Callaway 2012 Annual Report Download - page 49

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operates its business. In 2012, the Company’s gross margin was negatively affected by charges of $36.2 million
(4.3 margin points) that include (i) the write-off of inventory, property, plant and equipment, and intangible
assets in connection with the Company’s decision to transition its integrated device business to a third party
based model; (ii) the write-down of the Company’s ball manufacturing facility in Chicopee, Massachusetts to its
estimated net selling price as a result of the sale and lease-back of a reduced portion of the square footage of this
facility to better align with current needs; (iii) charges to write-down inventory related to the Company’s decision
to license to third parties the rights to develop, manufacture and distribute the Company’s apparel and footwear
product lines; (iv) charges related to reductions in workforce that impacted all regions and levels of the
Company’s business; and (v) charges related to the impairment of certain golf ball patents. In addition, gross
margin was negatively affected by increased promotional activity during 2012 primarily on in-line drivers,
fairway woods and irons products, as well as an increase in club component costs due to a combination of more
expensive premium materials and technology incorporated into the 2012 new product line. These decreases were
partially offset by the Company’s completion of its GOS initiatives in December 2011, which resulted in lower
club conversion costs. In 2011, gross margin was negatively affected by $20.6 million of costs (or 2.3 margin
points) in connection with the GOS initiatives. See “Segment Profitability” below for further discussion of gross
margins.
Selling expenses increased by $2.8 million to $268.1 million (32% of net sales) for the year ended
December 31, 2012 compared to $265.3 million (30% of net sales) in the comparable period of 2011. The dollar
increase was primarily due to increases of $13.0 million in advertising and promotional activities, which is
consistent with the Company’s Reorganization and Reinvestment Initiatives announced in June 2011, in addition
to a $4.6 million increase in restructuring charges associated with the Company’s Cost Reduction Initiatives
announced in July 2012. These increases were partially offset by a decrease of $10.3 million in employee costs
primarily as a result of a reduction in headcount period over period, as well as a decrease of $1.7 million in travel
expenses.
General and administrative expenses decreased by $26.0 million to $66.8 million (8% of net sales) for the
year ended December 31, 2012 compared to $92.8 million (10% of net sales) in the comparable period of 2011.
The dollar decrease was primarily due to (i) a $11.3 million decrease in employee costs primarily as a result of
reductions in severance charges and headcount period over period, (ii) the recognition of a $6.6 million net gain
from the sale of the Company’s Top-Flite and Ben Hogan brands during the first quarter of 2012, (iii) $6.5
million in impairment charges recognized in 2011, primarily in connection with certain intangible assets related
to the acquisition of Top-Flite in 2003, (iv) $3.8 million in building expenses incurred in 2011 associated with
the Company’s Reorganization and Reinvestment Initiatives, and (v) a $3.2 million decrease in legal expenses.
These decreases were partially offset by a $6.2 million net gain recognized in March 2011 in connection with the
sale of three of the Company’s buildings.
Research and development expenses decreased by $4.8 million to $29.5 million (4% of net sales) for the
year ended December 31, 2012 compared to $34.3 million (4% of net sales) in the comparable period of 2011.
This decrease was primarily due to a $3.4 million decrease in employee costs primarily as a result of a reduction
in headcount period over period, partially offset by charges incurred in connection with the Company’s Cost
Reduction Initiatives announced in July 2012.
Interest expense increased by $3.9 million to $5.5 million for the year ended December 31, 2012 compared
to $1.6 million in the comparable period of 2011. This increase was primarily due to interest and debt discount
amortization expense incurred in connection with the convertible notes issued in August 2012, in addition to an
increase in interest expense related to the ABL Facility.
Other income (expense), net improved by $11.3 million to income of $3.2 million for the year ended
December 31, 2012 compared to expense of $8.1 million in the comparable period of 2011. This increase in
income was primarily attributable to an increase in net foreign currency gains.
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