Callaway 2010 Annual Report Download - page 92

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From time to time, the Company enters into foreign currency forward contracts and put or call options for
the purpose of hedging foreign exchange rate exposures on existing or anticipated transactions. In the event of a
failure to honor one of these contracts by one of the banks with which the Company has contracted, management
believes any loss would be limited to the exchange rate differential from the time the contract was made until the
time it was settled.
Note 3. Restructuring Initiatives
In the fourth quarter of 2006, the Company began the implementation of certain gross margin improvement
initiatives. Since its inception and through the end of 2009, these initiatives primarily consisted of process
improvements in the procurement of direct materials, including all components used in finished products, and the
procurement of indirect goods and services as well as value engineering and automation to create efficiencies
within the Company’s operational areas. In 2010, the Company began the implementation of the next phase of
the gross margin improvement initiatives, which (as discussed below) targets the Company’s manufacturing and
distribution processes including streamlining the process in which the Company distributes components and
finished goods worldwide (the “Global Operations Strategy”). The Company expects to continue implementing
this phase of the gross margin improvement initiatives through 2011.
Global Operations Strategy
During the third quarter of 2010, as part of the Company’s Global Operations Strategy, the Company
announced the restructuring of its golf club and golf ball manufacturing and distribution operations. This
restructuring, which is designed to add speed and flexibility to customer service demands, optimize efficiencies,
and facilitate long-term gross margin improvements, includes the reorganization of the Company’s
manufacturing and distribution centers located in Carlsbad, California, Toronto, Canada, and Chicopee,
Massachusetts, the creation of third-party logistics sites in Dallas, Texas and Toronto, Canada, as well as the
establishment of a new production facility in Monterrey, Mexico. It is estimated that the restructuring will take
approximately 18 months to complete from the time of its announcement. The Company intends to maintain
limited manufacturing and distribution facilities in Carlsbad, California and Chicopee, Massachusetts.
As a result of this restructuring, the Company has recognized and will recognize non-cash charges for the
acceleration of depreciation on certain golf club and golf ball manufacturing equipment and cash charges related
to severance benefits and transition costs, which consist primarily of consulting expenses, costs associated with
redundancies during the start-up and training phase of the new production facility in Monterrey, Mexico, start-up
costs associated with the establishment of third-party logistics sites, travel expenses, and costs associated with
the transfer of inventory and equipment.
For the twelve months ended December 31, 2010, the Company recorded pre-tax charges of $14,816,000 in
connection with this restructuring, of which $12,827,000 and $1,989,000 was recognized within cost of goods
sold and general and administrative expenses, respectively, and of which $12,065,000 and $762,000 was
absorbed by the Company’s golf clubs and golf balls segments, respectively. Charges related to corporate general
and administrative expenses were excluded from the Company’s operating segments.
The Company currently estimates that the total costs related to this restructuring will be approximately
$35,000,000-$40,000,000, including the amounts recognized during the twelve months ended December 31,
2010. As of December 31, 2010, the total future estimated charges are $23,000,000, of which approximately
$20,000,000 will be settled in cash and approximately $3,000,000 will be non-cash charges, and $17,000,000 and
$6,000,000 will be absorbed by the golf clubs and golf balls segments, respectively. These estimated charges
reflect the Company’s best estimate as of the filing of this report based upon the Company’s current plans. Any
change in the Company’s plans during implementation, or any delays, difficulties, or change in costs associated
with the implementation of these initiatives, could affect the estimated amounts or timing of the charges.
F-14