Callaway 2011 Annual Report Download

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2011 ANNUAL REPORT

Table of contents

  • Page 1
    2011 ANNUAL REPORT

  • Page 2
    ... name on a scorecard for the very first time, we at Callaway have a single aim: to deliver the best performing products the game has ever known-products that perform so well, they literally put the joy of the game in your hands. Because the thrills of golf are out there. And we believe everyone with...

  • Page 3
    ... and the marketplace. We have addressed that issue and entered the adjustable metal woods category with the introduction of the new RAZR Fit Driver, which has been very well-received. We've also revamped our entire marketing program, injecting energy into our communications with the help of a new...

  • Page 4
    ... our core businesses by growing our share of the market. This is the key to our future success and an overriding principal that guided our appointment of Chip Brewer as Callaway's next CEO. Chip is a proven leader in the golf industry, where he has held executive positions since 1998. During...

  • Page 5
    2011 ANNUAL REPORT BOARD OF DIRECTORS SEnIOR MAnAGEMEnT Samuel H. Armacost Chairman Emeritus, SRI International Oliver G. Brewer, III President and Chief Executive Officer Ronald S. Beard Chairman of the Board, Callaway Golf Company; Partner, Zeughauser Group LLC; Retired Former Partner, Gibson...

  • Page 6
    ... REPORT CORPORATE DATA Independent Registered Public Accounting Firm MEE TInG AnD InFORMATIOn The 2012 Annual Meeting of Shareholders Wednesday, May 23, 2012 Callaway Golf Company Headquarters 2180 Rutherford Road Carlsbad, CA 92008 760.931.1771 For more information visit the Company's websites...

  • Page 7
    ... Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2011. FORWARD - LOOKInG InFORMATIOn Statements made in the letter to shareholders that relate to future plans, events, financial results, performance, or growth, including statements relating to future sales growth, market...

  • Page 8
    2011 ANNUAL REPORT

  • Page 9

  • Page 10

  • Page 11
    ... (760) 931-1771 (Address, including zip code, and telephone number, including area code, of principal executive offices) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, $.01 par value per share New York Stock...

  • Page 12
    ...Lady-FTiZ-FT Performance-FT Tour-Fusion-Gems-Great Big Bertha-Heavenwood-HX-HX Diablo-HX Diablo Tour-Hex Aerodynamics-Hex Black Tour- IMIX-Legacy-Legacy Aero-Marksman-Never Lay Up- Number One Putter in Golf-Odyssey-OptiFit-ORG.14-Razr Fit-Razr Hawk-Razr X-Razr XF-Razr X Forged-Razr X Muscleback-Razr...

  • Page 13
    CALLAWAY GOLF COMPANY INDEX PART I. Item 1. Item 1A. Item 1B. Item 2. Item 3. Item 4. Business ...Risk Factors ...Unresolved Staff Comments ...Properties ...Legal Proceedings ...Mine Safety Disclosures ...PART II. Item 5. Item 6. Item 7. Item 7A. Item 8. Item 9. Item 9A. Item 9B. Market for ...

  • Page 14
    [THIS PAGE INTENTIONALLY LEFT BLANK]

  • Page 15
    ... quality golf clubs (drivers, fairway woods, hybrids, irons, wedges and putters) and golf balls, and also sells golf accessories (such as GPS range finders, golf bags, gloves, footwear, apparel, headwear, eyewear, towels and umbrellas) under the Callaway Golf, Odyssey, Top-Flite and uPro brand names...

  • Page 16
    ... all price levels in the golf ball category. Accessories and Other. This product category includes sales of golf bags, golf gloves, golf footwear, GPS on-course range finders, golf apparel, packaged club sets, headwear, towels, umbrellas, eyewear and other accessories, as well as sales of pre-owned...

  • Page 17
    ...golf club and golf ball manufacturing, see below, "Certain Factors Affecting Callaway Golf Company" contained in Item 1A. Sales and Marketing Sales in the United States Of the Company's total net sales, approximately 47%, 48% and 50% were derived from customers within the United States in 2011, 2010...

  • Page 18
    ... data. All performance centers and participating on-and-off course retail stores are equipped with custom fitting systems that incorporate the use of an extensive variety of clubhead and shaft combinations in order to find a set of golf clubs that fits a golfer's personal specifications. In addition...

