2. Restructuring Initiatives

Global Operations Strategy

In 2010, the Company began the implementation of its Global Operations Strategy Initiatives (“GOS Initiatives”), which targeted the restructuring and relocation of the Company’s 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. This restructuring was completed in 2011 and only nominal charges were incurred in 2012. The Company intends to maintain limited manufacturing and distribution facilities in Carlsbad, California and Chicopee, Massachusetts.

During the three and six months ended June 30, 2011, the Company recorded pre-tax charges of $5,813,000 and $12,342,000, respectively in connection with this restructuring. The majority of these charges were recognized within cost of sales, and $8,356,000 and $3,793,000 were absorbed by the Company’s golf clubs and golf balls segments, respectively. Costs incurred during the first half of 2012 were de minimis. Charges related to corporate general and administrative expenses were excluded from the Company’s operating segments. In the aggregate through December 31, 2011, the Company recognized total charges of $39,496,000 in connection with the GOS Initiatives.

The charges recognized under this restructuring include 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.

Reorganization and Reinvestment Initiatives

In June 2011, the Company announced that it was implementing certain restructuring initiatives (the “Reorganization and Reinvestment Initiatives”) that involve (i) streamlining the Company’s organization to reduce costs, simplify internal processes, and increase focus on the Company’s consumers and retail partners, (ii) reorganizing the Company’s organizational structure to place greater emphasis on global brand management and improve the effectiveness of the Company’s key initiatives, and (iii) reinvesting in brand and demand creation initiatives to drive sales growth. The Company’s restructuring plan is expected to result in annualized pre-tax savings of approximately $50,000,000 with up to half of the savings to be reinvested into the Callaway and Odyssey brands and more effective demand creation initiatives. The majority of these savings and reinvestments are expected to be realized in 2012.

During the quarter ended June 30, 2012, the Company recognized $283,000 of charges in connection with these initiatives of which $148,000 and $135,000 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 $191,000 and $29,000, respectively. During the six months ended June 30, 2012, the Company recognized $720,000 of charges in connection with these initiatives of which $296,000 and $424,000 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 $554,000 and $108,000, respectively. Charges related to corporate general and administrative expenses were excluded from the Company’s operating segments. The Company expects future estimated charges of $183,000, to be settled in cash, during the balance of 2012.

The table below depicts the activity and liability balances recorded as part of the GOS Initiatives and the Reorganization and Reinvestment Initiatives as well as the current estimated future charges relating to these initiatives (in thousands). Amounts payable as of June 30, 2012 are included in accrued employee compensation and benefits, and amounts payable at December 31, 2011 are included in accrued employee compensation and benefits and accounts payable and accrued expenses in the accompanying consolidated condensed balance sheets. The majority of the amounts payable as of June 30, 2012 will be paid during the balance of 2012.


	GOS Initiatives						Reorganization and Reinvestment Initiatives			Total
	Workforce Reductions			Transition Costs			Workforce Reductions			Total
Restructuring payable balance, December 31, 2011	$	1,219		$	55		$	5,357		$	6,631
Charges to cost and expense		—			21			442			463
Cash payments		(559	)		(76	)		(3,357	)		(3,992	)

Restructuring payable balance, March 31, 2012	$	660		$	—		$	2,442		$	3,102
Charges to cost and expense		—			—			283			283
Cash payments		(159	)		—			(1,675	)		(1,834	)

Restructuring payable balance, June 30, 2012	$	501		$	—		$	1,050		$	1,551

Total future estimated charges as of June 30, 2012	$	—		$	—		$	183		$	183

Cost Reduction Initiatives

The Company has begun implementing additional cost-reduction initiatives (the “Cost Reduction Initiatives”). These initiatives are designed to streamline and simplify the Company’s organizational structure and change the manner in which the Company approaches and operates its business. The actions include a 12% reduction in workforce that impacts all regions and levels of the organization and include greater focus on the Company’s core product lines by licensing to third parties the rights to develop, manufacture and distribute certain non-core product lines (e.g. apparel and footwear). These initiatives are estimated to yield approximately $52,000,000 in annualized savings. In connection with these initiatives, the Company expects to incur total pre-tax charges of up to $36,000,000 to $42,000,000, of which less than 50% is expected to result in cash expenditures. The Company expects to incur these estimated charges over the following twelve months. These estimates are based upon current information and expectations, however, the amount or timing of these changes could vary as the Company further develops and implements these initiatives.

During the three and six months ended June 30, 2012, the Company recognized charges of $4,643,000 and $4,671,000, respectively, in connection with these initiatives. Amounts recognized in cost of goods sold and operating expenses totaled $937,000 and $3,706,000 during the three months ended June 30, 2012, respectively, and $961,000 and $3,710,000 during the six months ended June 30, 2012, respectively. Total charges absorbed by the Company’s golf clubs and golf balls operating segments were $1,667,000 and $324,000, respectively, for the three months ended June 30, 2012, and $1,686,000 and $333,000, respectively, for the six months ended June 30, 2012. Charges related to corporate general and administrative expenses were excluded from the Company’s operating segments.

The table below depicts the total charges recognized in 2012, the liability balances, and the current estimated future charges relating to the Cost Reduction Initiatives (in thousands). Amounts payable as of June 30, 2012 are included in accrued employee compensation and benefits on the accompanying consolidated condensed balance sheet.


	Cost Reduction Initiatives
	Workforce Reductions			Transition Costs			Asset Write-offs			Total
Charges to cost and expense	$	3,240		$	707		$	724		$	4,671
Non-cash items		(240	)		—			(724	)		(964	)
Cash payments		(542	)		(707	)		—			(1,249	)

Restructuring payable balance, June 30, 2012	$	2,458		$	—		$	—		$	2,458

Total future estimated charges as of June 30, 2012⁽¹⁾	$	10,700		$	5,300		$	18,300		$	34,300

(1)	For purposes of this table, the Company used the middle of the range of future estimated charges.

In connection with the Company’s Cost Reduction Initiatives, the Company is reorganizing its golf ball manufacturing supply chain. The Company is currently using only a small portion of its golf ball manufacturing facilities in Chicopee, Massachusetts and is exploring the possibility of selling those facilities. Because the Company intends to maintain manufacturing capabilities in Chicopee even if it sells the current facilities, the Company is also exploring alternative sites in the Chicopee area as well as the possibility of leasing back from potential buyers the portion of the facilities the Company is currently using. If the Company were to sell the facilities at less than their current carrying value, the Company would be required to recognize a charge equal to the amount by which the carrying value exceeds the sale price. The Company has included in the future estimated charges related to the Cost Reduction Initiatives summarized in the table above an estimate of potential charges relating to the reorganization of the golf ball manufacturing supply chain, including potential charges for the sale of the golf ball manufacturing facilities in Chicopee.