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 added speed and flexibility to customer service demands, optimized efficiencies, and facilitated long-term gross margin improvements, included 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 continues to maintain limited manufacturing and distribution facilities in Carlsbad, California and Chicopee, Massachusetts.

During the three and nine months ended September 30, 2011, the Company recorded pre-tax charges of $5,229,000 and $17,571,000, respectively in connection with this restructuring. The majority of these charges were recognized within cost of sales. Costs incurred during the first nine months of 2012 were nominal. See Note 17 for charges absorbed by 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 began the implementation of certain restructuring initiatives (the “Reorganization and Reinvestment Initiatives”) that involved (i) streamlining the Company’s organization to reduce costs, simplifying internal processes, and increasing 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 resulted in annualized pre-tax savings of approximately $50,000,000 of which approximately half of the savings were reinvested into the Callaway and Odyssey brands and demand creation initiatives.

During the quarters ended September 30, 2012 and 2011, the Company recognized total pre-tax charges of $291,000 and $7,395,000, respectively, in connection with these initiatives. Amounts recognized in cost of sales and operating expenses were $177,000 and $114,000, respectively during the third quarter of 2012, and $1,049,000 and $6,346,000, respectively, during the third quarter of 2011.

During the nine months ended September 30, 2012 and 2011, the Company recognized total pre-tax charges of $1,011,000 and $12,557,000, respectively, in connection with these initiatives. Amounts recognized in cost of sales and operating expenses were $473,000 and $538,000, respectively, during the first nine months of 2012, and $1,049,000 and $11,508,000, respectively, during the first nine months of 2011.

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 September 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 September 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		—			—			278			278
Cash payments		(159	)		—			(1,670	)		(1,829	)

Restructuring payable balance, June 30, 2012	$	501		$	—		$	1,050		$	1,551
Charges to cost and expense		—			—			291			291
Cash payments		(385	)		—			(330	)		(715	)

Restructuring payable balance, September 30, 2012	$	116		$	—		$	1,011		$	1,127

Total future estimated charges as of September 30, 2012	$	—		$	—		$	—		$	—

Cost Reduction Initiatives

In July 2012, the Company announced it was undertaking 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 (i) a reduction in workforce that impacts all regions and levels of the organization in addition to other transition costs, which resulted in pre-tax charges of $6,684,000 and $10,238,000 during the three and nine months ended September 30, 2012; (ii) greater focus on the Company’s core product lines including licensing to third parties the rights to develop, manufacture and distribute certain non-core product lines (e.g. apparel and footwear), which resulted in pre-tax charges of $3,575,000 and $4,692,000 in the three and nine months ended September 30, 2012; (iii) transitioning the Company’s integrated device business to a third party based model, which resulted in pre-tax charges of $16,473,000 in both the three and nine months ended September 30, 2012 (see Note 8 and Note 15); and (iv) the reorganization of the Company’s golf ball manufacturing supply chain, including the planned sale and lease-back of a reduced portion of the square footage of the Company’s ball manufacturing facility in Chicopee, Massachusetts (Note 7). Total pre-tax charges related to this reorganization were $8,352,000 in both the three and nine months ended September 30, 2012. These initiatives are estimated to yield approximately $60,000,000 in annualized savings. In connection with these initiatives, the Company expects to incur total pre-tax charges of approximately $55,000,000, of which approximately two-thirds is expected to result in non-cash expenditures. The Company expects to incur these estimated charges over the next twelve months. These estimates are based upon current information and expectations; however, the amount, nature, or timing of these charges could vary as the Company further develops and implements these initiatives.

During the three and nine months ended September 30, 2012, the Company recognized charges of $35,084,000 and $39,755,000, respectively, in connection with the Cost Reduction Initiatives. Amounts recognized in cost of goods sold and operating expenses totaled $27,302,000 and $7,782,000, respectively, during the three months ended September 30, 2012, and $28,263,000 and $11,492,000, respectively, during the nine months ended September 30, 2012. See Note 17 for charges absorbed by 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 September 30, 2012 are included in accrued employee compensation and benefits and accounts payable and accrued expenses 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

Charges to cost and expense	$	6,582		$	1,273		$	27,229		$	35,084
Non-cash items		(80	)		(666	)		(27,229	)		(27,975	)
Cash payments		(5,041	)		(329	)		—			(5,370	)

Restructuring payable balance, September 30, 2012	$	3,919		$	278		$	—		$	4,197

Total future estimated charges as of September 30, 2012	$	6,900		$	8,000		$	400		$	15,300