  • Page 19
    ... Top-Flite and Odyssey products, including drivers, fairway woods, hybrids, irons, putters, golf balls, footwear, eyewear, golf and lifestyle apparel and golf-related accessories, including uPro GPS on-course range finders, through its website www.shop.callawaygolf.com. Advertising and Promotion The...

  • Page 20
    ..., quality, performance, customer service and price. In order to gauge the effectiveness of the Company's response to such factors, management receives and evaluates Company-generated market trends for U.S. and foreign markets, as well as periodic public and customized market research for the...

  • Page 21
    ...TRG Accessories, LLC for a collection primarily consisting of travel gear, (iii) Nikon Vision Co., Ltd. for rangefinders, (iv) Sweda Company, LLC for a collection of padfolios, pens and other gift items for the corporate market, and (v) Walman Optical, for a line of prescription Callaway eyewear. In...

  • Page 22
    ..., Global Brand and Product Senior Vice President, Americas Managing Director, Europe, Middle East and Africa Managing Director, East Asia Managing Director, Southeast Asia and South Pacific Anthony S. Thornley was named interim President and Chief Executive Officer of the Company in June 2011. He...

  • Page 23
    ... for the sales and marketing functions in the United States, Canada and Latin America. Mr. Urzetta joined Callaway Golf in 2000 as Strategic Account Manager before quickly earning a promotion to Director of Strategic Accounts. He later held the positions of Vice President and Senior Vice President...

  • Page 24
    ... officers will be contained in the Company's definitive Proxy Statement in connection with the 2011 Annual Meeting of Shareholders. In addition, copies of the employment agreements for all the executive officers are included as exhibits to this report. Access to SEC Filings through Company Website...

  • Page 25
    ... customers' financial condition, their levels of business activity and their ability to pay trade obligations. The Company primarily sells its products to golf equipment retailers directly and through wholly-owned domestic and foreign subsidiaries, and to foreign distributors. The Company performs...

  • Page 26
    ... new products requires great precision in forecasting demand and assuring that supplies are ready and delivered during the critical selling periods. Finally, the rapid changeover in products creates a need to monitor and manage the closeout of older products both at retail and in the Company's own...

  • Page 27
    ... required to transition to other suppliers, the Company could experience significant production delays or disruption to its business. The Company also depends on a single or a limited number of suppliers for the materials it uses to make its golf balls. Many of these materials are customized for 13

  • Page 28
    ...'s results of operations. A disruption in the service or a significant increase in the cost of the Company's primary delivery and shipping services for its products and component parts could have a material adverse effect on the Company's business. The Company uses United Parcel Service ("UPS") for...

  • Page 29
    ... club and a pre-owned club. Successful marketing activities, discounted pricing, consignment sales, extended payment terms or new product introductions by competitors could negatively impact the Company's future sales. Golf Balls. The golf ball business is also highly competitive. There are a number...

  • Page 30
    ...damaged golf courses are repaired and golfers focus on repairing the damage to their homes, businesses and communities. Consequently, sustained adverse weather conditions, especially during the warm weather months, could materially affect the Company's sales. Goodwill and intangible assets represent...

  • Page 31
    ... affected. The Company's sales could decline if professional golfers do not endorse or use the Company's products. The Company establishes relationships with professional golfers in order to evaluate and promote Callaway Golf, Odyssey and Top-Flite branded products. The Company has entered into...

  • Page 32
    ... find their way to unauthorized outlets or distribution channels. This "gray market" for the Company's products can undermine authorized retailers and foreign wholesale distributors who promote and support the Company's products, and can injure the Company's image in the minds of its customers 18

  • Page 33
    ... a limited number of suppliers of golf club components in the United States, and the Company has increasingly become more reliant on suppliers and vendors located outside of the United States. The operation of foreign distribution in the Company's international markets, as well as the management of...

  • Page 34
    ... properties. The Company's principal executive offices and domestic operations are located in Carlsbad, California. The Company has five buildings that are utilized in its Carlsbad operations, which are comprised of corporate offices and the Company's performance center, as well as manufacturing...

  • Page 35
    ... and internationally, including properties in Texas, Australia, Canada, Japan, Korea, the United Kingdom, China, Thailand, Malaysia and India. The Company's operations at each of these properties are used to some extent for both the golf club and golf ball businesses. The Company believes...

  • Page 36
    ... number of holders of record of the Company's common stock was 7,900. The following table sets forth the range of high and low per share sales prices of the Company's common stock and per share dividends for the periods indicated. Year Ended December 31, Period: High 2011 Low Dividend High 2010...

