax charges of $0.11 for the Top-Flite
integration, $0.07 related to the 2005 Restructuring Initiatives and $0.01 for employee equity-based
compensation.
Years Ended December 31, 2006 and 2005
Net sales increased 2% to $1.0 billion for the year ended December 31, 2006 as compared to $998.1 million
for the year ended December 31, 2005. The overall increase in net sales during 2006 was due to a 9% increase in
sales of the Callaway Golf and Odyssey branded products partially offset by a 31% decline in sales of the
Top-Flite and Ben Hogan branded products. The Company is in the process of implementing several initiatives
designed to restore its Top-Flite and Ben Hogan brands, including a formal re-launch of the Top-Flite brand in
2007.
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