Callaway 2007 Annual Report Download - page 52

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(1) Amounts shown are before the deduction of corporate general and administration expenses and other
income (expenses) of $60.4 million and $50.2 million for the years ended December 31, 2006 and 2005,
respectively, which are not utilized by management in determining segment profitability. For further
information on segment reporting see Note 15 to the Consolidated Condensed Financial Statements—
”Segment Information” in this Form 10-K.
Pre-tax income in the Company’s golf clubs operating segment improved to $101.8 million for the year
ended December 31, 2006 compared to $68.3 million for the same period in 2005. The increase in the golf clubs
operating segment pre-tax income is primarily attributable to improved net sales of drivers and fairway woods as
well as the Company’s wedge and accessories product categories combined with a decline in operating expenses
as a result of the Company’s 2005 restructuring initiatives. These improvements were partially offset by a decline
in club gross margins due to an increase in manufacturing costs on new club products that incorporate more
complex designs as well as higher unit volumes of lower margin steel iron products sold during 2006.
Pre-tax loss in the Company’s golf balls operating segment declined to a loss of $6.4 million for the year
ended December 31, 2006 compared to a loss of $3.6 million for the same period in 2005. The decrease in the
golf ball operating segment pre-tax income is primarily due a decline in gross profit combined with relatively flat
net sales. This decline in gross profit resulted from a reduction in average selling prices of older Top-Flite brand
golf ball products, an increase in sales of lower priced, lower margin golf ball products as well as an overall
increase in golf ball manufacturing costs. In addition, during 2006, the Company recorded a $3.3 million charge
due to a work-in-progress inventory write-down as a result of an annual physical inventory count. These declines
were partially offset by an improvement in operating expenses primarily due to a decline in advertising and other
promotional expenses as well as a decrease in employee costs compared to the prior year.
Furthermore, during 2006 the Company incurred charges in connection with the 2005 Restructuring
Initiatives and the Top-Flite Integration Initiatives. The Company’s income before provision for income taxes for
the golf clubs and golf balls operating segments includes the recognition of charges in connection with these
initiatives in the amounts of $3.2 million and $3.8 million, respectively, for the year ended December 31, 2006,
and $6.5 million and $10.4 million, respectively, for the year ended December 31, 2005.
Financial Condition
The Company’s overall financial condition improved during the year ended December 31, 2007. Cash and
cash equivalents increased $3.5 million (8%) to $49.9 million at December 31, 2007, from $46.4 million at
December 31, 2006. The Company generated positive cash flow from operations of $152.0 million and an
additional $48.0 million from the issuance of common stock in connection with stock options exercised during
the year ended December 31, 2007. The Company used a portion of those funds to repurchase $114.8 million of
Company stock. Additionally, the Company made net payments of $43.5 million on its credit facility, funded
approximately $32.9 million in capital expenditures and paid dividends of $18.8 million during the year.
Management expects to fund the Company’s future operations from cash provided by its operating activities
combined with borrowings from its credit facilities, as deemed necessary.
The Company’s accounts receivable balance fluctuates throughout the year as a result of the general
seasonality of the Company’s business. The Company’s accounts receivable balance will generally be at its
highest during the first and second quarters and decline significantly during the third and fourth quarters as a
result of an increase in cash collections. As of December 31, 2007, the Company’s net accounts receivable
decreased $6.0 million to $112.1 million from $118.1 million as of December 31, 2006. The decrease in accounts
receivable is primarily attributable to a $5.5 million decrease in sales during the fourth quarter of 2007 compared
to the same quarter of the prior year.
The Company’s inventory balance also fluctuates throughout the year as a result of the general seasonality
of the Company’s business. Generally, the Company’s buildup of inventory levels begins during the fourth
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