Callaway 2012 Annual Report Download

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CALLAWAY GOLF COMPANY ANNUAL REPORT 2012
ANNUAL REPORT
2012

Table of contents

  • Page 1
    2012 ORT P E R AL ANNU

  • Page 2
    ... SERIOUSLY This is the New Callaway. We want to hear directly from golfers about what they think of our products. We are leveraging social media to make our company more approachable, more modern, and more responsive. Because the best way to impress golfers, is giving them exactly what they want...

  • Page 3
    ... Callaway is changing. Sure, we're still going to be producing the most technologically advanced clubs in the game, like the RAZR Fit Xtreme Driver. But how we communicate to golfers, and how we deliver those products, is going to be different. We're going to stay authentic to the game at all times...

  • Page 4
    ... made significant progress. clubs and golf balls in the industry. In order to regain this focus, in 2012 we streamlined our business by selling the Ben Hogan and Top-Flite brands, licensing our apparel and footwear businesses, and discontinuing our direct operations in the GPS/electronics category...

  • Page 5
    ... improvement in our 2013 operating results, these results will only be the beginning of a multi-year turnaround initiative and our performance should be viewed in this context and time frame. The good news is that I believe we are now headed in the right direction and results should continue...

  • Page 6
    ... executive Officer, Callaway Golf Company Neil Howie Managing Director, europe, Middle east and Africa John C. Cushman, III Co-Chairman, Cushman & Wakefield, Inc. Mark F. Leposky Yotaro Kobayashi Oliver "Chip" Brewer President and Chief executive Officer Senior Vice President, Global Operations...

  • Page 7
    ...AN D INFORMATION The 2013 Annual Meeting of Shareholders Wednesday, May 15, 2013 Callaway Golf Company Headquarters 2180 Rutherford Road Carlsbad, CA 92008 760.931.1771 For more information visit the Company's websites: callawaygolf.com odysseygolf.com shop.callawaygolf.com callawaygolfpreowned.com

  • Page 8
    ... by unfavorable economic or market conditions), as well as the general risks and uncertainties applicable to the Company and its business. For details concerning these and other risks and uncertainties, see Part I, Item IA, "Risk Factors" contained in the following Annual Report on Form 10-K, as...

  • Page 9
    2012 FINANCIAL ReSULTS

  • Page 10

  • Page 11
    ...1-10962 ' Callaway Golf Company (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 95-3797580 (I.R.S. Employer Identification No.) 2180 Rutherford Road Carlsbad, CA 92008 (760) 931-1771 (Address, including zip code, and...

  • Page 12
    ...-FT Tour-Fusion-Gems- Great Big Bertha-Heavenwood-HX-HX Diablo-Hex Aerodynamics-Hex Black Tour-Hex Chrome-Hex Hot-IMIX-Legacy-Legacy Aero-Legend-Marksman-Metal-X-Number One Putter in Golf-Odyssey- OptiFit-ORG.14-ProType-ProType Black-Razr Fit-Razr Fit Xtreme-Razr Hawk-Razr X-Razr XF- Razr X HL-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
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  • Page 15
    ...golf clubs (drivers, fairway woods, hybrids, irons, wedges and putters) and golf balls, and also sells golf accessories (such as golf bags, golf gloves, headwear, towels, umbrellas and travel gear) under the Callaway Golf and Odyssey brand names. The Company generally sells its products to retailers...

  • Page 16
    ... drivers, fairway woods and hybrid products are available in a variety of lofts, shafts and other specifications to accommodate the preferences and skill levels of all golfers. Irons. This product category includes sales of the Company's irons and wedges, which are sold under the Callaway Golf brand...

  • Page 17
    ... sale of such products. The Company also sells certain products to mass merchants. On a consolidated basis, no one customer that distributes golf clubs or golf balls in the United States accounted for more than 7% of the Company's consolidated revenues in 2012, compared to 6% in both 2011 and 2010...

  • Page 18
    ..., the Philippines, South Africa, and in numerous countries in Central and South America. Prices of golf clubs and balls for sales by distributors outside of the United States generally reflect an export pricing discount to compensate international distributors for selling and distribution costs...

  • Page 19
    ... of Callaway Golf and Odyssey products, including drivers, fairway woods, hybrids, irons, putters, golf balls, and golf-related accessories, through its websites shop.callawaygolf.com and www.odysseygolf.com. Advertising and Promotion The Company develops and executes its advertising and promotional...