  • Page 37
    ... of all dividends in ELY stock on the dividend payable date. COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN $140 $120 $100 $80 $60 $40 $20 $2006 2007 ELY 2008 S&P 500 2009 2010 S&P 600 Smallcap 2011 2006 2007 2008 2009 2010 2011 Callaway Golf (NYSE: ELY) ...$100.00 $122.96 $67.10 $55.20...

  • Page 38
    ... statements, related notes and other financial information appearing elsewhere in this report. Year Ended December 31, 2011(1),(2),(3),(4),(5) 2010(2),(3),(4) 2009(2),(3) 2008(2),(7),(8) (In thousands, except per share data) 2007(2) Statement of Operations Data: Net sales ...Cost of sales ...Gross...

  • Page 39
    ... years ended December 31, 2009, 2010 and 2011 include the results of operations of uPlay, LLC. (8) In the fourth quarter of 2008, the Company reversed a $19.9 million energy derivative valuation account. (9) Working capital, total assets and total Callaway Golf Company shareholders' equity for these...

  • Page 40
    ..., "Revenue Recognition," as products are shipped to customers, net of an allowance for sales returns and accruals for sales programs. The Company records a reserve for anticipated returns through a reduction of sales and cost of sales in the period that the related sales are recorded. Sales returns...

  • Page 41
    ... with outstanding gift cards decreased from $3.2 million at December 31, 2010 to $2.0 million at December 31, 2011. Revenues from course credits in connection with the use of the Company's uPro GPS on-course range finders are deferred when purchased and recognized when customers download the course...

  • Page 42
    ...warranty costs of each club product line over the expected warranty period. Where little or no claims experience may exist, the Company's warranty obligation calculation is based upon long-term historical warranty rates of similar products until sufficient data is available. As actual model-specific...

  • Page 43
    ...'s evaluation during 2011, the Company recorded a $52.5 million increase to income tax expense in order to establish a valuation allowance against its U.S. deferred tax assets. In addition, the Company has discontinued recognizing income tax benefits related to its U.S. net operating losses until it...

  • Page 44
    ...reference. Results of Operations Overview of Business and Seasonality The Company designs, manufactures and sells high quality golf clubs and golf balls and also sells golf apparel, golf footwear, golf bags, gloves, eyewear and other golf-related accessories, including uPro GPS on-course measurement...

  • Page 45
    ... a fourth quarter woods launch by the Company and the negative impact of natural disasters in Japan, Australia and South East Asia, resulted in an 8% decline in sales and a 300 basis point decline in gross margins with relatively flat operating expenses in 2011 compared to 2010. These declines were...

  • Page 46
    ... clubs and golf balls segments, as noted below (dollars in millions): Years Ended December 31, 2011 2010(1) Decline Dollars Percent Net sales Golf clubs ...$726.1 $791.1 $(65.0) Golf balls ...160.4 176.6 (16.2) $886.5 $967.7 $(81.2) (1) Certain prior period amounts have been reclassified to conform...

  • Page 47
    ...to $98.4 million (10% of net sales) in the comparable period of 2010. This decrease was primarily due to a reduction of $8.8 million in employee related expenses and a $6.2 million net gain recognized in connection with the sale of three of the Company's buildings in March 2011. These decreases were...

  • Page 48
    ... in Japan, Australia and South East Asia during 2011. The increase in average selling prices was primarily due to a favorable shift in product mix from sales of moderately priced drivers and fairway woods in 2010 to sales of more premium drivers in 2011 combined with less closeout activity during...

  • Page 49
    ...brand premium golf ball models due to there being no new premium golf ball launch in 2011 and lower investments in golf ball marketing and advertising in 2011. The slight decrease in average selling prices was generated by an unfavorable shift in product mix from sales of higher priced Callaway Tour...

  • Page 50
    ... Statements in this Form 10-K. Pre-tax income in the Company's golf clubs operating segment decreased to a pre-tax loss of $3.9 million for 2011 from pre-tax income of $39.2 million for 2010. This decrease was primarily attributable to the decrease in net sales as discussed above combined with...

  • Page 51
    ...each operating segment's results, see "Golf Club and Golf Ball Segments Results" below. Net sales information by region is summarized as follows (dollars in millions): Years Ended December 31, 2010 2009 Growth (Decline) Dollars Percent Net sales: United States ...$468.2 $475.4 $ (7.2) Europe ...130...

