Callaway 2013 Annual Report Download - page 47

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The $7.5 million (5%) decrease in net sales of golf balls to $132.1 million for the year ended December 31, 2013
was primarily due to a decline in sales volume and average selling prices. The decrease in sales volume was primarily
due to a $19.8 million decline in sales of Top-Flite golf balls due to the sale of the Top-Flite brand in 2012 partially offset
by an increase in sales of Callaway golf balls of $12.3 million during 2013 compared to the prior year. The decline in
average selling prices resulted from a shift in product mix to sales of lower priced golf ball models in 2013 compared to
sales of higher priced premium golf ball models in 2012. In addition, golf ball sales in 2013 were negatively impacted
by a decline in rounds played compared to rounds played in 2012.
Cost of Sales and Segment Profitability
The Company’s cost of sales is comprised primarily of material and component costs, distribution and warehousing
costs, and overhead. In general, approximately 65% - 70% and 85% - 90% of the Company’s golf ball and golf club cost
of sales, respectively, is variable in nature. Of these amounts, approximately 75% - 80% and 80% - 85%, respectively, 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.
Profitability by operating segment is summarized as follows (dollars in millions):
Years Ended
December 31, Growth
2013 2012 Dollars Percent
Income (loss) before income taxes:
Golf clubs(1) ......................................................................................... $ 27.7 $ (59.8) $ 87.5 146 %
Golf balls(1).......................................................................................... 1.6 (15.0) 16.6 111 %
Reconciling items(2)............................................................................. (42.6)(43.2) 0.6 (1)%
$(13.3)$
(118.0) $ 104.7 89 %
(1) Included in the Company’s golf clubs and golf balls segments are the following pre-tax charges:
• $6.4 million and $7.0 million, respectively, for the year ended December 31, 2013, in connection with the
Company's Cost Reduction Initiatives;
• $30.4 million and $16.6 million, respectively, for the year ended December 31, 2012, in connection with the
Company’s Cost Reduction Initiatives;
• $0.8 million and $0.2 million, respectively, for the year ended December 31, 2012 in connection with the
Company’s Reorganization and Reinvestment Initiatives that were announced in June 2011;
See Note 3 “Restructuring Initiatives” to the Notes to Consolidated Financial Statements for details regarding the
initiatives referenced herein.
(2) Reconciling items represent corporate general and administrative expenses and other income (expense) not included
by management in determining segment profitability. For the year ended December 31, 2013, the reconciling items
include:
• Pre-tax charges of $3.2 million in connection with the Cost Reduction Initiatives; and
• Net gains of $5.9 million related to foreign currency hedging contracts offset by foreign currency transaction
losses.
For the year ended December 31, 2012, the reconciling items include:
• Pre-tax charges of $7.1 million in connection with the Cost Reduction Initiatives;
• A pre-tax gain of $6.6 million in connection with the sale of the Top-Flite and Ben Hogan brands (see Note 8
“Goodwill and Intangible Assets” in the Notes to Consolidated Financial Statements); and
• Net gains of $3.2 million related to foreign currency hedging contracts offset by foreign currency transaction
losses.
Pre-tax income in the Company’s golf clubs operating segment improved to pre-tax income of $27.7 million for
2013 from a pre-tax loss of $59.8 million for 2012. This increase was primarily attributable to a $60.0 million increase
in gross margin combined with an increase in net sales as discussed above and a decrease in operating expenses as a result