  • Page 20
    ... on the community, the Callaway Golf Company Foundation and the Callaway Golf Community Giving program. Through these programs the Company and its employees are able to give back to the community through monetary donations and by providing community services. Information on both of these programs is...

  • Page 21
    ...non-prescription eyewear and golf apparel in regions outside the U.S., Canada, Latin America, Asia and Asia Pacific countries, and golf footwear in regions outside the U.S, Canada and Latin America. Employees As of December 31, 2012, the Company and its subsidiaries had approximately 1,500 full-time...

  • Page 22
    ..., East Asia Managing Director, Southeast Asia and South Pacific Managing Director, Europe, Middle East and Africa Oliver G. Brewer III is a Director and President and Chief Executive Officer of the Company and has served in such capacity since March 2012. Before joining Callaway Golf Company, Mr...

  • Page 23
    ... since joining the Company in 1997, including Vice President Asia Marketing and Business Development, General Manager, ERC International and Director of Advertising and Promotion. Mr. Boezeman has a Bachelor of Business Administration in International Business from the University of Hawaii. Leighton...

  • Page 24
    ...requests a copy. The information contained on the Company's website shall not be deemed to be incorporated into this report. Item 1A. Risk Factors Certain Factors Affecting Callaway Golf Company The Company's business, operations and financial condition are subject to various risks and uncertainties...

  • Page 25
    ...'s significant customers. A failure by the Company's customers to pay on a timely basis a significant portion of outstanding account receivable balances would adversely impact the Company's results of operations, financial condition and cash flows. The Company has significant international sales and...

  • Page 26
    ... preferences. In this marketplace, a substantial portion of the Company's annual revenues is generated each year by products that are in their first year of their product life cycle. These marketplace conditions raise a number of issues that the Company must successfully manage. For example, the...

  • Page 27
    ... affect the Company's sales. The Company generates substantially all of its revenues from the sale of golf-related products, including golf clubs, golf balls and golf accessories. The demand for golf-related products in general, and golf balls in particular, is directly related to the number of golf...

  • Page 28
    ... any of the Company's golf club or golf ball manufacturing facilities in the U.S. and in regions outside the U.S., or at the third-party logistics sites in the U.S. and Canada, could materially and adversely affect the Company's sales, profitability and results of operations. New regulations related...

  • Page 29
    ... golf club and golf ball sales. On a consolidated basis, no one customer that distributes golf clubs or golf balls in the United States accounted for more than 7% of the Company's consolidated revenues in 2012, compared to 6% in both 2011 and 2010. On a segment basis, in 2012, the top five golf club...

  • Page 30
    ... principal markets fewer people are playing golf during that time of year due to cold weather. Furthermore, the Company generally announces its new product line in the fourth quarter to allow retailers to plan for the new golf season. Such early announcements of new products could cause golfers, and...

  • Page 31
    ...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 32
    ...affected. The Company's sales and business could be materially and adversely affected 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 and Odyssey branded products. The...

  • Page 33
    ... of the Company. The Company sells and distributes its products directly in many key international markets in Europe, Asia, North America and elsewhere around the world. These activities have resulted and will continue to result in investments in inventory, accounts receivable, employees, corporate...

  • Page 34
    ... a breach in cyber security, its business and results of operations could suffer. All of the Company's major operations, including manufacturing, distribution, sales and accounting, are dependent upon the Company's complex information systems. The Company's information systems are vulnerable to...

  • Page 35
    ... States, 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 that its facilities currently are adequate to meet its...

  • Page 36
    ...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 2012 Low Dividend High 2011 Low Dividend First Quarter ...Second Quarter ...Third Quarter ...Fourth Quarter ... $7.29 $7.13 $6.45 $6.80 $5.48...

  • 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 $2007 2008 ELY 2009 S&P 500 2010 2011 S&P 600 Smallcap 2012 2007 2008 2009 2010 2011 2012 Callaway Golf (NYSE: ELY) ...$100.00 $54.57 $44.90 $ 48.30...

  • Page 38
    ...by the Company under its repurchase programs during the fourth quarter of 2012 (in thousands, except per share data): Three Months Ended December 31, 2012 Total Number Maximum of Shares Dollar Purchased as Value that Part of May Yet Be Total Number Weighted Publicly Purchased of Shares Average Price...