  • Page 52
    ... to: (i) net favorable changes in foreign currency rates; (ii) cost reductions on golf club components costs; (iii) a favorable shift in sales mix; (iv) lower promotional activity on in-line products in 2010 compared to 2009; and (v) a favorable shift in golf ball production to more cost efficient...

  • Page 53
    ... in net sales of accessories and other products to $235.7 million for the year ended December 31, 2010 was primarily attributable to: (i) increased sales of packaged sets, which include the current year launch of the women's Solaire line of golf clubs; (ii) increased sales of golf apparel under...

  • Page 54
    ... Callaway Golf product lines (primarily the premium Tour-i series) as well as the introduction of the new Solaire women's line of golf balls. The increase in average selling prices was generated by a shift in product mix to sales of more premium lines of golf balls in 2010 compared to 2009. Segment...

  • Page 55
    ... more cost efficient regions outside the United States, as well as a favorable shift in product mix as a result of increased sales of higher margin Callaway Golf balls in 2010 compared to sales of value priced Top-Flite golf balls in 2009. Financial Condition The Company's cash and cash equivalents...

  • Page 56
    ... December 31, 2011 compared to $268.6 million as of December 31, 2010. This decrease was driven primarily by the later timing of new product launches planned for 2012 as well as a reduction in out of catalog products resulting from improved product life-cycle management processes. Net inventories as...

  • Page 57
    ... stock repurchase authorizations. During 2011, the Company repurchased approximately 227,000 shares of its common stock under the November 2007 repurchase program at an average cost per share of $6.99 for a total cost of $1.6 million. The Company acquired these shares to satisfy the Company's tax...

  • Page 58
    ... under which it may be required to make payments in relation to certain transactions. These include (i) intellectual property indemnities to the Company's customers and licensees in connection with the use, sale and/or license of Company products or trademarks, (ii) indemnities to various lessors...

  • Page 59
    ... of the operating results of the Company's international subsidiaries into U.S. dollars for financial reporting purposes. As part of its strategy to manage the level of exposure to the risk of fluctuations in foreign currency exchange rates, the Company uses derivative financial instruments...

  • Page 60
    ... respectively. At December 31, 2011 and 2010, there were no outstanding foreign exchange contracts designated as cash flow hedges for anticipated sales denominated in foreign currencies. As part of the Company's risk management procedure, a sensitivity analysis model is used to measure the potential...

  • Page 61
    ... that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of December 31, 2011. Management's Report on Internal Control over Financial Reporting. The Company's management is responsible for establishing...

  • Page 62
    ... opinion. A company's internal control over financial reporting is a process designed by, or under the supervision of, the Company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other...

  • Page 63
    ... Company maintains employee benefit plans and programs in which its executive officers are participants. Copies of certain of these plans and programs are set forth or incorporated by reference as Exhibits to this report. Information required by Item 11 will be included in the Company's definitive...

  • Page 64
    ... or under the Promotion Plan since March 2002. For additional information, see Note 14 "Share-Based Compensation" to the Notes to Consolidated Financial Statements in this Form 10-K. 1995 Plan. Under the 1995 Plan, the Company granted stock options to non-executive officer employees and consultants...

  • Page 65
    .... All such requests should be directed to the Company's Investor Relations Department at Callaway Golf Company, 2180 Rutherford Road, Carlsbad, CA 92008. 3.1 3.2 Certificate of Incorporation, incorporated herein by this reference to Exhibit 3.1 to the Company's Current Report on Form 8-K, as filed...

  • Page 66
    ... 10.4 to the Company's Annual Report on Form 10-K for the year ended December 31, 2008, as filed with the Commission on February 27, 2009 (file no. 1-10962). Second Amendment to Officer Employment Agreement, effective as of April 30, 2010, by and between Callaway Golf Company and Steven C. McCracken...

  • Page 67
    ... 10.10 to the Company's Annual Report on Form 10-K for the year ended December 31, 2008, as filed with the Commission on February 27, 2009 (file no. 1-10962). Second Amendment to Officer Employment Agreement, effective as of April 30, 2010, by and between Callaway Golf Company and Thomas T. Yang...

  • Page 68
    ... with the Commission on June 9, 2006 (file no. 1-10962). Callaway Golf Company Non-Employee Directors Stock Option Plan (As Amended and Restated August 15, 2000), incorporated herein by this reference to Exhibit 10.25 to the Company's Annual Report on Form 10-K for the year ended December 31, 2001...

