Callaway 2009 Annual Report Download - page 56

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Segment Profitability
Profitability by operating segment is summarized as follows (dollars in millions):
Years Ended
December 31, Growth (Decline)
2008 2007 Dollars Percent
Income before income taxes
Golf clubs ................................................. $134.0 $151.8 $(17.8) (12)%
Golf balls ................................................. 6.9 0.9 6.0 667%
Reconciling items(1) ......................................... (39.6) (64.4) 24.8 39%
$101.3 $ 88.3 $ 13.0 15%
(1) Amounts shown are before the deduction of corporate general and administration expenses and other
income (expenses) of $39.6 million and $64.4 million for the years ended December 31, 2008 and 2007,
respectively, which are not utilized by management in determining segment profitability. For further
information on segment reporting see Note 18 to the Consolidated Financial Statements—“Segment
Information” in this Form 10-K.
Pre-tax income in the Company’s golf clubs operating segment decreased to $134.0 million for the year
ended December 31, 2008, from $151.8 million for the year ended December 31, 2007. The decrease in the golf
clubs operating segment pre-tax income was primarily attributable to a decline in net sales as discussed above
combined with a decline in gross margin. The decline in gross margin was primarily due to a less favorable club
product mix in 2008 as compared to 2007. This unfavorable shift in product mix is due in part to an overall
increase in sales of titanium driver products during the first half of 2008, which generally carry lower margins
than the Fusion Technology drivers introduced in 2007, as well as an increase in sales of accessories and other
products, which generally carry lower margins compared to club products. In addition, gross margin was
negatively affected by price reductions taken on older woods products, primarily on Big Bertha 460 drivers,
Fusion Technology drivers, X fairway woods and the region specific Hyper ERC titanium driver. These
decreases in gross margin were partially offset by cost reductions on club components as a result of improved
product design and improved club manufacturing efficiencies as a result of the Company’s gross margin
improvement initiatives. Operating expenses related to the golf club segment remained relatively consistent year
over year.
Pre-tax income in the Company’s golf balls operating segment increased to $6.9 million for the year ended
December 31, 2008, from $0.9 million for the year ended December 31, 2007. The increase in the golf balls
operating segment pre-tax income was primarily due to an increase in net sales as discussed above combined
with an improvement in gross margins. This improvement was primarily due to a favorable shift in product mix
as a result of the higher margin Tour i series, HX Hot Bite and Legacy golf balls launched in 2008 compared to
lower margin HX Hot golf balls launched in 2007, as well as improved ball manufacturing efficiencies as a result
of the Company’s gross margin improvement initiatives. These improvements in pre-tax income were partially
offset by an increase in operating expenses for the year ended December 31, 2008 as a result of an increase in
golf ball marketing expenses, depreciation expense, consulting expenses and travel expense in connection with
the Company’s international growth.
The Company has been actively implementing the gross margin improvement initiatives, which were
announced during the fourth quarter of 2006. As a result of these initiatives, the Company’s golf clubs and golf
balls operating segments absorbed charges of $6.0 million and $6.7 million, respectively, during the year ended
December 31, 2008 and $5.7 million and $3.2 million, respectively, during the year ended December 31, 2007.
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