Callaway 2008 Annual Report Download - page 49

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For the year ended December 31, 2008, gross profit decreased $6.4 million to $486.8 million from $493.2
million for the year ended December 31, 2007. Gross profit as a percentage of net sales remained consistent at
44% in the year ended December 31, 2008 and 2007. Gross margins were negatively affected by an unfavorable
shift in product mix from higher margin woods products to lower margin accessories and other products. These
decreases were partially offset by reductions in golf club component costs as a result of improved product design,
and improved manufacturing efficiencies resulting from the Company’s gross margin improvement initiatives.
Additionally, gross margins were positively affected by favorable changes in foreign currency rates during the
year ended December 31, 2008. See “Segment Profitability” below for further discussion of gross margins. Gross
profit for the year ended December 31, 2008 was negatively affected by charges of $12.5 million related to the
implementation of the Company’s gross margin improvement initiatives compared to $8.9 million for the
comparable period in 2007. The increase in gross margin improvement charges during the year ended
December 31, 2008 is primarily due to costs associated with the consolidation of golf ball production operations
into other existing locations, which resulted in the closure of the Company’s golf ball manufacturing facility in
Gloversville, New York during 2008.
Selling expenses increased $5.8 million (2%) to $287.8 million for the year ended December 31, 2008,
compared to $282.0 million for the year ended December 31, 2007. As a percentage of sales, selling expenses
increased to 26% for the twelve months ended December 31, 2008 compared to 25% for the comparable period
of 2007. The dollar increase in selling expense was primarily due to increases of $3.3 million in marketing
expenses, $2.2 million in depreciation expense as a result of the current year purchase of displays and shelving
fixtures, $2.3 million in consulting costs to support brand awareness initiatives and $2.1 million in travel and
entertainment expenses. These increases were partially offset by decreases of $3.9 million in share-based
compensation expense related to non-employees, and $2.8 million in employee costs primarily as a result of
decreases in employee incentive compensation expense and sales commissions. Additionally, the Company’s
selling expenses were unfavorably impacted by changes in foreign currency exchange rates on non-U.S. selling
expenses.
General and administrative expenses decreased $3.6 million (4%) to $85.5 million for the year ended
December 31, 2008, compared to $89.1 million for the year ended December 31, 2007. As a percentage of sales,
general and administrative expenses remained consistent at 8% during the twelve months ended December 31,
2008 and 2007. The dollar decrease in general and administrative expenses was primarily due to decreases of
$5.7 million in employee costs resulting from decreases in employee incentive compensation expense and
deferred compensation expense. In addition, legal expenses decreased by $3.9 million as a result of intellectual
property rights litigation expenses incurred in the prior year. These decreases were partially offset by an increase
in general and administrative expenses as a result of a $5.3 million gain which was recognized in 2007 as a result
of the sale of two buildings.
Research and development expenses decreased $2.6 million (8%) to $29.4 million for the year ended
December 31, 2008 compared to $32.0 million for the year ended December 31, 2007. As a percentage of sales,
research and development expenses remained consistent at 3% during the twelve months ended December 31,
2008 and 2007. The dollar decrease in research and development expenses was primarily due to a $2.1 million
decrease in employee incentive compensation expense.
Other income (expense) increased by $19.0 million for the year ended December 31, 2008, to income of
$17.1 million compared to expense of $1.9 million for the year ended December 31, 2007. This increase is
attributable to the reversal of a $19.9 million energy derivative valuation account established in 2001 in
connection with the Company’s termination of a long-term energy supply contract. The energy derivative
valuation account was subject to quarterly reviews by the Company in accordance with SFAS No. 140
“Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” As a result of
these quarterly reviews, during the fourth quarter of 2008 the Company determined that it had met the criteria
under SFAS No. 140 to extinguish the liability and therefore recognized a non-cash, non-operational benefit of
$19.9 million in other income. This increase in other income was partially offset by a $2.4 million decline in the
asset value of the Company’s deferred compensation plan.
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