  • Page 39
    ...annual consolidated financial statements, related notes and other financial information appearing elsewhere in this report. Year Ended December 31, 2012(1)(2)(3)(6) 2011(4)(5)(6)(7)(8) 2010(5)(6)(7) 2009(5)(6) (In thousands, except per share data) 2008(5)(10) Statement of Operations Data: Net sales...

  • Page 40
    ... first quarter of 2012, in an effort to simplify the Company's operations and increase focus on the Company's core Callaway and Odyssey business, the Company sold certain assets related to the Top-Flite and Ben Hogan brands, including trademarks, service marks and certain other intellectual property...

  • Page 41
    ... in accordance with Accounting Standards Codification ("ASC") Topic 605, "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...

  • Page 42
    ... business to a third-party based model, the Company will continue to maintain services related to course credits used in conjunction with the uPro GPS devices. Deferred revenue associated with unused course credits decreased to $2.5 million at December 31, 2012 from $2.9 million at December 31, 2011...

  • Page 43
    ... discounted future cash flows that would be generated from the use of these assets. In the first quarter of 2012, in an effort to simplify the Company's operations and increase focus on the Company's core Callaway and Odyssey brands, the Company sold the Top-Flite and Ben Hogan brands for net...

  • Page 44
    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 ...

  • Page 45
    ... stock units (collectively "restricted stock") based on the estimated fair value of the award on the date of grant. The estimated fair value is determined based on the closing price of the Company's common stock on the date of grant multiplied by the number of shares awarded. Compensation expense...

  • Page 46
    ...of Callaway Golf woods, hybrids, irons, wedges and putters as well as Odyssey putters. This segment also includes other golf-related accessories described above and royalties from licensing of the Company's trademarks and service marks as well as sales of pre-owned golf clubs. The golf balls segment...

  • Page 47
    ... 2012 2011 Pre-tax charges related to the Cost Reduction Initiatives ...Pre-tax impairment charges ...Pre-tax charges related to the Reorganization and Reinvestment Initiatives ...Pre-tax gain on the sale of Top-Flite and Ben Hogan brands ...Pre-tax charges related to the Global Operations Strategy...

  • Page 48
    ... of the Company's accessories and other products due to increased sales of packaged sets, apparel and GPS devices. The Company's net sales by operating segment are presented below (dollars in millions): Years Ended December 31, 2012 2011 Decline Dollars Percent Net sales: Golf clubs ...Golf balls...

  • Page 49
    ... of the Company's business; and (v) charges related to the impairment of certain golf ball patents. In addition, gross margin was negatively affected by increased promotional activity during 2012 primarily on in-line drivers, fairway woods and irons products, as well as an increase in club component...

  • Page 50
    ... planned launch timing of the Company's premium Legacy drivers which were launched during the third quarter of 2012 compared to the first quarter in 2011. This decline in average selling prices was partially offset by a favorable shift in sales mix resulting from fewer sales of lower priced hybrids...

  • Page 51
    ... recent years, sales of Top-Flite and Ben Hogan branded golf balls have represented approximately 25% of the Company's total golf ball annual sales. The increase in average selling prices was due to a favorable shift in sales mix from lower priced Top-Flite balls to higher priced Callaway golf balls...

  • Page 52
    ... in 2011. Pre-tax loss in the Company's golf balls operating segment increased to $15.0 million for 2012 from $12.7 million for 2011. This increase in pre-tax loss was primarily attributable to a decrease in net sales primarily due to the sale of the Top-Flite and Ben Hogan Brands, as discussed...

  • Page 53
    ... of 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, 2011 2010 Growth (Decline) Dollars Percent Net sales: United States ...Europe ...Japan ...Rest of Asia...

  • Page 54
    ... of 2010. Diluted loss per share increased to $2.82 in 2011 compared to $0.46 in 2010. The Company's net loss for the years ended December 31, 2011 and 2010 include the following charges (in millions): 2011 2010 Pre-tax Global Operation Strategy charges ...Pre-tax impairment charges ...Pre-tax...

  • Page 55
    ... compared to the prior year launch of Diablo Edge drivers and fairway woods during the first quarter of 2010. Additionally sales volumes were negatively impacted by the natural disasters in Japan, Australia and South East Asia during 2011. The increase in average selling prices was primarily due to...

