Callaway 2011 Annual Report Download - page 45

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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.
Over 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 continued weakening trend of the U.S. dollar in 2011, the translation of
foreign currency exchange rates had a net positive impact on the Company’s financial results during year ended
2011.
Executive Summary
The Company’s 2011 results reflect the impact of a challenging golf market as well as an unfavorable shift
in the competitive landscape driven by the success of certain competitor products launched during the year.
These factors, combined with the absence of a fourth quarter woods launch by the Company and the negative
impact of natural disasters in Japan, Australia and South East Asia, resulted in an 8% decline in sales and a 300
basis point decline in gross margins with relatively flat operating expenses in 2011 compared to 2010. These
declines were partially offset by the positive effects of changes in foreign currency rates on sales and gross
margins during the period as well as savings from the Company’s ongoing gross margin initiatives and current
year restructuring initiatives, as discussed below in more detail.
Net loss for the year ended December 31, 2011 increased to $171.8 million compared to $18.8 million in the
comparable period of 2010. Diluted loss per share increased to $2.82 in 2011 compared to $0.46 in 2010. The
Company’s net loss for the years ended December 31, 2011 and 2010 include the following charges:
2011 2010
Pre-tax Global Operation Strategy charges ......................................... $ (24.7) $(14.8)
Pre-tax impairment charges ..................................................... (6.5) (7.5)
Pre-tax charges related to the Reorganization and Reinvestment Initiatives ................ (16.3) —
Pre-tax gain on sale of buildings ................................................. 6.2 —
Income tax (provision) benefit(1) ................................................. (81.6) 16.8
Total charges ................................................................. $(122.9) $ (5.5)
(1) The Company’s income tax provision for 2011 includes charges of $52.5 million related to the
establishment of a valuation allowance against its U.S deferred tax assets, and $21.6 million related to the
recognition of certain prepaid tax expenses on intercompany profits. See Note 16 “Income Taxes” to the
Notes to Consolidated Financial Statements included in this Form 10-K.
In June 2011, as a result of the Company’s performance, the Company announced a restructuring plan (the
“Reorganization and Reinvestment Initiatives”) that involved personnel changes at all levels of the organization and
a reevaluation of business processes. The restructuring was designed to deliver annualized pre-tax savings of
approximately $50 million with the Company reinvesting approximately half that amount in brand and marketing
initiatives for 2012. During 2011, the Company completed substantially all of the personnel changes and has
reorganized the Company to provide for increased focus on the different product categories and regions of the
Company’s business with the intent to achieve sustained profitability in each area. The Company is on track to
achieve the $50 million annual savings target communicated last June and has begun investing a significant portion
of those savings in the Company’s newly developed 2012 globally integrated brand and marketing initiatives.
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