  • Page 69
    ... Callaway Golf Company Amended and Restated 2004 Incentive Plan (effective May 19, 2009), incorporated herein by this reference to Exhibit A to the Company's Definitive Proxy Statement on Schedule 14A, as filed with the Commission on April 3, 2009 (file no. 1-10962). 2011 Senior Management Incentive...

  • Page 70
    ... Company, Callaway Golf Sales Company, Callaway Golf Ball Operations, Inc., Callaway Golf Canada Ltd., Callaway Golf Europe Ltd., Callaway Golf Interactive, Inc., Callaway Golf International Sales Company, Callaway Golf European Holding Company Limited, Bank of America, N.A., as administrative agent...

  • Page 71
    ...duly authorized. CALLAWAY GOLF COMPANY By: /S/ ANTHONY S. THORNLEY Anthony S. Thornley President and Chief Executive Officer Date: March 2, 2012 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and...

  • Page 72
    ...; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /S/ ANTHONY S. THORNLEY 3. 4. Anthony S. Thornley President and Chief Executive Officer Date: March 2, 2012 58

  • Page 73
    ..., whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /S/ BRADLEY J. HOLIDAY 3. 4. Bradley J. Holiday Senior Executive Vice President and Chief Financial Officer Date: March 2, 2012 59

  • Page 74
    ... officers of Callaway Golf Company, a Delaware corporation (the "Company"), does hereby certify with respect to the Annual Report of the Company on Form 10-K for the year ended December 31, 2011, as filed with the Securities and Exchange Commission (the "10-K Report"), that: (1) the 10-K Report...

  • Page 75
    INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm ...Consolidated Balance Sheets as of December 31, 2011 and 2010 ...Consolidated Statements of Operations for the years ended December 31, 2011, 2010 and 2009 ...Consolidated Statements of Cash Flows ...

  • Page 76
    ... the Board of Directors and Shareholders of Callaway Golf Company Carlsbad, California We have audited the accompanying consolidated balance sheets of Callaway Golf Company and subsidiaries (the "Company") as of December 31, 2011 and 2010, and the related consolidated statements of operations, cash...

  • Page 77
    ... at market value, 0 shares and 291,341 shares at December 31, 2011 and 2010, respectively ...Less: Common stock held in treasury, at cost, 1,453,819 shares and 1,910,646 shares at December 31, 2011 and 2010, respectively ...Total Callaway Golf Company shareholders' equity ...Non-controlling interest...

  • Page 78
    CALLAWAY GOLF COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) Year Ended December 31, 2011 2010 2009 Net sales ...Cost of sales ...Gross profit ...Selling expenses ...General and administrative expenses ...Research and development expenses ...Total operating ...

  • Page 79
    CALLAWAY GOLF COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Year Ended December 31, 2011 2010 2009 Cash flows from operating activities: Net loss ...Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization ...Impairment charge ......

  • Page 80
    ... in redemption value of Preferred Stock ...Employee stock purchase plan ...Stock dividends ...Cash dividends ...Adjustment of Grantor Stock Trust shares to market ...Equity adjustment from foreign currency translation ...Change in non-controlling interest ...Net loss ...Balance, December 31, 2009...

  • Page 81
    ... golf clubs (drivers, fairway woods, hybrids, irons, wedges and putters) and golf balls. The Company also sells golf accessories such as golf bags, golf gloves, golf footwear, GPS on-course range finders, golf and lifestyle apparel, golf headwear, eyewear, golf towels and golf umbrellas. The Company...

  • Page 82
    ... associated with outstanding gift cards decreased from $3,247,000 at December 31, 2010 to $1,988,000 at December 31, 2011. Revenues from course credits in connection with the use of uPro GPS on-course range finders are deferred when purchased and recognized when customers download the course credits...

  • Page 83
    ...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, 2011 2010 2009...

  • Page 84
    ... well as management's estimates of market conditions and forecasts of future product demand, all of which are subject to change. Property, Plant and Equipment Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over...

  • Page 85
    ... assets consist of goodwill, trade names, trademarks, service marks, trade dress, patents and other intangible assets acquired during the acquisition of Odyssey Sports, Inc., the Top-Flite and Ben Hogan assets, FrogTrader, Inc., the Tour Golf Group assets, the uPlay, LLC assets and certain foreign...