  • Page 56
    ... priced Callaway Tour balls to sales of more moderately priced golf balls. Segment Profitability Profitability by operating segment is summarized as follows (dollars in millions): Years Ended December 31, 2011 2010 Growth/ (Decline) Dollars Percent Loss before income taxes: Golf clubs(1)(2) ...Golf...

  • Page 57
    ... outstanding balance on the ABL Facility. Additionally, during 2012, the Company used its cash and cash equivalents and net proceeds of $26.9 million from the sale of the Top-Flite and Ben Hogan brands to fund $28.8 million of cash used in operating activities in addition to $18.4 million in capital...

  • Page 58
    ...manufacture and distribute the Company's apparel and footwear product lines. In addition, the decrease in inventory was due to lower inventory levels as a result of fewer irons models offered in 2013 compared to 2012 as well as a decrease in golf ball inventory due to the sale of the Top-Flite brand...

  • Page 59
    ...000 principal amount of convertible notes, which is equal to a conversion price of approximately $7.50 per share, subject to customary anti-dilution adjustments. Upon the occurrence of certain change of control events of the Company, the Company will pay a premium on the convertible notes converted...

  • Page 60
    ... of market conditions and buying opportunities. The November 2007 repurchase program supersedes all prior stock repurchase authorizations and will remain in effect until completed or otherwise terminated by the Board of Directors During 2012, the Company repurchased approximately 122,000 shares of...

  • Page 61
    ... are generally outstanding for periods less than a year and are settled by cash payments upon delivery of goods and services and are not reflected in this line item. (3) The Company leases certain warehouse, distribution and office facilities, vehicles and office equipment under operating leases...

  • Page 62
    ... operations in 2012. As discussed above, during 2012, the Company implemented significant changes to its business, including among other things, steps designed to increase product sales as well as initiatives designed to reduce the Company's manufacturing costs and operating expenses. The Company...

  • Page 63
    ... and Hedging." As such, changes in the fair value of the contracts are recognized in earnings in the period of change. At December 31, 2012, 2011 and 2010, the notional amounts of the Company's foreign currency exchange contracts used to hedge the exposures discussed above were approximately...

  • Page 64
    ...by Bank of America Canada or Canada's...Company's internal control over financial reporting as of December 31, 2012. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in its report entitled Internal Control...

  • Page 65
    ... with the policies or procedures may deteriorate. The effectiveness of the Company's internal control over financial reporting as of December 31, 2012 has been audited by Deloitte & Touche LLP, the Company's independent registered public accounting firm, as stated in its report which is included...

  • Page 66
    ...Callaway Golf Company Carlsbad, California We have audited the internal control over financial reporting of Callaway Golf Company and its subsidiaries (the "Company") as of December 31, 2012, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring...

  • Page 67
    ... reference. Item 11. Executive Compensation The 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...

  • Page 68
    ... non-executive officer employees and consultants of the Company. Although the 1995 Plan permitted stock option grants to be made at less than the fair market value of the Company's common stock on the date of grant, the Company's practice was generally to grant stock options at exercise prices equal...

  • Page 69
    ..., Carlsbad, CA 92008. 2.1 Asset Purchase Agreement among American Sports Licensing, Inc. and Dick's Sporting Goods, Inc., collectively the buyer, and Callaway Golf Company as the seller dated as of March 30, 2012, incorporated herein by this reference to Exhibit 2.1 to the Company's Quarterly Report...

  • Page 70
    ... Bradley J. Holiday, incorporated herein by this reference to Exhibit 10.1 to the Company's Current Report on Form 8-K, as filed with the Commission on May 7, 2012 (file no. 110962). Officer Employment Agreement, effective as of April 25, 2012, by and between Callaway Golf Company and Mark Leposky...

  • Page 71
    ... to Exhibit 10.35 to the Company's Quarterly Report on Form 10-K for the year ended December 31, 2011, as filed with the Commission on March 2, 2012 (file no. 1-10962). Notice of Grant and Agreement for Stock Appreciation Right, by and between Callaway Golf Company and Anthony S. Thornley effective...

