Callaway Golf Fires KPMG as Auditor
Callaway Golf Co. disclosed Monday that it fired auditor KPMG because of a dispute over when $17 million in warranty reserves should be added to the firm’s bottom line.
In a conference call with analysts, officials from the Carlsbad, Calif., golf club manufacturer confirmed that the disagreement would delay their filing of the company’s third-quarter report with the Securities and Exchange Commission, possibly until February.
The postponement will allow the newly hired auditors, Deloitte & Touche, time to sort out the matter.
Bud Leedom, an analyst from Wells Fargo Securities in San Diego, called the wrangling over the reserves and the quarterly report more of a “vexing issue” than a problem for Callaway. “I have my eye on it, but it’s not alarming to me,” he said.
The dispute arises over the amount Callaway budgeted to pay for warranty repairs or replacements of its Biggest Big Bertha driver, which was introduced in 1997 and had problems with its titanium shafts.
Since then, Callaway improved the club’s design and strength, Leedom said. In addition, company officials said Monday that better record-keeping revealed fewer returns than expected, meaning that Callaway paid $17 million less for repairs than it had allotted..
The rub came in choosing when to report the change.
“In this particular case, unlike a lot of other companies, we’ve understated our earnings in a prior period,” said Brad Holiday, Callaway’s chief financial officer. “I guess we’re guilty of being too conservative.”
Company officials want to claim the full amount for the third quarter, arguing that the $17 million, although not part of operational earnings, constituted a “change in estimate,” Holiday said. Thus, the firm included it in figuring its third-quarter results showing $160 million in revenue and earnings of 19 cents a share -- 16 cents of that coming from the reclaimed warranty reserves.
But KPMG, which was hired in March, regarded the matter as an error, and advised the firm to restate earnings going further back, Holiday said.
When neither side budged, and the company missed its Nov. 14 deadline for its quarterly report, Callaway’s audit committee and board voted to dismiss KPMG.
A KPMG spokesman declined to comment Monday.
Buoyed by brisk sales of their new Big Bertha II drivers, Callaway officials also said Monday that they expect to do better than forecast in 2002. They said revenue should reach $790 million, rather than the $750 million projected, and earnings would reach 96 cents to $1 a share.
Next year, however, they estimated revenue would remain flat and earnings would dip to 88 cents a share -- about 7 cents below the consensus, said analyst Leedom.
Callaway reported the dismissal of KPMG after the markets closed Monday. In regular trading, its shares fell 27 cents, or 2.2%, to $11.80 on the New York Stock Exchange. But they rose in after-market trading to $12.30.
