Callaway 2008 Annual Report Download - page 47

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Executive Summary
The Company had record sales and earnings during the first half of 2008. These record results reflect the
strength of the Company’s brands, progress on the Company’s gross margin improvement initiatives and the
Company’s international business, which was able to more than offset the deteriorating economic conditions in
the United States during the first half of 2008.
During the second half of 2008, however, the deteriorating economic conditions began to spread to most of
the Company’s international markets and the economic conditions in the United States worsened. The
recessionary conditions experienced during the second half of 2008 had a significant adverse effect on consumer
and retailer confidence, which exacerbated the normal end of season sales slowdown and resulted in a $7.4
million (1%) decline in net sales for 2008 compared to 2007.
The deteriorating global economic conditions also had an adverse effect on the Company’s gross profit for
2008. Given the uncertain economic conditions during the second half of 2008, consumers trended toward lower
priced products and the Company reduced prices of certain older model products, which overall resulted in a
decrease in average selling prices during the second half of 2008 as compared to the comparable period in the
prior year. The impact of the decrease of average selling prices on gross profit was offset by the Company’s
continued successful implementation of its gross margin improvement initiatives as well as the positive impact of
foreign currency rates. As a result, the Company’s gross profit remained flat at 44% for 2008 compared to 2007.
Operating expenses for 2008 were essentially flat with 2007 despite inflationary pressures. The business
process improvements implemented by the Company over the past several years have increased the Company’s
flexibility to respond more quickly to changing market conditions. The Company was able to take advantage of
its increased flexibility and reduce its planned operating expenses as net sales declined. In addition, despite a
rapid decline in reorders during the latter part of 2008, the Company was able to finish the year with inventory as
a percentage of trailing 12 months net sales at 23%, which is consistent with the prior year.
Despite the impact of macroeconomic conditions on the Company’s 2008 results, the Company was able to
increase fully diluted earnings per share for 2008 to $1.04 as compared to fully diluted earnings per share of
$0.81 for 2007. The Company’s results for 2008 include a non-cash, non-operational benefit of $0.22 per share
related to the one-time reversal of a non-cash energy derivative valuation account that was established in 2001
associated with the termination of a long-term energy supply contract. The Company’s results also include for
2008 and 2007 cash and non-cash charges related to the Company’s gross margin improvement initiatives of
$0.12 and $0.08 per share, respectively.
Although the macroeconomic environment will provide many challenges in the short-term, management
believes the Company’s business fundamentals remain strong and that the Company is well positioned for the
future. The Company is the leader or one of the leaders in every market in which it competes; the Company has a
strong balance sheet; and the Company will continue to benefit from the many cost-savings initiatives
implemented over the past couple years. The Company intends to manage its costs and inventories prudently as
dictated by the current economic environment. The Company, however, also intends to continue to invest in
initiatives to prepare for long-term growth once economic conditions stabilize.
Management expects that the unfavorable global economic conditions experienced in the second half of
2008 will continue into 2009. Management also expects that the unfavorable global economic conditions will
have a negative impact upon not only customer orders but also consumer discretionary spending, which will
negatively impact sell-through and reorders of the Company’s products in 2009. Management expects that sales
of golf equipment in 2009 will be less than 2008 for the industry as a whole.
In addition, management believes that the turmoil in the foreign currency markets experienced in the second
half of 2008 will continue into 2009. This can have a significant effect upon the Company’s reported financial
results because approximately half of the Company’s sales occur outside of the United States in foreign
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