Callaway 2007 Annual Report Download - page 45

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December 31, 2007 from 39% in the comparable period of 2006. Overall gross margins during 2007 were
favorably impacted by increases in average selling prices resulting from a more favorable current year product
mix combined with improved manufacturing efficiencies, a decline in freight costs as well as other Gross Margin
Improvement Initiatives. Gross profit for the year ended December 31, 2007 was negatively affected by charges
of $8.9 million related to the implementation of the Company’s Gross Margin Improvement Initiatives. Gross
profit for the year ended December 31, 2006 was negatively affected by charges of $3.5 million related to the
Top-Flite Integration Initiatives, $1.9 million related to the Gross Margin Improvement Initiatives, as well as
$0.3 million in connection with the Company’s 2005 Restructuring Initiatives.
Selling expenses increased $27.5 million (11%) to $282.0 million for the year ended December 31, 2007 as
compared to $254.5 million for the year ended December 31, 2006. As a percentage of net sales, selling expense
remained constant at 25% for the years ended December 31, 2007 and 2006. The dollar increase was primarily
due to a $14.1 million increase in employee costs primarily related to employee incentive compensation as a
result of the Company’s improved financial performance in 2007. In addition, advertising and other promotional
expenses increased $8.0 million primarily due to expenditures associated with current year new product
introductions as well as the previously announced re-launch of the Top-Flite brand, and depreciation expense
increased $2.2 million as a result of an increase in display and shelving fixtures as well as fitting carts acquired
during 2007.
General and administrative expenses increased $9.4 million (12%) to $89.1 million for the year ended
December 31, 2007 as compared to $79.7 million for the year ended December 31, 2006. As a percentage of net
sales, general and administrative expenses remained constant at 8% for the years ended December 31, 2007 and
2006. The dollar increase was due to a $7.7 million increase in employee costs primarily related to employee
incentive compensation as a result of the Company’s improved financial performance, a $5.2 million increase in
corporate legal expense primarily associated with golf ball intellectual property rights litigation and a $1.8
million increase in professional fees primarily related to consulting services. These increases were partially offset
by a $5.4 million gain recognized in connection with the sale of two buildings in August and December of 2007.
Research and development expenses increased $5.2 million (19%) to $32.0 million for the year ended
December 31, 2007 as compared to $26.8 million for the year ended December 31, 2006. As a percentage of net
sales, research and development expenses remained constant at 3% for the years ended December 31, 2007 and
2006. The dollar increase was primarily due to a $3.6 million increase in employee costs primarily related to
employee incentive compensation as a result of the Company’s improved financial performance combined with
an increase in salaries and wages.
Other net expense decreased $0.2 million (10%) to $1.9 million for the year ended December 31, 2007 as
compared to $2.1 million for the year ended December 31, 2006. This improvement is primarily a result of a $0.9
million increase in net interest income primarily due to improved management of cash on hand, partially offset
by a decrease of $0.6 million in other income as a result of a favorable insurance claim recognized in the fourth
quarter of 2006.
The effective tax rate for the year ended December 31, 2007 was 38% compared to 33% for the year ended
December 31, 2006. The tax rate benefited from net favorable adjustments to previously estimated tax liabilities
in the amount of $1.6 million and $3.0 million for the years ended December 31, 2007 and 2006, respectively.
Additionally, the relative impact of these net favorable adjustments on the effective tax rate was greater in 2006
as a result of lower income before taxes in that year. Historically, the most significant favorable adjustments
resulted from the finalization of the Company’s prior year U.S. and state income tax returns as well as
agreements reached with major jurisdictions on certain issues necessitating a reassessment of the Company’s tax
exposures for all open tax years, with no individual year being significantly affected.
Net income for 2007 improved 134% to $54.6 million from net income of $23.3 million in 2006. The
diluted earnings per share improved 138% to $0.81 per share in 2007 compared to diluted earnings per share of
32