Callaway 2013 Annual Report Download - page 43

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In most of the regions where the Company does business, the game of golf is played primarily on a seasonal basis.
Weather conditions in most parts of the world generally restrict golf from being played year-round, with many of the
Company’s on-course customers closing during the cold weather months. The Company’s business is therefore subject
to seasonal fluctuations. In general, during the first quarter, the Company begins selling its products into the golf retail
channel for the new golf season. This initial sell-in generally continues into the second quarter. The Company’s second
quarter sales are significantly affected by the amount of reorder business of the products sold during the first quarter. The
Company’s third quarter sales are generally dependent on reorder business but are generally less than the second quarter
as many retailers begin decreasing their inventory levels in anticipation of the end of the golf season. The Company’s
fourth quarter sales are generally less than the other quarters due to the end of the golf season in many of the Company’s
key markets. However, third quarter sales can be affected by a mid-year launch of product, and 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 as well as weather conditions. 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.
More than half of the Company’s business is conducted in regions 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 2013, the Company’s reported net sales in regions outside the U.S. were
negatively affected by the translation of foreign currency sales into U.S. dollars based on 2013 exchange rates. If 2012
exchange rates were applied to 2013 reported net sales in regions outside the U.S. and all other factors were held constant,
net sales in such regions would have been $39.8 million higher than the net sales reported in 2013.
Executive Summary
The Company’s results for the year ended December 31, 2013 include sales growth as well as significant
improvements in gross margins, operating expenses, and operating income compared to the prior year. During 2013, the
Company refocused its business on golf equipment and more performance-oriented products, leveraged its strengths in
research and development, and changed its approach to sales and marketing. The Company also retired all of its preferred
stock thus lowering its cost of capital, increased its presence on tour, and completed the transition of its golf ball and golf
club manufacturing platforms. These improvements not only reflect the continued progress of the Company’s turnaround
plan, but also the increased hard goods market share and brand momentum the Company experienced in 2013.
The Company’s net sales increased approximately 1% in 2013 compared to the prior year despite adverse changes
in foreign currency rates, the sale in 2012 of the Top-Flite and Ben Hogan Brands, and the transition to a licensing
arrangement for apparel and footwear in North America. The sale of these brands and licensing arrangements negatively
impacted sales by $57.2 million in 2013 compared to 2012. In addition, changes in foreign currency rates negatively
affected net sales by $39.8 million in 2013 compared to 2012. On a constant currency basis, the Company’s current
business, which excludes the sold or transitioned brands and businesses, achieved 14% sales growth for the year ended
December 31, 2013, compared to the prior year.
In addition to improved sales, the Company's gross margin and operating expenses improved and the charges related
to the Cost Reduction Initiatives were significantly less during 2013 compared to 2012. Gross margin increased by 750
basis points to 37.3% in 2013 compared to 29.8% in 2012. This improvement was primarily driven by (i) a $22.1 million
decline in charges associated with the Company’s 2012 Cost Reduction Initiatives, (ii) increased sales of higher margin
woods products in 2013, primarily due to the current year success of the X Hot line of woods and mid-year product
launches, and (iii) less promotional activity by the Company in the current year. Gross margin was also favorably affected
by improved manufacturing efficiencies and a lower cost structure resulting from the Company's Cost Reduction
Initiatives. Additionally, as a result of these initiatives, as well as a continued focus on cost management, the Company's