Callaway 2010 Annual Report Download - page 87

Royalty income is recorded in net sales as underlying product sales occur, subject to certain minimums, in
accordance with the related licensing arrangements. The Company recognized royalty income under its various
licensing agreements of $5,831,000, $5,634,000 and $8,847,000 during 2010, 2009 and 2008, respectively.
Warranty Policy
The Company has a stated two-year warranty policy for its golf clubs. The Company’s policy is to accrue
the estimated cost of satisfying future warranty claims at the time the sale is recorded. In estimating its future
warranty obligations, the Company considers various relevant factors, including the Company’s stated warranty
policies and practices, the historical frequency of claims, and the cost to replace or repair its products under
warranty. The decrease in the estimated future warranty obligation is primarily due to a decline in sales and in
warranty return rates primarily due to improved durability of newer products combined with an increase in
customer paid repairs. The following table provides a reconciliation of the activity related to the Company’s
reserve for warranty expense:
Year Ended December 31,
2010 2009 2008
(In thousands)
Beginning balance ................................................. $9,449 $ 11,614 $ 12,386
Provision ......................................................... 8,439 8,544 9,698
Claims paid/costs incurred ........................................... (9,461) (10,709) (10,470)
Ending balance .................................................... $8,427 $ 9,449 $ 11,614
Fair Value of Financial Instruments
The Company’s financial instruments consist of cash and cash equivalents, trade receivables and payables,
forward foreign currency exchange and option contracts (see Note 11) and its financing arrangements (see
Note 10). The carrying amounts of these instruments approximate fair value because of their short-term
maturities and variable interest rates. In addition, through October 1, 2009, the Company had a Company-owned
life insurance policy in order to support a deferred compensation plan that was offered to certain employees. On
October 1, 2009, the Company announced the termination of the plan (see Note 15).
Advertising Costs
The Company advertises primarily through television and print media. The Company’s policy is to expense
advertising costs, including production costs, as incurred. Advertising expenses for 2010, 2009 and 2008 were
$48,432,000, $47,366,000 and $56,020,000, respectively.
Research and Development Costs
Research and development costs are expensed as incurred. Research and development costs for 2010, 2009
and 2008 were $36,383,000, $32,213,000 and $29,370,000, respectively.
Foreign Currency Translation and Transactions
The Company’s foreign subsidiaries utilize their local currency as their functional currency. The accounts of
these foreign subsidiaries have been translated into United States dollars using the current exchange rate at the
balance sheet date for assets and liabilities and at the average exchange rate for the period for revenues and
expenses. Cumulative translation gains or losses are recorded as accumulated other comprehensive income in
shareholders’ equity. Gains or losses resulting from transactions that are made in a currency different from the
functional currency are recognized in earnings as they occur. The Company recorded net foreign currency
transaction losses of $11,674,000 and $482,000 in 2010 and 2009, respectively, and net foreign currency
transaction gains of $519,000 in 2008.
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