  • Page 86
    ...the Company's evaluation during 2011, the Company recorded a $52,455,000 increase to income tax expense in order to establish a valuation allowance against its U.S. deferred tax assets. In addition, the Company has discontinued recognizing income tax benefits related to its U.S. net operating losses...

  • Page 87
    ... operating segments are organized on the basis of products and consist of Golf Clubs and Golf Balls. The Golf Clubs segment consists primarily of Callaway Golf and Top-Flite woods, hybrids, irons, wedges and putters as well as Odyssey putters, pre-owned clubs, GPS on-course range finders, other golf...

  • Page 88
    ... in Carlsbad, California and Chicopee, Massachusetts. As a result of this restructuring, the Company has recognized 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...

  • Page 89
    $16,329,000 of charges related to these initiatives, of which $1,251,000 and $15,078,000 were recognized in cost of goods sold and operating expenses, respectively. Total charges absorbed by the Company's golf clubs and golf balls operating segments were $5,642,000 and $1,329,000 respectively. The ...

  • Page 90
    ... preferred signage rights, rights as the preferred supplier of golf products used or offered for use at TopGolf facilities at prices no less than those paid by the Company's customers, preferred retail positioning in the TopGolf retail stores, access to consumer information obtained by TopGolf...

  • Page 91
    ... Information December 31, 2011 2010 (In thousands) Accounts receivable, net: Trade accounts receivable ...Allowance for doubtful accounts ...Inventories: Raw materials ...Work-in-process ...Finished goods ...Property, plant and equipment, net: Land ...Buildings and improvements ...Machinery...

  • Page 92
    ... trade names and trademarks acquired as part of the Top-Flite acquisition, the Company considered the continued negative impact of a trend in the golf industry where premium branded competitor golf balls are being sold through the mass market channel as well as a recent increase of in-house brands...

  • Page 93
    ...-Flite acquisition. Both charges were reflected in general and administrative expenses in the accompanying statement of operations for the years ended December 31, 2011 and 2010. In addition, in the fourth quarter of 2011, the Company conducted an impairment test on goodwill related to its reporting...

  • Page 94
    ... of the operating results of the Company's international subsidiaries into U.S. dollars for financial reporting purposes. As part of its strategy to manage the level of exposure to the risk of fluctuations in foreign currency exchange rates, the Company uses derivative financial instruments...

  • Page 95
    ... purchase plan ("ESPP") and outstanding restricted stock units granted to employees and non-employees (see Note 14) are excluded from the calculation in periods when a net loss is reported as their effect would be anti-dilutive. For the years ended December 31, 2011, 2010 and 2009, shares totaling...

  • Page 96
    ...In November 2007, the Company announced that its Board of Directors authorized it to repurchase shares of its common stock in the open market or in private transactions, subject to the Company's assessment of market conditions and buying opportunities, up to a maximum cost to the Company of $100,000...

  • Page 97
    ... to the Company's officers, employees, consultants and certain other non-employees who provide services to the Company. All grants under the 2004 Plan are discretionary, although no participant may receive awards in any one year in excess of 2,000,000 shares. The maximum number of shares issuable...

  • Page 98
    ... relating to outstanding stock options for the years ended December 31, 2011, 2010 and 2009, respectively. The Company records compensation expense for employee stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes option-pricing model. The model...

  • Page 99
    ...years ended December 31, 2011 and 2009. At December 31, 2011, there was $3,351,000 of total unrecognized compensation expense related to options granted to employees under the Company's share-based payment plans. That cost is expected to be recognized over a weighted-average period of 1.3 years. The...

  • Page 100
    ... end of each interim reporting period and is based on the closing price of the Company's stock. PSUs generally vest over two and three year periods. The table below summarizes the total number of PSUs granted to employees during the years ended December 31, 2011, 2010 and 2009 (in thousands). # of...

  • Page 101
    ... share-based compensation related to employees and directors. Amounts are in thousands, except for per share data. 2011 2010 2009 Cost of sales ...Operating expenses ...Total cost of employee share-based compensation included in loss before income tax ...Income tax benefit ...Amount included in net...

  • Page 102
    ... sharing contributions at a rate of 25% per year, becoming fully vested after the completion of four years of service. In accordance with the provisions of the 401(k) Plan, the Company matched employee contributions in the amount of $5,061,000, $5,431,000 and $1,380,000 during 2011, 2010 and 2009...

