Callaway 2013 Annual Report Download - page 45

Download and view the complete annual report

Please find page 45 of the 2013 Callaway annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 114

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114

31
of foreign currency sales into U.S. dollars based upon 2012 exchange rates. If 2012 exchange rates were applied to 2013
reported 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 reported during the year ended December 31, 2013.
Gross profit increased $66.6 million to $314.8 million in 2013 from $248.2 million in 2012. Gross profit as a percent
of net sales increased to 37.3% in 2013 compared to 29.8% in 2012. This increase in gross margin was primarily due to
(i) a favorable shift in sales mix from sales of lower margin golf accessories to increased sales of higher margin golf club
products in 2013 compared to 2012; (ii) a decline in charges associated with the Company's Cost Reduction Initiatives;
and (iii) improved manufacturing efficiencies resulting from the Cost Reduction Initiatives. These increases were partially
offset by the unfavorable impact of changes in foreign currency rates and an increase in club component costs.
The Company’s cost of sales is comprised primarily of material and component costs, distribution and warehousing
costs, and overhead. In general, on a consolidated basis, approximately 80% - 85% of total cost of sales is variable in
nature and will fluctuate with sales volumes. Of this amount, approximately 80% - 85% is comprised of material and
component costs. Generally, the relative significance of the components of costs of sales does not vary materially from
period to period. See “Segment Profitability” below for further discussion of gross margins.
Selling expenses decreased by $41.6 million to $226.5 million (26.9% of net sales) for the year ended December 31,
2013 compared to $268.1 million (32.1% of net sales) in the comparable period of 2012. This decrease was primarily
due to the Cost Reduction Initiatives, which resulted in a $21.7 million decline in employee costs, travel and entertainment,
consulting and expenses in connection with the Company's transition of its apparel and footwear businesses in the U.S.
to a licensing arrangement, in addition to a decrease of $14.4 million in marketing expenses.
General and administrative expenses increased by $1.3 million to $68.1 million (8.1% of net sales) for the year
ended December 31, 2013 compared to $66.8 million (8.0% of net sales) in the comparable period of 2012. This increase
was primarily due to the recognition of a $6.6 million net gain in connection with the sale of the Company’s Top-Flite
and Ben Hogan brands during the first half of 2012, in addition to a $4.3 million increase in bad debt expense in 2013.
These increases were partially offset by the Cost Reduction Initiatives, which resulted in a $5.4 million decline in employee
costs, travel and entertainment and expenses in connection with the Company's wind-down of its GPS device business,
in addition to a decrease of $4.2 million in professional fees and depreciation and amortization expense.
Research and development expenses increased by $1.4 million to $30.9 million (3.7% of net sales) for the year
ended December 31, 2013 compared to $29.5 million (3.5% of net sales) in the comparable period of 2012, primarily due
to an increase in employee costs as a result of accrued employee incentive compensation in 2013.
Interest expense increased by $3.6 million to $9.1 million for the year ended December 31, 2013 compared to $5.5
million in the comparable period of 2012. This increase was primarily due to the recognition of a full year of interest and
debt discount amortization expense in 2013 in connection with the convertible notes issued in August 2012.
Other income (expense), improved by $2.8 million to income of $6.0 million for the year ended December 31, 2013
compared to income of $3.2 million in the comparable period of 2012. This increase in income was primarily attributable
to an increase in net foreign currency gains.
The Company’s provision for income taxes increased to $5.6 million for the year ended December 31, 2013,
compared to $4.9 million in the comparable period of 2012. The $0.7 million increase resulted from the sale of indefinite
lived assets relating to the Top-Flite and Ben Hogan brands in the first quarter of 2012. Due to the effects of the Company's
valuation allowance against its U.S. deferred tax assets, the Company’s effective tax rate for the year ended December 31,
2013 is not comparable to its effective tax rate for the year ended December 31, 2012, as the Company’s provision for
income taxes is not directly correlated to the amount of its pretax losses.