Callaway 2012 Annual Report Download - page 57

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respectively, related to net realized and unrealized foreign currency hedging losses, offset by net foreign
currency transaction gains included in other income (expense), and (iii) a pre-tax gain of $6.2 million
recognized in 2011 in connection with the sale of certain buildings (see Note 7 “Sale of Buildings” to the
Notes to Consolidated Financial Statements in this Form 10-K). For further information on segment
reporting see Note 19 “Segment Information” to the Notes to Consolidated Financial Statements in this
Form 10-K.
Pre-tax income in the Company’s golf clubs operating segment decreased to a pre-tax loss of $3.9 million
for 2011 from pre-tax income of $39.2 million for 2010. This decrease was primarily attributable to the decrease
in net sales as discussed above combined with a decrease in gross margin. The decrease in gross margin was
primarily driven by incremental charges of $3.5 million in 2011 related to the final phase of the Company’s GOS
Initiatives. Gross margin was also negatively impacted by (i) a decrease in production volumes which resulted in
an unfavorable absorption of fixed costs, and (ii) the decline in sales in Japan which generally have the highest
gross margins of the Company’s sales. These decreases were partially offset by (i) cost savings resulting from the
Company’s GOS Initiatives including cost reductions on golf club components costs as a result of improved
product designs and sourcing of lower cost raw materials as well as reductions on club conversion costs
generated from labor savings on clubs produced in the Company’s new manufacturing facility in Monterrey,
Mexico, (ii) a decrease in close-out activity, and (iii) favorable changes in foreign currency rates in 2011. In
addition, in 2011, the golf clubs operating segment absorbed $5.6 million in charges related to the Company’s
Reorganization and Reinvestment Initiatives, most of which was recognized in operating expenses.
Pre-tax income in the Company’s golf balls operating segment decreased to a pre-tax loss of $12.7 million
for 2011 from pre-tax income of $2.6 million for 2010. This decrease was primarily attributable to the decrease
in net sales as discussed above combined with a decrease in gross margin. The decrease in gross margin was
primarily driven by incremental charges of $4.2 million in 2011 related to the final phase of the Company’s GOS
Initiatives. Gross margin was also negatively impacted by a decrease in production volumes which resulted in
unfavorable absorption of fixed costs as well as an increase in raw material costs used in the production and
procurement of golf balls, partially offset by favorable changes in foreign currency rates in 2011. In addition, in
2011, the golf balls operating segment absorbed $1.3 million in charges related to the Company’s Reorganization
and Reinvestment Initiatives, most of which was recognized in operating expenses.
Financial Condition
The Company’s cash and cash equivalents increased $9.0 million to $52.0 million at December 31, 2012,
from $43.0 million at December 31, 2011. The increase in cash was primarily due to the issuance of the
convertible notes for net cash proceeds of $46.8 million. In addition, the Company completed the exchange of
982,361 shares of the Company’s outstanding 7.5% Series B Cumulative Perpetual Convertible Preferred Stock
for $63.2 million of convertible notes and 5,866,821 shares of the Company’s common stock. As a result of these
transactions, the Company recorded $107.1 million of convertible notes (net of discounts) as of December 31,
2012. The Company used a portion of the proceeds from the issuance of the convertible notes to pay down the
outstanding balance on the ABL Facility. Additionally, during 2012, the Company used its cash and cash
equivalents and net proceeds of $26.9 million from the sale of the Top-Flite and Ben Hogan brands to fund $28.8
million of cash used in operating activities in addition to $18.4 million in capital expenditures. Management
expects to fund the Company’s future operations from cash on hand, cash provided by its operating activities
combined with borrowings from the ABL Facility, as deemed necessary (see further information on the ABL
Facility in Liquidity and Capital Resources below).
The Company’s accounts receivable balance fluctuates throughout the year as a result of the general
seasonality of the Company’s business. The Company’s accounts receivable balance will generally be at its
highest during the first and second quarters and decline significantly during the third and fourth quarters as a
result of an increase in cash collections and lower sales. As of December 31, 2012, the Company’s net accounts
receivable decreased $24.6 million to $91.1 million from $115.7 million as of December 31, 2011. This decrease
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