Callaway 2014 Annual Report Download - page 44

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28
sales can be affected from time to time by the early launch of product introductions related to the new golf season of the
subsequent year. This seasonality, and therefore quarter to quarter fluctuations, can be affected by many factors, including the
timing of new product introductions as well as weather conditions. In general, because of this seasonality, a majority of the
Company’s sales and most, if not all, of its profitability occurs during the first half of the year.
Foreign Currency. A significant portion of the Company’s business is conducted outside of the United States in currencies
other than the U.S. dollar. As a result, changes in foreign currency rates can have a significant effect on the Company’s financial
results. The Company enters into foreign currency exchange contracts to mitigate the effects of changes in foreign currency
rates. While these foreign currency exchange contracts can mitigate the effects of changes in foreign currency rates, they do
not eliminate those effects, which can be significant. These effects include (i) the translation of results denominated in foreign
currency into U.S. dollars for reporting purposes, (ii) the mark-to-market adjustments of certain intercompany balance sheet
accounts denominated in foreign currencies and (iii) the mark-to-market adjustments on the Company’s foreign currency
exchange contracts. In general, the Company’s overall financial results are affected positively by a weaker U.S. dollar and
are affected negatively by a stronger U.S. dollar as compared to the foreign currencies in which the Company conducts its
business. During 2014, the Company’s reported net sales in regions outside the United States were negatively affected by the
translation of foreign currency sales into U.S. dollars based on 2014 exchange rates. If 2013 exchange rates were applied to
2014 reported sales in regions outside the United States and all other factors were held constant, net sales in such regions
would have been $11.1 million higher than the net sales reported in 2014. Additionally, in general, the U.S. dollar has
strengthened against the foreign currencies in which the Company conducts its business, primarily the Japanese Yen. If this
trend persists or if the U.S. dollar further strengthens against these currencies, it could significantly adversely impact the
Company's future results of operations.
Executive Summary
The Company’s net sales for 2014 increased by 5% to $886.9 million as compared to $842.8 million in 2013. Despite
softer than expected market conditions, the Company continued to gain market share, driven by growth in sales of woods
(8%), irons (12%), golf balls (5%) and accessories and other (2%). Additionally, despite the impact of $11.1 million of
unfavorable fluctuations in foreign currency rates, the Company experienced growth in all geographic segments, including
the United States (5%), Japan (3%), Europe (11%), Rest of Asia (7%) and other foreign countries (1%).
The Company’s gross profit as a percentage of sales increased 310 basis points in 2014 compared to the prior year. These
increases were primarily the result of favorable pricing combined with an increase in sales of higher margin products compared
to 2013, as well as improved manufacturing and distribution efficiencies resulting from the Company’s prior cost-reduction
initiatives. In addition, there were no charges related to the cost-reduction initiatives in 2014 compared to charges incurred
in 2013 of $11.1 million (see Note 3 "Restructuring Initiatives" in the Notes to Consolidated Financial Statements in this Form
10-K).
During 2014, the Company continued to manage operating expenses while also increasing its investment in its marketing
and tour programs. As a result, operating expenses remained flat in 2014 compared to 2013. Operating expenses in 2013
included charges of $4.7 million related to the Company's cost-reduction initiatives, as well as incremental charges of $5.4
million for bad debt.
For the year ended December 31, 2014, the Company’s other income (expense) decreased by $6.1 million to other
expense of $0.1 million compared to other income of $6.0 million in 2013. The decline is primarily attributable to a net
decrease in foreign currency contract gains.
In 2014, net income improved significantly to $16.0 million compared to a net loss of $18.9 million in 2013 and diluted
earnings per share increased to $0.20 compared to a diluted loss per share of $0.31 in 2013. These improvements reflect the
Company’s continued improvements in market share and operating efficiencies, resulting in its return to profitability for the
first time since 2008 - a significant milestone in the Company’s turnaround plan.