  • Page 72
    10.26 Callaway Golf Company 1995 Employee Stock Incentive Plan (As Amended and Restated November 7, 2001), incorporated herein by this reference to Exhibit 10.22 to the Company's Annual Report on Form 10-K for the year ended December 31, 2002, as filed with the Commission on March 17, 2003 (file no...

  • Page 73
    ... 22, 2011, among Callaway Golf Company, Callaway Golf Sales Company, Callaway Golf Ball Operations, Inc., Callaway Golf Canada Ltd., Callaway Golf Interactive, Inc., Callaway Golf International Sales Company, Bank of America, N.A., as administrative agent and collateral agent, UBS Securities LLC, as...

  • Page 74
    ...* XBRL Taxonomy Extension Calculation Linkbase Document* XBRL Taxonomy Extension Definition Linkbase Document* XBRL Taxonomy Extension Label Linkbase Document* XBRL Taxonomy Extension Presentation Linkbase Document* †Included in this report * The XBRL information is being furnished and not filed...

  • Page 75
    ... duly authorized. CALLAWAY GOLF COMPANY By: /S/ OLIVER G. BREWER III Oliver G. Brewer III President and Chief Executive Officer Date: March 8, 2013 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...

  • Page 76
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  • Page 77
    ... Public Accounting Firm ...Consolidated Balance Sheets as of December 31, 2012 and 2011 ...Consolidated Statements of Operations for the years ended December 31, 2012, 2011 and 2010 ...Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2012, 2011 and 2010...

  • Page 78
    ...FIRM To 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, 2012 and 2011, and the related consolidated statements of operations...

  • Page 79
    ..., except share and per share data) December 31, 2012 2011 ASSETS Current assets: Cash and cash equivalents ...Accounts receivable, net ...Inventories ...Deferred taxes, net ...Income taxes receivable ...Other current assets ...Assets held for sale ...Total current assets ...Property, plant and...

  • Page 80
    CALLAWAY GOLF COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) Year Ended December 31, 2012 2011 2010 Net sales ...Cost of sales ...Gross profit ...Selling expenses ...General and administrative expenses ...Research and development expenses ...Total operating ...

  • Page 81
    CALLAWAY GOLF COMPANY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited) (In thousands) Year Ended December 31, 2012 2011 2010 Net loss ...$(122,946) $(171,820) $(18,804) Other comprehensive income, net of tax: Foreign currency translation adjustments ...699 507 7,324 Comprehensive ...

  • Page 82
    CALLAWAY GOLF COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Year Ended December 31, 2012 2011 2010 Cash flows from operating activities: Net loss ...$(122,946) $(171,820) $(18,804) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation ...

  • Page 83
    ... 13,067) - - - - - Adjustment of grantor stock trust shares to market ...- - - - 27 - - (27) - - - Equity adjustment from foreign currency translation 7,324 - - - - Change in non-controlling interest 358) Net loss 18,804) - - - - 346 Balance, December 31, 2010 ...1,400 $ 14 66,317 $663 $264,235...

  • Page 84
    ... clubs (drivers, fairway woods, hybrids, irons, wedges and putters) and golf balls. The Company also sells golf-related accessories such as golf bags, golf gloves, golf headwear, eyewear, golf towels and golf umbrellas. The Company generally sells its products to golf retailers (including pro shops...

  • Page 85
    ...219,000 and $5,831,000 during 2012, 2011 and 2010, 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...

  • Page 86
    ...observable. The Company utilizes a discounted cash flow valuation model whenever applicable to derive a fair value measurement on long-lived assets, goodwill and amortizing intangibles. The Company uses its internal cash flow estimates discounted at an appropriate rate, quoted market prices, royalty...

  • Page 87
    ... transactions of $3,343,000 in 2012 and net gains of $708,000 and $6,926,000 in 2011 and 2010, respectively. Derivatives and Hedging The Company uses derivative financial instruments to manage its exposure to foreign exchange rates. The derivative instruments are accounted for pursuant to ASC Topic...

  • Page 88
    ... assets consist of goodwill, trade names, trademarks, service marks, trade dress, patents and other intangible assets acquired during the acquisition of Odyssey Sports, Inc. in 1997, FrogTrader, Inc. in 2004, the Tour Golf Group Inc. assets in 2006, the uPlay, LLC assets in 2008, and certain...

