Callaway 2013 Annual Report Download - page 49

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in 2012 compared to $467.1 million in 2011 due largely to a decline in sales in Europe and the Company’s Rest of Asia
region. This decline was partially offset by an increase in sales in Japan. In 2011, sales in Japan were negatively affected
by the March 2011 earthquake and tsunami. Additionally, the Company’s reported net sales in regions outside the United
States in 2012 were unfavorably affected by the translation of foreign currency sales into U.S. dollars based upon 2012
exchange rates. If 2011 exchange rates were applied to 2012 reported sales in regions outside the U.S. and all other factors
were held constant, net sales in such regions would have been $4.9 million higher than reported during the year ended
December 31, 2012.
Gross profit decreased $63.1 million to $248.2 million in 2012 from $311.3 million in 2011. Gross margin as a
percent of net sales decreased to 30% in 2012 compared to 35% in 2011. The decrease in gross margin was primarily
attributable to charges that were recognized in connection with the Company’s Cost Reduction Initiatives that were
announced in July 2012. These initiatives were designed to streamline and simplify the Company’s organizational structure
as well as change the manner in which the Company approaches and 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.