Callaway 2010 Annual Report Download - page 47

fourth quarter 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. In general, however, because of this
seasonality, a majority of the Company’s sales and most, if not all, of its profitability generally occurs during the
first half of the year.
Approximately half of the Company’s business is conducted outside of the United States and is conducted 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. As a result of the overall weakening of the U.S. dollar during 2010 compared to 2009, the translation of
foreign currency exchange rates had a net positive impact on the Company’s financial results during 2010.
Executive Summary
When the recent economic crisis hit the golf industry in mid-2008, the Company made the decision to weather
the crisis with a balanced approach between managing costs and continuing to invest in initiatives that would
benefit its business once the economic crisis subsided and the golf industry recovered. During 2010, the overall golf
industry did not recover as management had anticipated. In 2010, the golf industry declined in the United States by
approximately 2% compared to 2009, which declined by approximately 12% compared to 2008. The Company
believes that there were similar declines in the golf industry internationally. During this period, consistent with its
balanced approach strategy, the Company managed its costs but also invested in (i) new and emerging markets such
as China, India and other countries in Southeast Asia, (ii) new technology, including its new forged composite
technology and its uPro business, (iii) its growing accessories and apparel business, and (iv) in its global operations
strategy initiatives targeted at improving gross margins, including the reorganization of its golf club and golf ball
manufacturing and distribution operations. Although the Company’s overall 2010 financial results were
significantly affected by this industry decline and by these investments, as well as by some non-operational charges,
the Company is encouraged by signs of improving general economic and market conditions and by improvements
in the Company’s underlying operational performance as a result of these investments.
Despite the overall decline in the golf industry, the Company’s net sales in 2010 increased 2% compared to
2009, primarily as a result of favorable foreign currency rates, an overall increase in average selling prices, and
increased sales in the Company’s accessories and apparel businesses and new and emerging markets. These
improvements offset a decline in sales in the United States and Europe, which continued to be adversely affected by
constrained consumer spending on discretionary durable products, particularly during the height of the golf season.
The Company’s gross profit as a percentage of net sales for 2010 improved by 2 percentage points to 38%,
compared to 36% for 2009, despite absorbing an incremental $6.7 million in charges in 2010 related to the
implementation of the Company’s global operations strategy. This 2 percentage points increase is primarily the
result of net favorable changes in foreign currency exchange rates, benefits derived from the Company’s prior
global operations strategy initiatives, and less promotional activity on in-line products in 2010 compared to 2009.
During 2010, the Company’s operating expenses as a percentage of net sales increased to 41% from 39% in
2009. Operating expenses in 2010 include a $7.5 million non-cash impairment charge related to certain
intangible assets acquired in 2003 as part of the Top-Flite acquisition. The operating expenses in 2010 also
reflect increased costs related to the investments described above and the adverse net effect of changes in foreign
currency rates.
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