  • Page 89
    ... forfeiture rates are not consistent with the Company's estimates, the Company may be required to increase or decrease compensation expenses in future periods. The Company uses the Black-Scholes option valuation model to estimate the fair value of its stock options and stock appreciation rights...

  • Page 90
    ... woods, hybrids, irons, wedges and putters as well as Odyssey putters, pre-owned clubs, rangefinders, other golf-related accessories and royalties from licensing of the Company's trademarks and service marks. The golf balls segment consists of Callaway Golf golf balls that are designed, manufactured...

  • Page 91
    ... United States. In 2012 and 2011, approximately 53% of the Company's net sales were made in regions outside of the United States, compared to 52% in 2010. Prolonged unfavorable economic conditions in the United States or in the Company's international markets could significantly increase the Company...

  • Page 92
    ... into the Callaway and Odyssey brands and demand creation initiatives. In connection with these initiatives, during 2012 the Company recognized net pre-tax charges of $1,012,000 of which $473,000 and $539,000 were recognized in cost of sales and operating expenses, respectively. In 2011, the Company...

  • Page 93
    ...2012 are included in accrued employee compensation and benefits and accounts...Company and its business. If the Company is unable to generate sufficient cash flows to fund its business due to a further decline in sales or otherwise, and is unable to reduce its manufacturing costs and operating... United ...

  • Page 94
    ... other things, restrictions on incurrence of additional debt, liens, dividends and other restricted payments, asset sales, investments, mergers, acquisitions and affiliate transactions. As of December 31, 2012, the Company was in compliance with all covenants of the ABL Facility. Additionally, the...

  • Page 95
    ...generally convertible at any time at the holder's option into common stock of the Company at an initial conversion rate of 14.1844 shares of Callaway's common stock per share of preferred stock, which is equivalent to an initial conversion price of approximately $7.05 per share. At December 31, 2012...

  • Page 96
    .... Note 7. Sale of Buildings In connection with the Company's Cost Reduction Initiatives, during the third quarter of 2012, the Company reached an agreement in principle to sell its golf ball manufacturing facility in Chicopee, Massachusetts and lease back a reduced portion of the square footage to...

  • Page 97
    ... device business to a third party based model. As a result, the Company performed an impairment analysis and determined that the discounted expected cash flows from the sales of uPro GPS devices were less than the carrying values of the intangible assets and goodwill associated with the uPlay, LLC...

  • Page 98
    ... service marks for net cash proceeds of $19,900,000. In addition, in February 2012, the Company completed the sale of the Ben Hogan brand including trademarks, service marks and certain other intellectual property for net cash proceeds of $6,961,000. The net book value of the Top-Flite and Ben Hogan...

  • Page 99
    ... December 31, 2012 2011 (In thousands) Accounts receivable, net: Trade accounts receivable ...Allowance for sales returns ...Allowance for doubtful accounts ...Inventories: Raw materials ...Work-in-process ...Finished goods ...Property, plant and equipment, net: Land ...Buildings and improvements...

  • Page 100
    Note 12. Income Taxes The Company's loss before income tax provision (benefit) was subject to taxes in the following jurisdictions for the following periods (in thousands): Year Ended December 31, 2012 2011 2010 United States ...Foreign ... $(134,384) $(105,841) $(46,365) 16,338 15,580 10,803 $(118...

  • Page 101
    ... stock options and rights ...Deferred revenue and other ...Operating loss carryforwards ...Tax credit carryforwards ...Correlative effects of global income allocations ...Federal impact of state taxes ...Basis difference related to intangible assets with a definite life ...Total deferred tax assets...

  • Page 102
    ... 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. At December 31, 2012 and 2011, the valuation...

  • Page 103
    ... $515,000, respectively. The most significant adjustments in each year related to adjustments resulting from the finalization of the Company's prior year U.S. and state income tax returns as well as agreements reached with the Internal Revenue Service and other major jurisdictions on certain issues...

  • Page 104
    ... and foreign jurisdictions. The Company is generally no longer subject to income tax examinations by tax authorities in its major jurisdictions as follows: Major Tax Jurisdiction Years No Longer Subject to Audit U.S. federal California (U.S.) Canada Japan South Korea United Kingdom 2008 and prior...

  • Page 105
    ... non-cancelable operating leases as of December 31, 2012 are as follows (in thousands): 2013 ...2014 ...2015 ...2016 ...2017 ...Thereafter ...$12,914 10,571 5,849 2,639 1,717 313 $34,003 Rent expense for the Company's lease commitments for the years ended December 31, 2012, 2011 and 2010 was $18...

