Callaway Golf
Let's start with a pair of snapshots for Callaway Golf Co., a prominent golf club maker which was the subject of a Warranty Week article way back on March 24, 2003. At that time, the company had just fired its auditors at KPMG LLP because they refused to go along with the accounting treatment the company preferred to use to report a downward change in its warranty cost estimates.
Back in 2002, Callaway had noticed that claims on a new line of titanium clubs were being paid at a lower rate than it had initially predicted, and so it wanted to take $17 million out of its warranty reserve, pay taxes on it, and report a one-time $10.5 million net boost to profits. KPMG insisted that the excess $17 million be treated as a cumulative error, and that its removal should be reported retroactively, spreading the earnings boost over multiple quarters.
To make a long story short, KPMG got the boot, Callaway got its boost, and Deloitte & Touche LLP got its foot in the door as the company's new auditors. The downward change in estimate resulted in a one-time gain that helped the company avoid back-to-back quarterly losses, but of course that was a secondary effect of the increased product quality that caused it.
None of that controversy is visible in either Figures 1 or 2, but perhaps that's the point? The company got its way, lowered its warranty costs, and business continued as usual. Callaway continued making golf clubs, and continued to pay claims. There was no long-lasting effect, and no shortfall that later needed to be corrected.
However, now that we have five more years of data, it becomes immediately apparent that Callaway could use a few lessons in how to manage warranty costs for such a seasonal product line as golf clubs. Claims always spike in the third quarter and plunge in the first quarter, which of course meshes well with the golf season in its major markets. But they average out over the course of the year to somewhere within the 1.5% to 1.8% range.
If that's the case, the company should be accruing funds at more or less the same rate in every season, flattening out the green line in Figure 1, as many of the farm equipment and homebuilding companies have learned to do. But instead, accruals rise and fall in much the same seasonal pattern as claims, rising as high as 2.4% of sales and plunging as low as 0.9%.
Back in 2002, Callaway had noticed that claims on a new line of titanium clubs were being paid at a lower rate than it had initially predicted, and so it wanted to take $17 million out of its warranty reserve, pay taxes on it, and report a one-time $10.5 million net boost to profits. KPMG insisted that the excess $17 million be treated as a cumulative error, and that its removal should be reported retroactively, spreading the earnings boost over multiple quarters.
To make a long story short, KPMG got the boot, Callaway got its boost, and Deloitte & Touche LLP got its foot in the door as the company's new auditors. The downward change in estimate resulted in a one-time gain that helped the company avoid back-to-back quarterly losses, but of course that was a secondary effect of the increased product quality that caused it.
None of that controversy is visible in either Figures 1 or 2, but perhaps that's the point? The company got its way, lowered its warranty costs, and business continued as usual. Callaway continued making golf clubs, and continued to pay claims. There was no long-lasting effect, and no shortfall that later needed to be corrected.
However, now that we have five more years of data, it becomes immediately apparent that Callaway could use a few lessons in how to manage warranty costs for such a seasonal product line as golf clubs. Claims always spike in the third quarter and plunge in the first quarter, which of course meshes well with the golf season in its major markets. But they average out over the course of the year to somewhere within the 1.5% to 1.8% range.
If that's the case, the company should be accruing funds at more or less the same rate in every season, flattening out the green line in Figure 1, as many of the farm equipment and homebuilding companies have learned to do. But instead, accruals rise and fall in much the same seasonal pattern as claims, rising as high as 2.4% of sales and plunging as low as 0.9%.
posted by 65UNDER.COM at
8:40 PM
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