  • Page 103
    ... and a net deferred benefit of $1,184,000 related to reserves for uncertain tax positions in accordance with ASC Topic 740-25-6. Deferred tax assets and liabilities result from temporary differences between the financial reporting and tax bases of assets and liabilities and are measured using the...

  • Page 104
    ... a result, in 2011, the Company recorded a $52,455,000 increase to income tax expense in order to establish a valuation allowance against its U.S. deferred tax assets and discontinued recognizing income tax benefits related to its U.S. net operating losses. If sufficient positive evidence arises in...

  • Page 105
    ..., including the value of the Company's stock at the time of the ownership change. Although the Company's ownership has changed significantly during the three-year period ended December 31, 2011 (due in significant part to the Company's June 2009 preferred stock offering), the Company does not...

  • Page 106
    ... of operations or its financial position. The Company recognizes interest and/or penalties related to income tax matters in income tax expense. For the years ended December 31, 2011, 2010 and 2009, the Company recognized tax expense of approximately $242,000, and a net benefit of approximately...

  • Page 107
    ... incident to its business activities, including claims, proceedings, and investigations relating to commercial disputes and employment matters. The Company also receives from time to time information claiming that products sold by the Company infringe or may infringe patent, trademark, or other...

  • Page 108
    ..., Case No. C.A. 09131, asserting claims against Acushnet for patent infringement with regard to the new balls. Specifically, the complaint asserts that two golf ball patents owned by the Company and acquired from Top-Flite are infringed by the new versions of the Pro V1 golf balls introduced in 2009...

  • Page 109
    ... Superior Court for the County of San Diego, Case No. 37-2009-00050363-CU-BC-NC, against Corporate Trade Inc. ("CTI") seeking damages for breach of contract and for declaratory relief based on the asserted use and transfer of corporate trade credits to the Company in connection with the purchase of...

  • Page 110
    ... under which it may be required to make payments in relation to certain transactions. These include (i) intellectual property indemnities to the Company's customers and licensees in connection with the use, sale and/or license of Company products, (ii) indemnities to various lessors in connection...

  • Page 111
    ... The Company's operating segments are organized on the basis of products and include golf clubs and golf balls. The golf clubs segment consists primarily of Callaway Golf and Top-Flite woods, hybrids, irons, wedges and putters as well as Odyssey putters, pre-owned clubs, GPS on-course range finders...

  • Page 112
    ... utilized by management to evaluate its operating segments. 2011 2010 (In thousands) 2009 Net sales Golf Clubs(1) ...Golf Balls(1) ...Loss before income tax Golf Clubs(1),(2),(3) ...Golf Balls(1),(2),(3) ...Reconciling items(4) ...Identifiable assets(5)(7) Golf Clubs ...Golf Balls(6) ...Reconciling...

  • Page 113
    ...to shareholders' equity of $8,967,000 (see Note 16). The Company's net sales by product category are as follows: Year Ended December 31, 2011 2010(1) 2009(1) (In thousands) Net sales Drivers and Fairway Woods ...Irons ...Putters ...Golf Balls ...Accessories and Other ... $212,901 207,790 88,831 160...

  • Page 114
    ... operates. Revenues are attributed to the location to which the product was shipped. Long-lived assets are based on location of domicile. Long-Lived Assets (excluding goodwill, intangible assets and deferred tax Sales assets) (In thousands) 2011 United States ...Europe ...Japan ...Rest of Asia...

  • Page 115
    ... On February 16, 2012, the Company completed the sale of its Ben Hogan brand, which included all trademarks, service marks, and certain other intellectual property as well as license arrangements for apparel and accessories under the Ben Hogan brand name, for net proceeds of approximately $6,800,000...

  • Page 116
    SCHEDULE II CALLAWAY GOLF COMPANY CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS For the Years Ended December 31, 2011, 2010 and 2009 Allowance Allowance for for Sales Doubtful Returns Accounts (In thousands) Date Balance, December 31, 2008 ...$ 6,424 $ 8,619 Provision ...23,607 2,469 Write-off, ...

  • Page 117
    ..., forests where high conservation values are threatened, genetically modified organisms, violation of people's civil and traditional rights and wood from forests harvested for the purpose of converting the land to plantations or other non-forest use. • This annual report is printed on McCoy gloss...

  • Page 118
    CALLAWAY GOLF COMPANY 2180 Rutherford Road Carlsbad, CA 92008-7328 callawaygolf.com