  • Page 106
    ... continuation, upon the termination of employment following a change in control. Note 14. Capital Stock Common Stock and Preferred Stock As of December 31, 2012, the Company has an authorized capital of 243,000,000 shares, $0.01 par value, of which 240,000,000 shares are designated common stock, and...

  • Page 107
    ..., 2011 and 2010: Year Ended December 31, 2011 2010 (In thousands) Employee stock option exercises ...Employee restricted stock units vested ...Employee stock plan purchases ...Total shares released from the GST ...Note 15. Share-Based Compensation - 205 86 291 62 221 409 692 The Company accounts...

  • Page 108
    ...stock options for the years ended December 31, 2012, 2011 and 2010, 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 uses various assumptions...

  • Page 109
    ...-date fair value of options granted during the years ended December 31, 2012, 2011 and 2010 was $2.63, $2.94 and $2.37 per share, respectively. At December 31, 2012, there was $952,000 of total unrecognized compensation expense related to options granted to employees under the Company's share-based...

  • Page 110
    ... units awarded under the 2004 Plan and the 2001 Directors Plan are recorded at the Company's closing stock price on the date of grant. Restricted stock units generally vest at the end of a three year period. In 2012, 2011 and 2010, the weighted average grant-date fair value of restricted stock units...

  • Page 111
    ... employees authorized the Company to withhold compensation and use the withheld amounts to purchase shares of the Company's common stock at 85% of the closing price on the last day of each six-month offering period. In 2011, the Company terminated this program. In 2011 and 2010 the Company...

  • Page 112
    ... the Internal Revenue Code (the "401(k) Plan") for all employees who satisfy the age and service requirements under the 401(k) Plan. Each participant may elect to contribute up to 75% of annual compensation, up to the maximum permitted under federal law. In 2012, the Company matched amounts equal to...

  • Page 113
    ... the net book value of these patents (see Note 8). In the fourth quarter of 2011, the Company conducted an impairment test on goodwill related to its reporting unit in Australia. Due to the negative impact of significant flooding and inclement weather as well as a decline in economic conditions in...

  • Page 114
    ... well as the fair value of contingent contracts that represent financial instruments (in thousands). The carrying values of cash and cash equivalents, trade accounts receivable and trade accounts payable and accrued expenses at December 31, 2012 and 2011 are reasonable estimates of fair value due to...

  • Page 115
    ... Golf and Top-Flite woods, hybrids, irons, wedges and putters as well as Odyssey putters, pre-owned clubs, GPS devices and rangefinders, other golf-related accessories and royalties from licensing of the Company's trademarks and service marks. Prior to the first quarter of 2012, the golf balls...

  • Page 116
    ... operating segments. 2012 2011 (In thousands) 2010 Net sales Golf Clubs ...Golf Balls ...Loss before income tax Golf Clubs(1) ...Golf Balls(1) ...Reconciling items(2) ...Identifiable assets(3) Golf Clubs ...Golf Balls(4) ...Reconciling items(3) ...Additions to long-lived assets Golf Clubs ...Golf...

  • Page 117
    ... 7), and the golf ball manufacturing facility in Gloversville, New York, respectively. The Company's net sales by product category are as follows: Year Ended December 31, 2012 2011(1) 2010 (In thousands) Net sales: Drivers and Fairway Woods ...Irons ...Putters ...Golf Balls ...Accessories and Other...

  • Page 118
    ...in which the Company 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 deferred tax Sales assets) (In thousands) 2012 United States ...Europe ...Japan ...Rest of Asia ...Other foreign...

  • Page 119
    ... Note 3). (2) During the first quarter of 2012, the Company recognized an after-tax gain of $4,069,000 ($0.06 per share) in connection with the sale of the Top-Flite and Ben Hogan brands (see Note 8). (3) During the second, third and fourth quarters of 2012, the Company recognized after-tax charges...

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    WINNERS PLAY HEX BLACK TOUR " I had a big advantage this week, I felt, because when the winds started coming up, when the rain started coming up, I felt like I had an advantage by the way my ball was ï¬,ying and being controlled through that wind. Phil Mickelson (following his 2012 Pebble Beach Win...

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